All pricing methods have one goal in common: that you produce your target net profit. We’ll look at several approaches beginning with using a single divisor (or a single multiplier…they provide the same result).

What you need to know:
1. Your product and material costs
2. Your hourly labor costs
3. The hourly labor burden costs (this includes the company benefits provided for each labor-hour)
4. Your overhead as a percentage of sales
5. Your desired net profit as a percentage of sales
6. Your sales commission as a percentage of sales

Step 1: Add Up Your Costs
For each job add your costs for equipment, materials and burdened labor. If you aren’t sure what your burden per labor hour is you can start by assuming it’s 30% of the hourly wage.

Example:
Equipment = $2,000
Labor 16 hours @ $20 per hour = $320
Burden @ 30% of labor = $96
Total Costs = $2,416

Step 2: Calculate Your Divisor
Add your overhead as a percentage of sales and your desired net profit as a percentage of sales. Subtract that number from 1.0. The remainder is your divisor.

Example:
Overhead = 45%
Desired Net Profit = 15%
Total = 60%
1-.60 = .40 = Divisor

Step 3: Calculate Your Selling Price Before Sales Commission
Divide your Total Costs by your Divisor.

Example:
Total Costs = $2,416
Divisor = .40

$2,416 / .40 = $6,040 Selling Price Before Sales Commission

Step 4: Calculate Your Selling Price Including Sales Commission
Add the percentage of the sale that will be the sales commission to the selling price and the total is your Total Selling Price Including Sales Commission.

Example:
Selling Price Before Sales Commission = $6,040
Sales Commission = 8% of $6,040 = $483
Total Selling Price Including Sales Commission = $6,523

How to Calculate a Multiplier
The multiplier will produce exactly the same selling price. Divide 1.0 by the divisor and the result is the multiplier.
Example:
1.0 / .40 = 2.5 Multiplier
Try this out on the example above and you’ll see the same selling price as a result.

What’s good about using a single divisor or multiplier?
It’s simple and easy to use. It helps contractors just starting out how to think about their costs in relation to overhead and the difference between gross profit and net profit. This method works well if the contractor consistently does the same kind of work, such as high-efficiency furnace and air conditioner replacements that have similar material costs and labor time to complete.

What’s not so good about a single divisor or multiplier?
When jobs vary widely in equipment, material and labor costs this method will produce too wide of a pricing range, tending to “over-price” high-end equipment and “under-price” lower end equipment sales making you less price competitive. If this is the case then another method, which we’ll cover next week, is more desirable.

Email me for a How to Price For a Profit worksheet.