Build your profit into your price
he reason many
drycleaners fail to grow is that they simply don’t
understand the art of pricing. It is vital that a business have
a firm pricing policy; one that reflects all the costs of doing
business, including an adequate gross profit, an adequate net
profit and a reasonable return on investment.
So many times I’ve recommended
against building a new plant or even, buying a new
cleaning machine, because I didn’t
think that particular cleaner was going to get the same ROI he
would have gotten by leaving his money in the bank!
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Pricing is both an art and a science, and
one that should be reviewed at least every three months. Your
pricing should reflect the necessary operating margins to keep
your business profitable. However, your pricing, absolutely,
must be commensurate with the value the customer actually
receives.
The problem of over-pricing, in this
industry, is not as prevalent as under-pricing. Over-pricing
will be quickly reflected in loss of volume, and a failure to
grow as rapidly as expected. Quite often there’ll be
complaints about quality and returns which are really price
complaints in disguise. You’ll also notice many people
asking the price and walking away.
A much more common and serious problem is
under-pricing. A cleaner that is under-pricing may have a high
cash flow and his business may seem to be good, but his gross
profits and net profits keep getting smaller.
If you base the prices you charge solely
on the prices your competitors charge, you’re
under-priced.
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If your prices haven’t been changed
in six months, you’re under-priced.
When increases in piece counts and cash
flow don’t result in increased profits, you’re
under-priced.
If you have a good accountant, he should
be able to determine from analyzing your financial statements
whether your services are under-priced. While under-pricing may
make increasing your volume easier, it won’t make
surviving any easier. You have to work harder to charge more,
but the end result is success as opposed to failure.
“How should I price my services?”
When you sell a service, and not a
commodity, it can be difficult to establish the right price.
The problem is even more complicated for drycleaners because
they sell multiple services — drycleaning, alterations,
laundry, etc.
Most drycleaners do not consider all of
the factors necessary to determine a fair selling price. They
consider equipment, labor, supplies and other overhead
expenses, but they fail to factor in a planned profit margin.
Then they’re surprised to find that there is little or no
profit to be had, after all of the other expenses are paid.
Profits don’t just happen. They have to be planned for.
Ground rules for pricing your services
1. Each
service you sell should contribute to your bottom line.
Don’t allow one to subsidize another. Don’t
deliberately operate one service at a loss to promote the
success of another.
2. Be sure
that you have an accounting system that accurately reflects all
of your operating and overhead expenses. You need all of the
facts to determine the true costs of providing your various
services.
3. Understand
the difference between direct and indirect costs. Direct costs
are expenditures you incur because you perform a specific
service for your customers. If you eliminate that specific
service, you eliminate the machinery, materials and labor you
need to perform it. Direct costs can easily be assigned to that
specific service.
However, indirect costs go on even though
you eliminate a specific service to your customers. For
instance, your rent will probably remain the same even if you
discontinued a particular service.
Some expenses, like utilities, can be
classified as both direct and indirect costs, because they may
increase or decrease only partially in relation to the services
you offer. Your goal is to find some basis that will allow you
to allocate indirect costs to each service in order to
determine the total cost of that service.
Analyzing your costs per unit of service
Now that you know the ground rules, you
should use the cost method of arriving at prices for the
services you sell. Here are the steps:
1. Determine
your direct costs per unit of service. (This, of course, will
be different for each of your different services.) This is done
by taking all of the costs, which are specific to this service,
and dividing those costs by the number of pieces serviced.
2. Determine
your indirect costs per unit of service. Here you may have to
take each indirect cost, such as rent, insurance, etc. and
divide by the total number of pieces from all of your services.
3. Add the
direct and indirect costs to obtain the total cost per unit in
each of your various services.
4. Determine
the percentage of net profit you want to make on each piece in
your different services. Subtract that figure from 100 percent.
The difference is your cost complement.
5. Divide the
total cost per unit of service (from step 3) by your cost
complement and multiply by 100 to get the price you should be
charging per piece for that service.
For example, suppose your total direct and
indirect costs to dryclean a pair of pants is $3. And, suppose
you’d be satisfied to make a net profit of 25 percent.
Step 4
100%
–25% (desired
net profit)
75% (cost
complement)
Step 5
$3 (cost per
unit)
Divided .75 = 4
Divided .75 = 4
4 x 100 = 400 ($4)
Following this equation, the price you
should charge for a pair of drycleaned pants is $4.
This is a logical method you can use to
determine prices for your services. The method is based on your
total cost for each service. It considers a fair price to the
customer and a reasonable income to you.
Dennis McCrory is president of The Golomb
Group Inc., a firm that designs marketing programs for
drycleaners. Contact him at The Golomb Group Inc., 7664 Plaza
Ct., Willowbrook, IL 60527 Tele: (800) 679-5856
E-mail: dennismccrory@golombgroup.com
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