Basics
of Figuring
a Selling Price for the Printer.
List
Price vs. Cost Plus
In any business deciding on a selling price can be one of your most
difficult task. To begin you should
have a basic understanding of the three most common methods of determining
selling price. List Price, Cost Plus or what is often refereed to as Time and
Material, and last, by the seat of your pants. The later has little merit although I
have seen it used by some old timers with surprising results. One big advantage
to this method is it doesn’t take much effort.
List Price and Time and Material, Here on referred to as Cost
Plus, are
the two methods with which you should become familiar. List Price is the most common
method used in retail sales. As the name implies, the price is taken off a list.
The list is made up using many factors including
base cost of the product plus some marketing cost and something for
profit and a lot of experience. The most important consideration is what the
market will bare or where we need to be price wise to get the market share we
desire. The super market and your favorite fast food place are good places to
see list pricing in action. The price of items sold there is taken off a list.
It is not directly affected by the costs involved making and bringing them to
you. A burger and fries costs so much. That’s it! If they sell 500 an hour or
5 an hour, or If the person making them gets paid $5.50 an hour or $14.00. The
price is the price. That’s List Price in it’s purest form.
In Cost Plus pricing we take a closer look at exactly what we are putting
into the finished product. Every job is looked at on an individual basis as to
the cost of raw materials used and then an estimate is made of the time to
produce the item and a dollar value placed on that time. Once the estimated cost
is figured a mark up is added to cover operating cost and expected profits. The
basic concepts of this method of pricing comes easy to most people
because they can grasp the idea that if we invest $10.00 in some thing
and I would like to make $5.00 for my efforts then I should sell it for $15.00.
Simple?
Most Printers use some variation of the Cost Plus method.
With most computerized pricing system available today much of the pain
has been taken out of estimating in this method. The biggest decisions you have
to make is what rates you want to charge in the different departments in your
shop. These are
referred to as your Hourly Rates or Burden Rates. The most basic way to set
Hourly Rates is sit down with your accountant and figure your total
overhead. That includes your rent, utilities, phone, insurance, office expense,
advertising, taxes and so on and don’t forget administrative labor. Divide
that by the number of unit hours of production you have available in your shop. Lets say
in a shop with two people in the office and five people in production the
overhead comes to around $12,000.00 and your five production people work 160
hours a month. That’s 800 production units. Divide 800 into 12000 and you get
$15.00. That means that IF you charge $15.00 over and above wages for every hour
your people work in a month you will cover overhead. Assuming they all work 100%
of the time. In reality this will not work. We need to consider other factors.
Can we sell all the hours in a month? Will everyone produce their quota per hour
every hour? Of course not. You need to make adjustments to allow for the reality
of the situation.
When we have agreed on an Hourly Amount for overhead we will add this to
our payroll per hour in a given department to get our Hourly Rate. Example. We
pay our Press person $12.00 an hour added to our adjusted overhead Hourly Rate
of $22.00 and we have a cost at our press of $34.00 for each hour it produces.
Now if we find how long it will take to do an operation at the press we can
estimate what it should sell each hour for. If our press person can run 4000
sheets of paper per hour we take 4 divided into $34.00 an get a cost of
$8.50 to run 1000 pieces. Add to that the cost of paper, prep work,
plates and finishing figuring each operation the same way and you have an
estimated selling price.
That was simple enough. Now the fun part. Printer #1 has a new
$150,000.00 press and a new building and a few added overhead costs that drives
his overhead Hourly Rate up to $80.00 per hour and to top that they only get
2000 an hour of the press plus the person running the press has convinced
everyone he is worth $24.00 an hour wages. Wow! The Hourly Rate we need to
charge out in this shop is about $52.00 for a 1000 impressions.
Printer #2 has the same equipment package but chose not to put the cost
of the press in their overhead but rather view it as a capital investment in his
business and the press person produces at a better rate, 4000 impressions an
hour, and is satisfied with $16.00 an hour wage. The Hourly Rate in this
shop would be about $38.00 per hour or $9.50 per 1000 impressions.
Printer #3 Has an old, old Multi, runs it him self, works out of his
basement. He can pretty much charge what he wants and still be happy. He will
always be the lowest bid.
This may explain why on any given day the estimated prices from three
Printers. Printers
may vary as much as 300%. Our examples above are totally fictitious. I used
extremes to show how different shops using the same approach will get different
prices.
Of course we need to understand that the main idea in figuring prices is
to make as much as we can and still remain competitive in our market place and
keep our customers happy. By getting a handle on the basics of Cost Plus pricing
you can pretty much develop a pricing system that will work for you. By
understanding List Price and Cost Plus you can see how you could develop a Price
List for the most common items you produce and use the Cost Plus on the items
you consider custom manufacturing.
On a recent trip to the super market a printer named Bill, who swore by
The Time and Material method of pricing, went to the ground beef section to get
a package of meat. He noticed that some of the meat was selling at $1.19 a pound
and some at $2.25 a pound and he could not see any difference. He rang the bell
for help and asked “Why the price difference?” He was told that the $2.25 a
pound meat was ground on our newest machine by our highest paid worker and that
the $1.19 a pound meat was ground by an apprentice on our old machine. Bill was
confused by the answer because he had been conditioned over time to know super
markets sold at List Prices. He never much thought about it. In his printing
business Bill always used the Cost Plus method to figure the selling price of
his product. When the Super Market used it Bill felt it was unfair. Of course
this would not happen. Super Markets run on List Price. All the meat costs the
same regardless how much it costs to get it in a package or for that matter, how
far the truck drove to bring it to the store. When the store runs an ad the cost
is the same in all of their location even if some sell more than others.
To familiarize yourself with who uses the different methods take a few
moments to create a list of businesses that use List Price and/or
Cost Plus
pricing.
List Price businesses may include most all sellers of consumer goods.
Clothing, shoes, pots and pans, food, automobiles, tools, baked goods.
Newspapers, magazines and motor oil. Can you think of more?
Cost Plus or Time and Material businesses might be, the addition to your
house, having your lawn cut, fixing your smashed car, computer repair,
alterations to your clothing, having a web page setup and so on.
These lists should give you something to think about. We all know the
selling price of some products that are in the List Price group have their price
effected by certain costs in obtaining the product. Isn’t that Cost Plus?.
These are examples of how both methods are actually used to decide a selling
price. When you have developed a feel for both methods you can play one with the
other and come up with the ultimate Hi-bred system to determine selling price.
Bob
Becker
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