Determining the Actual Cost-Per-Copy15 Oct, 2003 By: Ronelle Ingram imageSource
Determining the Actual Cost-Per-Copy
I am in the mist of trying to FAIRLY measure and predict the cost of service and
supplies on digital equipment for long term Cost-Per-Copy (CPC) maintenance
agreements. Sounds simple enough-all I need do is to accurately estimate cost,
over the next five years, for all of the products we are selling (or have ever
accurately come up with a CPC number, I must take into consideration the cost of
parts, inflation, tax rates, office rent, shipping fees, world terrorism, wars
in the Middle East, earthquakes, flood, hurricanes, lighting strikes, famine,
gasoline prices, health insurance rates, auto expenses, profit sharing, a new
DSL or T-1 line, cell phone expenses…you get the idea. Those are only the
outside factors; I forgot to mention 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 (one thousandth of one cent) plus or minus .0001.
vs. Service: The CPC War
Manufacturers will often present spreadsheets with a few raw costs designed to
convince the customer and the sales department that a fair and equitable cost of
a single copy is .0034. I have always considered these pricing aids to be
advertising material-interesting to look at, but not useable in the real world.
As you can see, the appropriate, profitable pricing of service agreements is
much more complex than manufacturers suggest.
suggesting a .0034 CPC price, any internally published pricing over .0035,
guaranteed for the length of the 5-year lease appears unjustified. "Service
is waging a war against the sales department insisting upon a service and supply
rate of .0125 cent per copy," said our sales reps who are constantly
challenging service pricing. "Sales will never be able to beat the
competition if the service department insists on making over 400 percent
profit." I hear it everyday. "The sales department is being broadsided
by the service department's unrealistic expectations of receiving more than a
half-cent per copy for the service portion of the CPC revenue," the sales
reps say. "The new digital equipment requires less service. We shouldn't
lose any Money at .007. That will cover our service and supply costs. We can't
be competitive at .009 per copy."
battle lines have been drawn. Sales departments want .0034 while service is
asking for .0125. How can two groups of people, looking at the same facts, see
such different results?
ONE: Never trust anyone else's numbers. You can use Internet sites,
customized software, manufactures' pricing sheets, and you can listen to your
trusted sales you're your controller or even your company's president, but
remember, you are the one who is ultimately responsible. Personal agendas,
mathematical errors, rounding numbers down or stupidity always seem to come into
play and numbers usually differ. Be sure of your numbers and how you went about
TWO: Six months after a product is launched, re-calculate the cost of
service and supplies. Adjust your service pricing according.
THREE: Revisit your service pricing on a yearly basis. Be fair to your
company and to the customer.
FOUR: Raise service agreement pricing each year. A slow, gradual increase
allows you to recoup the necessary increase in 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 necessary for the enduser to upgrade to
FIVE: 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 acceptable level of service and supplies. I normally add a
17 percent markup to the raw cost of any needed part or supply to establish the
weighted cost. This percentage is established by dividing the manufacture's
wholesale price by 83 percent (the reciprocal of 17 percent).
SIX: By adding in the 17 percent markup, the true cost of part is
established. Next, calculate your labor cost. This is also referred to as an
hourly burden rate or cost of the service hour. A justifiable cost of the labor
hour is between $42 and $95 per hour. While, this is an enormous range, I
seriously doubt if any dealership in America has an hourly digital tech burden
rate under $42.
Once you have your weighted the cost of parts, labor and travel, calculate the
cost of a reasonable profit. All too often, PROFIT is never calculated into the
cost of a product or service. PROFIT is a COST of all products or services that
we sell. Profit deserves a line item on your costing sheet. Profit must be a
part of your pricing formula and is a necessary part of doing business.
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
order to stay in business, a consistent profit must be made. Consequently,
pricing a product at a level that "covers your cost" is lunacy.
Covering your cost is a one-way ticket to bankruptcy. Under pricing your
products will ultimately cause your company to go out of business.
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. Do NOT fall into the trap of
allowing the customer or another company's sales rep dictate the prices that
will allow your company to make a profit.