Why is the right pricing so important?
If your jobs aren’t priced right, you will quickly run out of opportunities to bring in sales. If you don’t earn revenue or sales for your business you will soon run out of things to do. No revenue, no business! So making certain The Price is Right is about as important to your business as anything, right? Right!
As we all know, today’s market is very competitive and it certainly feels like PRICE is becoming a bigger and bigger reason in the customer’s decision-making process. When deciding on your price, there are many considerations to arrive at The Right Price. We will review these later in our the Price is Right workbook.
Here are the 2 Essential and Fundamental reasons we need to arrive at The Right Price
- To Make Money: Making a fair and reasonable profit
- 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.
- Learn the Basics of Covering “The Nut”
- How to Determine “The Nut” or Total Overhead Expenses
The Basics of Covering “The Nut”
You will need to understand the covering ‘the nut” concept to help determine your price and the Right Price. The term “the nut” is a term that has been used for covering your overhead costs or reaching a break-even point with your financials. So when we add all of the total combined Gross Margin of an organization we will always consider “covering the nut” as our rock bottom Gross Margin to provide a break-even position.
How to Determine “the nut” or your overall overhead expenses
The first step to building the right price is to determine what your total overhead expenses are for your organization. We often call this “the nut” or “cover the nut.” This is what is needed to be covered before you can make a profit. This represents your breakeven point.
You need to “make the nut” or “cover the nut” with your pricing at the minimum! If we don’t “cover the nut” it will not be a fun place to work – we can assure you.
- Determine your total combined overhead expenses for your organization including:
- Indirects and Sales
- General and Administrative Expenses – as an average monthly total, as an annual cost in dollars and as a percentage of revenue
Add up these overhead expenses to determine “the nut” that needs to be covered
- Indirect Salaries: Supervisors, Sales People, Mechanics, Vacation/Holidays, Estimators, Sales People, Sales Incentive, Field Bonuses
- Automobile and Equipment: Rent, Depreciation, Maintenance, Gas/Oil, Repairs, Shop Expense
- Other Indirect: Dump Fees, Indirect Materials, Employee Training, Liability Ins. Claim, Hand Tools, Uniforms and Laundry, Power Equipment, Yard Rent, Yard Maintenance
Total Indirect Expenses $ ______________
Sales General and Administration
- Professional Services: Audit and Accounting, Legal, Director Fees, Employee Recruiting, Consulting/ Professional Services, Secretarial Services
- Taxes and Licenses: Property Taxes, Vehicle Licenses, Business Taxes, Other Taxes
- Travel and Entertainment: Travel, Lodging, Meals and Entertainment, Company Meeting Expense
- Advertising and Promotion: Display Advertising, Promotional Publications, Promotional Gifts, Trade Show Fees, Seminars
- Salaries: Officers, Administrative Supervision, Office and Accounting, Purchasing, Incentive Compensation, Deferred Profit Sharing, Pay Overhead Applied
Total Sales, General and Administration $ ___________________
Total Indirect Expenses + S, G and A = Total Overhead Expenses or “the nut” $ ____________________
The simple way to determine your total overhead is:
Subtract your Direct Costs (labor+ burden + materials) from all of your Total Costs
All remaining costs will be considered Overhead Costs or “the nut”
What is “the nut” or total overhead expense you’re working with? per year? average per month?
Total annual “nut” $_____________________ or _______% of revenue per year
Total monthly “nut” $ ____________________ or _______% of revenue / average per month
The Price is Right – What is Needed to Cover “The Nut” Summary
Getting The Right Price will include “covering the nut” plus more to make a Net Profit. Know what your total combined overhead costs are and understand that at the minimum, you will need to generate an overall combined Gross Margin that “covers the nut.”
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