Does Your Price Cover All Costs

Does Your Price Cover All Costs

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When you invoice the customer in order to get paid, your price must include everything that goes into delivering the service and getting the money into your bank account.

The price you ask can’t take into account only the time spent actually executing the task.

How many steps are required to execute the specific task? Let’s take something as simple as a logo design for an example:

  1. First you have to market your service
  2. Then you will get a brief from your client
  3. You have to travel to the client
  4. You have to offer a first concept or, usually, more than one concept
  5. The client will propose changes
  6. You apply these and resubmit the concept
  7. The client will make more alterations
  8. Now you have to invoice the client
  9. You have to follow up on the invoice
  10. You have to make sure you’re paid.

If you only charge for actual design time, you’re dead in the water. These steps are the most basic units of any process in the consulting services industries. Even writing a business letter on behalf of a client will include these steps.

Leaving step one aside for the moment, a very simple logo design will take a minimum of ten hours. Your price must reflect the time the entire labour process took from beginning to end. If that prices you out of the market, there is something wrong with your business recipe.

This is why it’s so important to have an accurate idea of what the cost to your business is of each of the steps in the process.

 

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If you cannot recoup the cost of the labour across all ten steps, you are subsidising your clients. You are there to render services to your clients, not subsidise them. There is a huge difference between the two.

Balancing cost and logistics

Reduce as many of your actions to routines that can be executed by means of a template. Spend time setting up templates that will reduce the options you offer to your clients and offer them clear, distinctive types to choose from. Leave as little choice as possible.

Have a recipe for executing each of these of options. In those businesses where you invoice in order to get paid, failure to take careful note of the entire business process leads to chronic fatigue and underpaid syndrome.

If your business sells over the counter and customers pay before they leave, your pricing checklist will be different from those who invoice and chase debtors. But you still need one.

For instance if you have a coffee shop, you will have to look at:

  • Time spent sourcing products and ingredients
  • Time spent dealing with suppliers
  • Time spent receiving supplies, storing and controlling inventory.

But in this kind of business, failing to take into account the total time spent on all the steps of the process probably won’t be your major worry.

The cost of time will manifest itself in time to move inventory, managing perishable foodstuffs, and so forth. The longer you need to keep products on the shelf or in the storeroom, the more you lose on the interest you could have earned on the money you paid for the inventory.

Your products cost you what you paid to the supplier + the interest you lose on the cost of the products while they remain unsold. You can’t just calculate your gross profit margin on what you paid the supplier subtracted from your sales.

If you buy stock that occupies shelf space for six months, it’s costing you more by the factor of interest the bank would have paid you if you had banked the money. Just-in-time buying of merchandise is crucial.

Better organisation, creating templates and reducing most of what you do to a routine is one angle of attack, avoiding inefficiency and wasting time and money.

Bertie du Plessis
Bertie du Plessis founded his successful consultancy firm, MindPilot, 17 years ago. He names several of South Africa’s blue chip corporations among his client list and has taught as a lecturer and guest lecturer in six different disciplines at tertiary institutions. His fin24.com blog is the most read business blog on the 24.com domain. Visit Bertie Du Plessis's website for more information.