Pricing for Profit–Part 2

When we last left Alice, she was finally on a road that would take her somewhere she wanted to be – the land of profits and clamoring buyers.

Now that you know your desired profit and what that means for sales it’s time to determine how to price your services and products.

Hourly Billing Rates

Think about what we already know. We know the technician is part of our Cost of Goods Sold. Our Gross Profit margin is 55%. This means, we must also make 55% on our technicians/labor.

We pay the technician $25 per hour for his gross pay. Let’s assume a 30% burden rate to cover taxes, benefits, insurance and other employee costs. That means our $25 per hour employee costs the company $32.50 per hour. At 40 hours per week, the employee costs the company $67,600 per year. We need to make a 55% profit on this employee. $67,600 x 1.55 = $104,780. This is our projected profit on the employee during the year. Let’s assume the employee is billable on the average of 35 hours per week – 87.5% billable. So, our goal is to make $104,780 in gross profit from the employee billing 35 hours per week.

Our gross profit margin is 55%, we need to “gross up” our profit to revenue.

$104,780 / .45 = $232,844

35 billable hours per week x 52 weeks = 1,820 billable hours per year

$232,844 / 1820 hours = $128 per hour

Your technician billing rate must be $128 per hour to meet your goals.

Service Rates

Now that you know how to calculate sales goals and billing rates, service rates should be simple.

Take the cost of your service, whatever the service is and “gross up” to meet your gross profit margin. If anti-virus costs $1 per month per license, and our COGS are 45 cents per dollar sold. Take the $1 and divide by .45 for a total sale price of $2.22. You need to sell that anti-virus license for at least $2.22 to meet your gross profit margin.

Summary

As you can see, the formulas are very basic, but you need accurate information in order to calculate them. Look at each item in your P&L reports. Ask yourself if this number changes because you have 2 customers or 200 customers. If it changes based on volume, it is a variable. If it is the same regardless of how many customers, it is a fixed expense. Get to know these numbers and understand what is going on in your business. The more you know, the more you can control.

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