Full Version: Pricing name badges
From: Dave Jones (DAVERJ) [#19]
8 Mar 2007
To: Doc (GREAT_ATLANTIC) [#17] 8 Mar 2007
In your expenses you show 40 seconds on the laser, but I'm guessing there's a couple minutes involved there somewhere, such as taking the order, entering the name in the computer, positioning the name to the next available space on the plastic, putting the plastic in, removing the final part, cleaning it and wrapping it, etc... At least if you're making the badges in small quantities. Obviously less extra time per badge when doing large quantities.
$0.01 overhead amazes me. If that's based on 40 seconds, then that's $12/day (assuming you can bill customers for ever second of an 8 hour day), or $60/week or $240 per month. That means you can pay the rent, utilities, equipment costs, insurance, garbage pickup, showroom materials, office supplies, workers time not spent on billable jobs, your time cleaning the laser, accountant, etc... all for $240 per month. But if the real job took longer than the 40 seconds of laser time, lets say 3 minutes each for one or two badges, then that $0.01 comes out to more like $32/month to cover all of your overhead.
I don't know your business at all, but if it does take a couple extra minutes per badge in small quantities, and your overhead is more like the typical couple thousand a month that most small businesses have, then I'd add another couple of dollars to that cost, bringing it closer to $4 for a $5.25 sale. But I'm making a lot of assumptions and could be completely wrong here.
From: Mike (MIKEN) [#20]
8 Mar 2007
To: ALL
I have several wholesale customers which I sell as a group. I have a fixed price for all of them whether their order is one or a 100. All but one customer in this group sells 1500 to 3000 of these name tags per year each. They all sell at the price I established as "magic". But one of the members insists on setting their own price which is 20% higher--and even though it is well under $10 per name tag they haven't sold a single one in more than three years.
From: PenTrophy (PENINSULATROPHY) [#21]
8 Mar 2007
To: Dave Jones (DAVERJ) [#19] 8 Mar 2007
I am reading from your method of billing, when a customer walks in your store the meter begins to run. $1 per question and a sir charge if you have to further explain the answer. ......LOL....
I don't know how others laser/rotary machines work but I can run an entire set of name plates without repositioning the plastic. If the customer e-mails me.... Even better.. Merge Print.. A teams worth of trophy plates and all I type in is year and team name once.
I will admit rounding the corners and placing a bar pin or magnet and then packing the item take extra time. And of course preparing the bill and if they pay by check.... well then there's a trip to your bank or the % fee for processing a credit card..... and on and on.
Some of use charge $4.50 and some charge 18.50 (with a $15.00 set up fee)....... and ther rest of us are in the middle.
Where does it end....... :@
From: Doc (GREAT_ATLANTIC) [#22]
8 Mar 2007
To: Dave Jones (DAVERJ) [#19] 8 Mar 2007
President
takes 34 seconds to laser (...like I don't have enough to do, I actually threw one in the machine as a reality check.) If it's taking you a total of 3 minutes per badge on average, perhaps there's a more efficient method you might consider.
Second, I think you're confusing the overhead issue. Overhead is a relatively fixed cost. But to amortize its effect on your business, you really have to carve it up based on total gross sales over the course a full fiscal year, not as a component of time or a single sale. Remember that more products are being produced and sold at the same time as the individual badge is spending in the laser.
Finally, you're missing the hourly rate at which labor has been accounted. In our case it's $135.00, which could be more or less depending on your own business model. Once again, this is a component not only of the margin, but also as a credit on the balance sheet against amortized cost (...and overhead.)
In our case, $5.25/badge yields an acceptable profit based on volume. Show me a competitor that charges my client base $12.50, and I'll show you an ex-competitor.
From: Dave Jones (DAVERJ) [#23]
9 Mar 2007
To: Doc (GREAT_ATLANTIC) [#22] 9 Mar 2007
My whole point was that in calculating your costs on an item, there is more time spent on an item than just the laser time. And that extra time needs to be calculated into what it cost you to do the job in order to see your real profit on the job.
