Pricing Maintenance Agreements to Achieve Business Goals5 Sep, 2006 By: Jack Duncan imageSource
Pricing Maintenance Agreements to Achieve Business Goals
If we are to realize even a moderate amount of success in meeting the
profitability goals of the most commonly used business models today, we must
have a fair and accurate way to price maintenance agreements (M/A) to achieve
Major elements necessary for this process include assessing an accurate cost
per page for labor, parts and supplies; adequate tools to insure that our
operating costs are realistic, and a reasonable feel for competitive pricing in
For example, we must realize that to achieve a gross profit goal of over 50
percent that we can not price our maintenance agreements at a 40 percent margin.
The math just won’t work. If we are to price some of our agreements at 40
percent, we must also have some priced at 60 percent or more. Let’s break down
these elements individually.
Our labor cost per hour is known as our Burden Rate. Burden rate is calculated
by totaling the technician’s direct monthly compensation (wages) and their
indirect compensation such as insurance, the company’s portion of social
security, retirement etc., travel expenses such as company vehicle cost or
mileage reimbursement, and general and administrative expenses charged to the
department divided by the number of working technicians. Then we divide this
total by the average number of customer hours the technician works in a month.
Example: General & Administrative Expenses for Service Department Management
salaries, rent, utilities etc. - $23,000; Total Technicians - 18; G&A per
Tech - $1,277.78.
If you are able to plot the burden rate for your individual technicians and
use it for cost purposes, you should know your average, or default burden rate.
In the event that this information is not available, a figure that is used
nationally is $60 per hour.
While parts cost should be fairly simple, ensure that you are increasing the
cost of the individual parts slightly to cover stocking expenses. Items such as
printed circuit boards should be expensed or charged to the cost of operating
the machine at what it will cost to make the board usable again and not the
total cost of the board.
Cost per Copy, Print or Impression for Service
Actual CPC calculations are accomplished by totaling the parts and labor expense
on a service call and dividing by the number of copies or prints made between
that call and the next service call.
Since the actual cost per copy or print is not readily available on many
systems, it may be best to use information from manufacturers or suppliers to
determine operating cost per copy. You may want to put in a “Margin for Error”
by slightly understating the yields on the items; in
the chart example, we adjust the yield to 80% of the suggested yield. Once
totaled, we now have our operating CPC for the desired equipment we are to
determine the M/A price for. In this example it is $0.01445.
Margin or Markup?
For this exercise, we will use margins, but remember that if you wish to use a
markup above cost, you must markup cost times 2, or 200 percent to achieve a 50
Pricing the M/A
Remembering our goal of achieving a 50 percent or greater GP for Service and 35
percent for supply, we should create a table that will allow us to produce
pricing based on operating volumes with the lower volumes at a higher margin. As
you can see, there is a sliding scale for margins that start above the targets
in order to reduce margins in higher volumes. These numbers are for example
Other factors, including efficiency, our own operating costs and marketplace
pressure may have an effect on these prices as well, so must be considered.
Things such as productive hours per technician per month have a huge effect on
burden rates; incomplete call percentages that drive labor cost upwards;
equipment copies; and prints between calls (reliability). If the operating costs
per copy are not available, consider acquiring this information from a reputable
source such as BEI Services. Their information may also be used to compare the
operating costs of your equipment in the field to national numbers.
Marketplace pressure often forces margins and profit targets to be adjusted
in order to compete. Growth also contributes to the erosion of these margins as
often we need more aggressive maintenance pricing to get larger deals.
Discounts will play a major role in the effectiveness of this type of M/A
pricing. Many dealers use a practice of “Making Service Whole” by taking the
amount discounted on maintenance from the gross profit of the equipment sale.
While we want to make a profit once on the sale of the equipment, we must also
remember that we need to make a profit from 36 to 60 times in aftermarket!
In any event, if you do not know your operating cost per copy or print, or it
is not an efficient cost, and you do not have your M/A’s priced at the desired
margins, you are certain to fail compared to current business models. If you
sell your maintenance at 40 percent margins, I believe it is mathematically
impossible for you to make 50 percent GP in service.