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Profit Is A Cost

10 Oct, 2001 By: Ronelle Ingram imageSource

Profit Is A Cost

shouldn’t lose any Money at $.007. That will cover our service and supply
costs. You don’t understand the market place. We can’t be competitive at
$.009 per copy.”


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 new digital equipment
requires less service. $.0075 has become the new benchmark for the service and
supply portion of long term Cost Per Copy maintenance agreements. My current
task has been trying to FAIRLY measure and predict the cost of service and
supplies cost on the digital equipment. All I need do is to accurately estimate
cost for the next five years, for all of the products we are selling (or have
ever sold). The figures must take into consideration the cost of parts,
inflation, tax rates, office rent, shipping fees, rolling electrical blackouts,
earthquakes, flood, hurricanes, lighting strikes, famine, gasoline prices,
health insurance rates, auto expenses, profit sharing, a new DSL line, Goodyear
tire recalls, cell phone expenses, etc. You get the idea. Oh, I forgot to
mention equipment reliability, upgrades (modifications when the equipment does
not work as originally designed), PM cycles, labor rates and travel time. Yes,
this estimate must be extended out to four decimals. The price is to be quoted
to the one-thousandth of one cent. That is plus or minus $.0001.


Factor Comparison

appropriate, profitable pricing of service agreements is much more complex than
the manufacturers suggest when they publish a spreadsheet with a few raw costs
that convinces the customer and the sales department that a fair and equitable
cost of a single copy is $.0034. Instantly any internally published pricing over
$.0035, guaranteed for the length of the 5-year lease, is unjustified.
“Service is waging a war against the sales department insisting upon a service
and supply rate of $.0125 cent per copy. Sales will never be able to beat the
competition if the service department insists on making over 400% profit.”


battle lines have been drawn. Cost $.0034. Price $.0125. How can two groups of
people, looking at the same facts, see such different results? Both groups must
do their own homework.


feel the manufacturer’s pricing spreadsheet is designed to assist dealers in
calculating the cost of usage. I have always considered these pricing aids to be
advertising material. Interesting to look at, but not useable in the real world.
Customers can compare different manufacturer’s advertising literature to one


sites offering specialized software provide cost analysis compiled from
subscribing user groups. These CPC rankings normally use the discounted price of
needed consumable parts, using (unrealistic) maximum yields of all needed items.
Labor cost, emergency calls, recalls, travel, parking, training, etc. are all
conveniently left out of the equation. The cost of part manuals, internet usage,
DSL lines, the cost of labor to order, receive and pick parts for the tech, the
capital needed to have a parts inventory, warehouse space, a computer system to
track, etc. are all conveniently removed form the costing process. Some might
say all these items are considered overhead. I agree. Consequently, this part is
responsible for carrying the burden of its fair share of the overhead.


Of Pricing

a service manager who tires to keep up on costs and adjust our service pricing
accordingly, I have learned a few rules of pricing survival, such as:

  • Rule
    trust anyone else’s number. Do the math yourself. Internet sites,
    customized software, manufacture’s pricing sheet, your trusted sales rep,
    controller, or even your company’s president are not to be trusted.
    Personal agenda, mathematical errors, rounding numbers down or stupidity
    always seem to come into play. Our numbers usually differ. My numbers seem
    to always be higher. Only trust your own numbers.

  • Rule
    months after a product is launched, re-calculate the cost of service and
    supplies. Adjust your service pricing accordingly. 

  • Rule
    Revisit your service pricing on a yearly basis. Be fair to your
    company and to the customer.

  • Rule
    service agreement pricing each year. A slow, gradual increase allows you to
    recoup the necessary increase in cost over the coarse 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
    new equipment. 

  • Rule
    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%
    markup to the raw cost of any needed part or supply to establish the
    weighted cost. This 17% amount is established by dividing the
    manufacture’s wholesale price by 83% (the reciprocal of 17%).

  • Rule
    adding in the 17% markup, the true cost of the part is established. Next,
    figure out 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. That is an enormous range. I seriously doubt
    any dealership in America has an hourly digital tech burden rate under $42.

The Important Part

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. Figure 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 customers.


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.


think 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.” Realistically use the
manufacturer’s pricing sheet as a guideline for your own product pricing. Do
NOT fall into the trap that allows a customer or another companies sales rep’s
the ability to dictate the price that you know must be charged to make a profit.


must be a part of your pricing formula. Profit is a legitimate cost of every
business transaction. Profit is part of the cost of being in business.

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