Learn How to Mark-up Your Direct Costs to Arrive at the Right Price #3

Why is The Price is Right so Important?

If the price isn’t right you will quickly run out of opportunities to sell your services and make money. Without sales and revenue, what will your business do? No revenue no business!

So making sure the Price is Right is about as important to your business as anything, right?

Here are the 2 Essential and Fundamental reasons you need to arrive at the Right Price:

  1. To Make Money: Making a fair and reasonable profit
  2. Being Competitive: Getting more work/sales when competing with similarly qualified competitors

When the Price is Right you will be able to achieve a sufficient gross margin to “cover the nut” or pay for your overhead expenses and then have enough left over to make a Fair Net Profit.

When the Price is Right you also will be within 10 to 15 percent of your best competitors’ pricing.

Key Takeaway:

• Learn the basics marking up your direct costs to arrive at the Right Price – to MAKE MONEY

Overview:

You have determined that in order to cover “the nut” or your overhead costs and make a net profit that you will need to generate an overall combined Gross Margin of 45 to 50 percent (average range needed).The combined Gross Margins from all of the departments need to add up to a number that will cover your overhead expenses plus what you have set as your targeted Net Profit. Remember, not all departments are created equal. Some departments may generate more Gross Margin than others so you need to determine separate Gross Margin goals for each Department as well.

Determine Your Direct Costs:

  • Know your HAW’s (hourly average wage) per crew, per department
  • Know your materials cost per department
  • Get a handle on your total direct costs per department/revenue stream

OK, now what do you do with all of this?

How to Determine Your Price

Here is one simple formula that we have used is to arrive at the targeted Gross Margin:

Divide the Direct Cost (labor + burden + materials) by the reciprocal of the desired Gross Margin desired.

Example:

  • Direct Cost = $100 and the desired Gross Margin is 55 percent
  • Divide $100 by .45 (the reciprocal of 55 percent) = $222.22 Sales Price
  • Take Sales Price of $222.22 minus Direct Costs of $100 = $122.22 Gross Margin
  • Take $122.22 Gross Profit Dollars/Sales Price of $222.22 = 55 percent Gross Margin

Now ask yourself, will this mark up generate enough margin to cover overhead and deliver a fair profit?

Other Examples:

You have determined that your HAWs: Hourly Average Wages for maintenance is $12 per hour and your maintenance material costs average 10 percent of HAWs so your Direct Costs for maintenance equals:

$12.00 x 10% (materials) = your cost is $13.20 per hour

In order to generate a 45 percent Gross Margin on $13.20 cost you will need to divide $13.20 by .55 (the reciprocal of 45 percent) = $24 Charge Out Price needed to generate a 45 percent Gross Margin

Know and Love Gross Margin

Understanding the power of Gross Margin is essential. It basically will boil down to getting enough Revenue generating the right Gross Margin to cover the overhead costs and to make a Net Profit.

We know this sounds oversimplified but it really is that simple.

Sounds pretty easy (not at all)… that is now one of the great challenges you will always be facing to be financially successful in this business.

The Price is Right – How to Markup the Direct Costs Summary

Getting the Right Price includes the proper markup of Direct Costs to arrive at the desired Gross Margin that “covers the nut” (overhead expenses) and to make a Net Profit. Use the simple formula of dividing your direct costs by the reciprocal of the desired Gross Margin and you will be well on your way to having the Right Price to MAKE MONEY!

2 Comments
  1. Hi Bill…. when I tried to watch this it was moving real slow and stopping and jerking. Could be my computer, but when I go to youtube, most of the stuff I watch there is smooth. Maybe has to do with buffering or something? I like the name of that other book you show.. “green side up”.. Have a nice Thanksgiving – Cindy

  2. Cindy,

    Always a pleasure to hear from you and thanks for your comments. Not sure what the issue is on the video but I’m glad you are watching our E-Newsletter. The Green Side Up book written by my fellow Head Harvester Ed Laflamme is a great one to have and I highly recommend you get a copy. Maybe one for you and one for your boss Allen. Keep up the great work you are doing in Orange County, California with Marketing and Sales!

    Happy Thanksgiving!

    Head Harvester Bill

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