Overhead is not completely fixed, but usually is fairly consistent. Overhead has to include everything that costs you money that is not directly added to an invoice for a sale. So if your phone bill or electric bill goes up, so does your overhead. You can average it over the year, but need to add enough to each product made and sold to cover it or it ends up coming out of your calculated profit, in which case your profit isn't what you thought it was.
And overhead does relate to billable hours, because time you spend doing things that are not billable, such as cleaning the laser, means time spent that you're not paying the overhead. If a person running a one man shop works 40 hours a week and only 30 of that is billable work time, then they need to calculate the overhead to add to each job based on those 30 hours, not 40. Which means the amount added for overhead is a bit higher than if calculated at a 40 hr week.
It's not that much more complicated with a multi-person shop. If the total number of jobs done in a week in a larger shop add up to 150 hr of billable time, then the overhead gets divided by that many hours instead of 30. But in a multi-person shop the overhead is also much higher, so it tends to still be a fair amount that needs to be added.
At $0.01 added for a 1 minute job in a one man shop that can bill for 30 hours of every week, that's $18/week to cover overhead. Even if you have 3 jobs going out the door at the same time, that's $54/week to cover overhead. Even a shop running out of a basement has more overhead than that. Even at 34 seconds per badge, that's $31/week if it's a single job at a time and $93/week for 3 jobs at a time. To pay an overhead of $2000/month you would have to make the equivalent of 200,000 badges per month if there is only $0.01 per badge to cover it. That's 63 hours a day worth of badges at 34 seconds each.
From: Doc (GREAT_ATLANTIC) [#24]
9 Mar 2007
To: Dave Jones (DAVERJ) [#23] 9 Mar 2007
Here's an example: there are four of us working here. While one is creating 100 name badges, another is fulfilling a custom resin order of 300 pieces, another is processing a set of 30 state plaques for a tournament and yet another is rotary engraving 150 handles for curling stones. The overhead costs are fixed....insurance, rent, etc. remains the same, and even the electricity is fairly constant since the machines are almost always running. But the total gross revenue is being credited against that overhead....not the individual hours of the each job.
....and if my overhead was only $2,000/month, I'd throw a party. :'-(
EDITED: 9 Mar 2007 by GREAT_ATLANTIC
From: Harvey only (HARVEY-ONLY) [#25]
9 Mar 2007
To: Doc (GREAT_ATLANTIC) [#24] 9 Mar 2007
That will get you into a whole load of financial problems.
There are more complicated ways of figuring it that are more accurate but this will give you a handle.
Take all of your costs, less material costs. Divide that by the hours that are worked, let's say on a monthly basis. That is the real cost of an hour of anyone's time. I had a spreadsheet and a method of figuring posted at one time that could give you the cost of each person's time easily.
It usually turns out to be between 3 and 15 times the person's actual salary. Large companies run about 5X, smaller ones about 8-10X. More than that and you could be in trouble unless you have a fantastic markup.
From: Doc (GREAT_ATLANTIC) [#26]
9 Mar 2007
To: Harvey only (HARVEY-ONLY) [#25] 9 Mar 2007
In other words, can you justify selling at $12.00? Absolutely...in a vacuum. But unless you calculate your absolute costs against gross revenue, you'll never get a picture of your low-end profitability when it's needed. And unless you create something that is truly unique, patented, sold only by you....the competition at some level will always exist.
From: Dave Jones (DAVERJ) [#27]
9 Mar 2007
To: Doc (GREAT_ATLANTIC) [#24] 9 Mar 2007
I didn't miss the multiple jobs part. I did mention that in the second half of my post. If you have 4 people working 8 hours a day and every minute of every hour they work can be charged to a customer (aka billable hours), which is not likely but possible, then your overhead should be spread across 32 hours of jobs per day.
