Profit is a
necessary element of the cost of being in business. No matter what
type of service your company provides, the need to make a profit
remains. As more dealers shift their emphasis to Selling Managed
Print Services and Document Management, the measuring of profit
continues to be refined.
The reduction in cost of equipment, parts and supplies has been
equalized by the added expense of software, training, system
integrators, lengthy selling cycle and ongoing client
communication requirements. Additional inflationary increases in
vehicle operation rates, labor cost, health insurance premiums,
higher state and federal tax liabilities and the need to make a
profit increase your overhead expenses.
You hear things like, “We shouldn’t lose any money at $.005. That
will cover our service and supply costs. You don’t understand the
market place. We can’t be competitive at $.007 per copy.”
Or, “The sales department is being broadsided by the service
department’s unrealistic expectations of getting more than a
half-cent per click for the service portion of the CPC and MPS
revenue. The new digital equipment requires less service.” As a
result, $.0075 has become the new benchmark for the service and
supply portion of long term Cost Per Copy maintenance agreements.
The service manager’s current task is to fairly measure and
predict the cost of field service, supply costs and support on
current and future MPS and CPC agreements. All one needs to do is
to accurately estimate the servicing and supply costs over the
next three to five years, for all of the products you are
currently selling, have ever sold, and all the products that any
OEM has ever offered or sold.
This costing must take into consideration the cost of parts,
inflation, tax rates, office rent, shipping fees, natural
disasters, gasoline prices, health insurance rates, auto expenses,
profit sharing, labtops, smart phones, PDAs... you get the idea.
Also to be considered is the cost of equipment reliability,
upgrades (modifications when the equipment does not work as
originally designed), PM cycles, labor rates and travel time. And
yes, this estimate must be extended out to four decimals. The
price is to be quoted to the one thousandth of one cent. That is
plus or minus .0001.
The appropriate, profitable pricing of MPS, CPC and old fashioned
service agreements is much more complex than what the
manufacturers suggest when they publish a spreadsheet with a few
raw costs that convinces the customer and the sales department
that a fair and equitable cost of a single click is $.0034.
Instantly the sales department insists that any servicing rate
over .0035, guaranteed for the length of the 5-year lease, is
unjustified. “Service is waging a war against the sales department
insisting upon a service and supply rate of $.0125 cent per copy.
Sales will never be able to beat the competition if the service
department insists on making over 400% in profit.”
The battle lines have been drawn: Cost $.0034 — Price $.0125. How
can two groups of people, looking at the same facts, see such
different results? Both groups must do their own homework.
Some feel the manufacturer’s pricing spreadsheet is designed to
assist dealers in calculating the cost of usage. I have always
considered these pricing aids to be advertising material—
interesting to look at, but not useable when calculating
profitable pricing.
I am suspect of costs that are calculated through cost analysis
compiled from subscribing user groups. Unless you know that your
hourly labor burden rate is being used to figure the cost per
click, there is no appropriate valuation of the cost per click
information being offered. Additionally these CPC rankings
normally use the discounted price of needed consumable parts,
using (unrealistic) maximum yields of all needed items. Accurate
labor cost, emergency calls, recalls, travel, parking, training,
etc. are all conveniently left out of the equation. The cost of
part manuals, internet usage, the cost of labor to order, receive
and pick parts for the tech, the capital needed to have a parts
inventory, warehouse space, a computer system to track, etc. are
all conveniently removed from the costing process. Some might say
all these items are considered overhead. I agree. Consequently,
each labor hour and part is responsible for carrying its own share
of the company’s overhead costs.
As a service manager whose goal is to appropriately adjust
pricing to cover our cost, I have learned to use a few pricing
survival guidelines:
1. Do the math yourself. Only trust your own numbers.
Internet sites, customized software, manufacturer’s pricing sheet,
your trusted sales rep, controller or even your company’s
president are not to be trusted. Personal agenda, mathematical
errors or rounding number down always seem to come into play. Our
numbers usually differ. Mine always seem to be higher.
2. Six
months after a product is launched, re-calculate the cost of
service and supplies. Adjust your service pricing accordingly.
3. Revisit your service pricing on a yearly basis. Be fair
to your company and to the customer.
4. Structure long term maintenance (MA, CPC, MPS, etc.)
pricing so there will be an allowable, gradual, yearly increase.
This enables you to recoup the necessary additional costs over the
course of the life of the equipment. When pricing is raised
properly, somewhere between year three and year ten, it becomes
economically advantageous for the end user to upgrade to new
equipment. I use the phrase, automatic yearly renewal at the then
prevailing rates, on all our long term agreements.
5. When establishing your cost, calculate a specific amount
of cost to cover the overhead of providing the parts, supplies,
labor, and freight necessary to provide an acceptable level of
service and supplies. I normally add a 17% markup to the raw cost
of any needed part or supply item to establish the weighted, or
true, cost. This 17% amount is established by dividing the
manufacturer’s wholesale price by 83% (the reciprocal of 17%).
6. Next, calculate your labor cost. This is also referred
to as an hourly burden rate or cost of the service hour. In
today’s labor market, a field tech being paid $15 per hour has a
justifiable cost of the hourly labor burden rate of between $65
and $115 per hour. That is an enormous range. I seriously doubt
there is any dealership in America that has an hourly digital tech
burden rate under $65.
Once you have your weighted cost of parts, labor and travel;
calculate the cost of a reasonable profit. All too often, profit
is never calculated into the cost of the products and services we
offer. PROFIT is part of the COST of all products and services
that we sell. Profit deserves a line item on your costing spread
sheet. Figure in your acceptable rate of profit as an actual cost
of the product. If you are selling your products and labor without
consciously adding the needed profit to your calculations, you are
doing a disservice to your employer, vendors and customers.
In order to
stay in business, a consistent profit must be achieved.
Consequently, pricing a product at a level that only “covers your
cost” is a one-way ticket to bankruptcy. Under-pricing your
products will ultimately cause your company to have to reduce the
quality of service and products you offer or eventually go out of
business.
Profit is a legitimate cost of every transaction.
I think back fondly to the days when 007 made me think about the
adventures of James Bond. Now .007 is my first point of
negotiation for service and supply pricing on those competitive
deals. It is the responsibility of the sales, service and supply
departments to do the numbers. Use the manufacturer’s pricing
sheet as a guideline for your own product pricing, but do NOT fall
into the trap of allowing the customer or another company’s sales
rep dictate the profit you hope to make for your company. Profit
must be a part of your pricing formula.
Ronelle Ingram,
author of Service With A Smile, also teaches service seminars. She
can be reached at
ronellei@msn.com
