Pricing for profit

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Accounting and Business Services for the PCO

PRICING FOR PROFITA DIVISION OF WEALTH DEPOT, LLC

Customer Acquisition and Pricing for Profit

Daniel S. Gordon, CPA

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Agenda

The PCO Pricing Model

Pricing Ant Management – A Case Study

Increasing Prices

Final Thoughts

Questions

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The PCO Pricing Model

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The Pest Management Pricing Model

Money

This is an hourly charge for our service that covers our costs and allows us to make a reasonable profit. How do we know what that hourly rate should be? Accountants calculate this number using a technique called BREAKEVEN ANALYSIS.

Time

The service time that it takes to fulfill the obligation of eliminating the customer’s Pests under the service pro-gram. This includes treatment time and call back time

It is based on two variables:

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Break-Even Analysis

Break-Even point in units (service hours)

=

fixed costs divided by gross profit per hour.

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Definition

Fixed Costs :

Any cost that remains constant at any volume of business (i.e. rent, advertising, utilities, etc.)

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Variable Costs

Costs associated with producing one unit of our service. For our purposes, one unit of a service will be one hour of service. Thus, variable costs are those costs that rise and fall based upon the number of hours that we provide service.

Examples Hourly pay for your employees, WorkersCompensation Insurance, Material Costs, etc.

Definition

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Definition

Gross Profit

The difference between the price charged per unit (Hour of Service) and the variable costs.

Example

If we bill our service at $100 per hour and a technicians gets $20 per hour and all other variable costs associated with providing that hour of service are $35, our gross profit would be $45. (figured: $100 billed less ($20+$35) variable costs).

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Breakeven point in units (service hours)

= Fixed costs divided by gross profit per hour.

What Is My Breakeven Point?

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If rent, utilities and all other fixed costs are $10,000 and we use our $45.00 gross profit per hr example than our breakeven point is 222.2 hours of service at a $100 per hour selling price.

After 222.2 hours of service we will start making a profit of $45 per hour. You see the gross profit contributes to paying the fixed costs. Once the fixed costs are paid, the gross profit contributes to bottom line profit. This is the reason some accountants call gross profit the contribution margin.

Example

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$10,000 Fixed Costs$45.00 Per Hr Variable Costs == 222.22 Hrs to Break Even

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YES!!!!

However, at various sales levels certain fixed costs rise (i.e. after a certain sales level, a new piece of equipment might have to be added, thus the cost of using that piece of equipment must be added to fixed costs).

Therefore, figuring your breakeven point can sometimes be confusing.

Is it Really That Simple?

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Our Gross Margins Shrinks

thereby increasing our

Breakeven Point

What Happens if We Lower Our Price?

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Pricing Ant Management

A Case Study

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Pricing - A Case Study

While this is not meant to endorse any one method of Ant treatment, the PMP needs to decide on a program.

Typically there are two programs that could be offered to Customers to control ants.

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Pricing - A Case Study Type 1 Program

Employing this type of program would have the PMPperform a one time intensive that may take several hours while offering free call backs for the service guarantee period (i.e. one year, six months, etc.).

This type of program usually gives the customer an option to renew at the end of the service guarantee period

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Type 1 Program


The PMP might spend three and one half hours onthe intensive with an average of 2 call backs eachat 45 minutes during the service contract period or five hours total.

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Type 2 Program


Using this program the PMP spends less time on the intensive but returns for periodic visits either monthly or quarterly.

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Type 2 Program


Two hours might be spent on the intensive with three additional quarterly visits that each average 45 minutes with an average of 1 call back per year at another 45 minutes. Here again, we are at 5 hours for the year.

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No matter which program is used,


The PMP must estimate the time to be spent fulfilling his obligation to the customer.

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We need to

Understand our costs

Hourly Rate Calculation


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Variable Cost Calculation- Annual

Salary Cost $12.00 per Hr 2080 Hrs Per Yr $24,960

Normal OT $12.00 per Hr X 1.5 X 7 X 52 Wks $ 6,552

Total $31,512

FICA $31512 X .0765 $ 2,411

SUTA $31512 X .03 (Base Amount) $ 945

FUTA $7,700 X .008 (Base Amount) $ 62

Workers Comp – assume 5.5% $ 1,733

Family Med $ 4,800

Other Benefits $ 500

Total Salary Cost of 1 Tech. $41,963


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Variable Cost Calculation- Annual

Other Variable

Uniforms $ 300

Vehicle Lease (Annual – 1 Truck $475 x 12 mo) $ 5,700

Vehicle Insurance (Annual – 1 Truck) $ 1,800

Vehicle Maint & Repair (Annual – 1 Truck) $ 1,800

Vehicle Fuel (Annual – 1 Truck) $ 3,600

Chemicals (Annual – 1 Truck) $ 6,000

Other misc, Registration etc. $ 1,150

Salary Cost – Prior Slide $41,963

Total Variable Costs (Annual – 1 Truck) $62,313


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Productive Hours Calculation

Total Workable Hrs Per Yr 47 Hrs per Week X 52 2,444

Less: Tech Vacation - 2 Weeks (80)

Holidays – 10 days (80)

Sick Time – 4 days (32)

Production Time Available 2,252

X 60% Utilization .60

Technician Hrs Per year Available to Work 1,351

Variable Cost Per Hr of Work:

Total Variable Cost – Prior Slide) $62,313

Divided by Hrs Available / 1351

Total Variable Cost Per Hr $46.12


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Fixed Cost

Now: Its time to figure out our Fixed Costs.