But you're missing my point. At $0.01 to cover overhead on 40 seconds of work, for 32 hours in a day (4 people all working at the same time on 4 different jobs) that still only brings in $28.80 a day from all the work those people did to cover your overhead. That's only going to cover $576 of your overhead that month. The rest of your overhead is coming out of what you calculated as profit.
I'm not saying you aren't making plenty of money to cover your overhead. I'm saying your calculation of your profit per job is flawed if you don't account for enough of the overhead, and for the extra small pieces of time involved in completing the job, beyond the laser time.
Here's another way to look at it, and why you should charge overhead based on time instead of gross sales. These figures are exagerations, but bear with me. Say you have one type of product that makes you $10 per hour profit and another one that makes you $1000 per hour profit. Lets say that based on dividing overhead by billable time your overhead costs you $1 per hour. If you charge it based on gross sales then you would add $0.01 to the calculation of the $10/hr profit job and $0.99 to the $1000/hr profit job. But then what happens if in a given month you only get orders for the one that pays $10/hr profit? You end up only covering 1% of your overhead. If you had calculated both at the $1/hour overhead then no matter what orders come in, the overhead is covered.
And on your comment about several minutes per badge being extreme. That example was based on doing a couple of badges, not 500. No matter how many you do there is more time involved than just the laser time. For a small order the extra time might be several minutes divided by only a couple of badges. For a large order it might be more minutes divided by a lot more badges, so might only average a few extra seconds per badge. But it's still time beyond laser time that should be calculated into your cost analysis. Your cost per badge is quite different if you get an order for 2 badges vs an order for 500.
From: Dave Jones (DAVERJ) [#28]
9 Mar 2007
To: PenTrophy (PENINSULATROPHY) [#21] 9 Mar 2007
The meter doesn't just start running when the customer comes in the door. It's always running. If you spend half your time taking orders, buying materials, etc... and the other half engraving stuff, and you only charge for the actual engraving time without somehow calculating the rest of the time into the cost, then you'll go broke. Even faster if you have to pay somebody else to take the orders, buy materials, etc...
You need to figure all of that extra time as either part of the job or part of the overhead. Either way it needs to be calculated into the cost of that job.
I've seen a lot of small companies fold where the peope were working 60 hours a week, had jobs coming in, but ended up with nothing in the end because they weren't calculating their true costs into the bids/quotes.
From: Doc (GREAT_ATLANTIC) [#29]
9 Mar 2007
To: Dave Jones (DAVERJ) [#27] 9 Mar 2007
Ahh! It just dawned on me where the disconnect is with this thread. The $.01 calculation isn't an overall assignment based on time, or part of a formula to determine pricing....it was simply a product of this particular item based on its total cost in backing into the justification of a retail price. That overhead assignment changes for each product value in this direction. It wasn't meant to represent an absolute in determining pricing for all products, but rather as a component for the overall profitability of this one item at $5.25. We've essentially gone in two separate directions in this discussion.
In other words, we don't assume that the $.01 covers a specific time in production....it assumes that given fixed costs versus total gross revenue, $.01 of the $5.25 represents overhead. That factors all production at different margins, price points, production requirements, etc. And depending on an operation's total gross sales, that number either increases or decreases.
In the larger picture, outbound pricing based on overhead is absolutely necessary....and I certainly wouldn't attribute only $.01 to the equation regardless of production time, given our fixed costs.
From: Peter [#30]
9 Mar 2007
To: ALL
Hi Doc,
Yeah Adeaide is only a smallplace. It certainly isnt Manhattan. We have only 1,250,000 people here.
But at the sametime, we have a plethora of engraving companies.
We have never subscribed to " cheaper means more, business school of economics"
Capitalism , democracy, competition and the magic ingrdient...Marketing are well and truly alive here in Australia..
regards
Peter
From: Doc (GREAT_ATLANTIC) [#31]
9 Mar 2007
To: Peter [#30] 10 Mar 2007
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