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Implementing An Effective Cost-Plus Pricing Strategy

Cost-Plus pricing is indisputably the most common pricing technique used by printing organizations. A cost-plus pricing strategy is pretty much what the name implies. You set a price by estimating your costs and add a markup to get the sell price. The markup should include a desired profit-margin, unless you are a non-profit organization. If you set prices below your cost, you will not generate enough revenue to cover all of your expenses. Set the price too high and customers will go to your competitors to get a better deal.

Most companies use cost-plus pricing because itís simple to understand and implement. Just calculate your out of pocket costs, add a reasonable markup, and you have a price. But cost-plus pricing is more complex than many realize.

Sure, itís easy to determine your paper cost and other purchases. The real challenge is estimating your internal out-of-pocket costs such as employee expenses, equipment operating costs, utilities, sales and administrative costs, and the other 100+ expenses required to produce a customerís order.

The only effective way of estimating internal costs is with accurate budgeted hourly cost rates. Nevertheless, most companies estimate cost with erroneous or outdated cost rates that donít reflect their true costs.

The primary objective of budgeted hourly cost rates is to ensure 100 percent of all out-of-pocket costs are recovered with chargeable production hours. If you estimate or sell 5 hours of press time, then part of your out-of-pocket is recovered in those 5 hours.

There are several industry best practices for calculating budgeted hourly cost rates. The methods and formulas vary based on a number of factors including the type of expense, the type production equipment, employee pay rates and benefits, how often a machine runs, the depreciation of equipment, and many other considerations. Calculating budgeted hourly cost rates can be perplexing and challenging, often requiring the help of someone with accounting expertise.

Profectusí has developed budgeted hourly cost software called the Cost Rates Advisor with simplifies the process. The Cost Rates Advisor has an easy user interface, pre-programmed formulas and industry best practices. A Data Import Wizard saves hours of data entry by importing income statements, payroll reports, and other data.

Accurate budgeted hourly cost rates provide a true picture of out-of-pocket costs so you can effectively price jobs using a cost-plus strategy. Ultimately making your shop more competitive and profitable.

By: Craig L Press
Profectus, Inc.

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