Remember that we need this calculation in order to calculate break even.

Let’s take a look at the list of possible

fixed costs.

Annual Fixed Costs.Particulars Amount

Advertising $5,000.00Office Wages $6,000.00Office Wages – Payroll Taxes $3,654.00Office Wages – Benefits $4,800.00Office Rent $2,000.00Office Vehicle Expense $7,200.00Computer Costs $4,500.00Office Supplies $480.00Office Equipment Lease Exp $1,800.00Telephone $9,600.00Printing $3,600.00Office Maintenance $1,800.00Postage $2,400.00Accounting Fees $6,000.00Dues & Subscriptions $2,000.00Travel & Entertainment $3,600.00Utilities $2,400.00Misc. Office Expense $6,000.00

Total Fixed Expenses $217,634.00


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Break Even:

Let’s figure out how many Hours it takes to break even. In this exercise we need to assume various selling prices per hour.

From that we subtract our variable cost per hour to get our gross profit per hour. Once we know our gross profit per hour, we can calculate our breakeven point in number of

service hours.

After we hit breakeven we start making profit in an amount equal to Gross Profit per hour

multiplied by the number of hours that we sell over breakeven!!!

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Scenario 1 Scenario 2 Scenario 3 Scenario 4 Selling Price Per Hour $50.00 $60.00 $75.00 $95.00 Less: Variable Costs Per Hour $46.12 $46.12 $46.12 $46.12 Equals: Gross Profit Per Hour $ 3.88 $13.88 $28.88 $48.88 Annual Fixed Costs $217,634 $217,634 $217,634 $217,634 Divided By: Gross Profit Per Hour- Above $3.88 $13.88 $28.88 $48.88 Equals: Breakeven In Hours 56,091 Hrs 15,680 Hrs 7,536 Hrs 4,452 Hrs Net Profit per Hour after Breakeven

$3.88 $13.88 $28.88 $48.88

Break Even:

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Pricing Ant Management Services

Using the discussion above and assuming we want to breakeven using the least amount of hours in our example, we would use the $95.00 per hour and each program would be priced at $475.00 as follows:

Type 1 Program – 5 hours x $95.00 = $475.00 Due at completion of the intensive.

Type 2 Program – 5 hours x $95.00 = $475.00 $190.00 Due after the Intensive and $95.00 Due for each of 3 Quarterly visits (we assume the call back time is built into the regularly scheduled services)


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Let’s Go Back to This Chart: Scenario 1 Scenario 2 Scenario 3 Scenario 4 Selling Price Per Hour $50.00 $60.00 $75.00 $95.00 Less: Variable Costs Per Hour $46.12 $46.12 $46.12 $46.12 Equals: Gross Profit Per Hour $ 3.88 $13.88 $28.88 $48.88 Annual Fixed Costs $217,634 $217,634 $217,634 $217,634 Divided By: Gross Profit Per Hour- Above $3.88 $13.88 $28.88 $48.88 Equals: Breakeven In Hours 56,091 Hrs 15,680 Hrs 7,536 Hrs 4,452 Hrs Net Profit per Hour after Breakeven

$3.88 $13.88 $28.88 $48.88

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Draw Your Own Conclusions about the pricing.

Let me leave you with this thought using the numbers in the assumptions.

At $50.00 per Hour - You would need well over 20 Trucks to breakeven

At $95.00 per hour – You would need 2 Trucks to breakeven

Use your own Numbers but;

[Never Be a Low Baller – Beat the competition with Quality Service!!]

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Increasing Prices

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What prices need to be increased?

Anything less than our standard hourly rate

When to increase prices?

Usually the anniversary date of the contract

How do you determine HOW MUCH?

The difference between the standard hourly rate

and what is currently charged

Pricing should be analyzed at least annually to consider a revision.

PRICING - KEY ISSUES

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Your standard hourly billing rate should be analyzed and adjusted to

ensure that your hourly cost and profit objectives are being met.

Your estimated time to complete a job including time to retreat should

be reviewed to determine if your estimated time to complete a

particular job is accurate.

6 STEPS TO INCREASING PRICES

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Your standard pricing for new work and your customer service records

should be viewed to determine the amount of time spent servicing each

customer and the amount of money that each customer was billed for the

year.

Divide the total amount of money billed, by the amount of hours of

worked, to determine the dollars per hour on each account.


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Once the dollar per hour has been determined for each customer and each

job type , compare that dollar per hour to the standard hourly billing rate.

If necessary increase the price to bring the dollar per hour in line with the

standard billing rate per hour.

Once the price increase amount has been determined , the most important

step is selling the price increase to your customers by showing the value of

your service.


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Final Thoughts

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Final Thoughts

The business of pest control is a very simple business.

As our company grows we tend to complicate things.Remember the business consists of a few very simple steps:

Take a phone call from a potential customer Visit their house and solve their pest problem Collect Payment and deposit it in the bank Set the customer up on a regular service route

and charge them accordingly.

If we can do the above repeatedly we will have a very SUCCESSFUL BUSINESS.

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So how do you compete with the COMPETITION?

Beat them on quality WORKMANSHIP!!!

Never on PRICE!!!

Final Thoughts

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QuestionsQuestions

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