Pricing for profit

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Accounting and Business Services for the PCO
PRICING FOR PROFIT
A DIVISION OF WEALTH DEPOT, LLC
Customer Acquisition and
Pricing for Profit
Daniel S. Gordon, CPA
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PRICING FOR PROFIT
Agenda
 The PCO Pricing Model
 Pricing Ant Management – A Case Study
 Increasing Prices
 Final Thoughts
 Questions
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PRICING FOR PROFIT
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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PRICING FOR PROFIT
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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PRICING FOR PROFIT
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, Workers
Compensation Insurance, Material Costs, etc.
Definition
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PRICING FOR PROFIT
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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PRICING FOR PROFIT
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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PRICING FOR PROFIT
$10,000 Fixed Costs
$45.00 Per Hr Variable Costs == 222.22 Hrs to Break Even
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PRICING FOR PROFIT
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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PRICING FOR PROFIT
Our Gross Margins Shrinks
thereby increasing our
Breakeven Point
What Happens if We Lower Our Price?
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PRICING FOR PROFIT
Pricing Ant Management
A Case Study
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PRICING FOR PROFIT
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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 Type 1 Program
Employing this type of program would have the PMP
perform 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 on
the intensive with an average of 2 call backs each
at 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 $5,000.00
Office Wages $6,000.00
Office Wages – Payroll Taxes $3,654.00
Office Wages – Benefits $4,800.00
Office Rent $2,000.00
Office Vehicle Expense $7,200.00
Computer Costs $4,500.00
Office Supplies $480.00
Office Equipment Lease Exp $1,800.00
Telephone $9,600.00
Printing $3,600.00
Office Maintenance $1,800.00
Postage $2,400.00
Accounting Fees $6,000.00
Dues & Subscriptions $2,000.00
Travel & Entertainment $3,600.00
Utilities $2,400.00
Misc. 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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Pricing for profit

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