Now that you have the basics and why you want to increase your company’s profitability, let’s continue ways to increase profitability.
#6 – Know Your Overhead Cost per unit of revenue.
Overhead cost per unit of revenue is simply total overhead cost divided by revenue units. If your overhead cost per hour is $50 per unit and your competitor’s overhead cost per unit is $30 per unit, then for an 8 unit job your overhead cost is $400 and your competitor’s overhead cost is $240. Your competitor can charge the same price and earn $160 more than you do. Or, your competitor can charge $160 less and win the job.
A quick and easy way to decrease overhead cost is to ask your field and office personnel. If you ask, “How would you decrease overhead by $500 or $1000 a month, they won’t be able to think of anything. That’s number that is larger than they can imagine from a personal level. If you ask, “How can we shave $100 a month from overhead costs?” they will probably come up with some great ideas. Implement the simple things they suggest, whenever feasible, to decrease your overhead cost per hour.
And, the greater the number of units, the lower the overhead cost per unit.
#7 – Price from the bottom up.
Most owners still determine what their costs are and then divide by 1 minus the gross margin. This does NOT take overhead into consideration.
Start at net profit. What net profit do you want to earn for the unit of revenue? Do you want a higher net profit for or lower net profit for different types of products?
These are questions you need to ask before you establish your pricing.
Here’s an example from the HVAC world:
One of my clients continually complained about duct jobs. He moaned that he could never make money on them because of the labor involved.
I said, “Fine. What net profit per hour do you want for duct jobs?”
He answered and then we established the prices for duct jobs.
He agreed that if a customer was not willing to pay what he required to do those jobs, then he would not do the work.
And, I never head a complaint about duct jobs again.
So, start at the bottom line.
- What profit do you want to earn?
- What is the overhead cost (using overhead cost per hour)?
- Add the two numbers. This gives you your gross profit per hour.
- How many hours will the job take?
- Multiply those hours by the gross profit per hour.
- This gives you your total gross profit.
- Then add the direct cost for the job. (Make sure you add commission in these numbers).
- This is the selling price to the customer.
Next week, more ways to increase your profitability.
How financially fit is your business?
Click here to take this one minute assessment.
Books/Audios that could help your business and you.
Casey Brown makes an interesting case for whether you should raise prices and how to raise prices if you decide to do so. She has implemented what she suggests in the book and gives you stories from companies she has helped change their pricing strategy.
Click here to order on Amazon: https://amzn.to/4jjyoSg