PRICING - 27.06.2014

Testing the economics of your prices

Old rate card

A rate card is a list of prices used by a service business which could charge labour by the hour but decides to offer fixed rates instead. Prices published on the rate card would be for specific services. For example, a garage with set charges for different levels of car servicing; a design agency with set prices per page for a brochure; and a firm of solicitors with set prices for property conveyancing.

Revising the rate. Businesses using rate cards can be slow to revise their prices. If they do, it’s often linked to price inflation or competitors’ rates.

Tip. Even if your business revises its rate card regularly, it always makes sense to periodically test it against your business model to ensure that the business remains profitable.

What’s a business model?

The business model in this context is a financial model describing the economics of your business.

Example. A car servicing garage’s business model would show the total volume of sales of each element in the rate card that is needed to cover the cost of the mechanics and other overheads, bearing in mind the volume of work its mechanics are capable of delivering.

Tip 1. Use a spreadsheet to build a model of the business. A good starting point is the cost side of the annual budget or if you do not have a budget, the prior year’s costs.

Tip 2. Because the business is labour intensive, ensure you have a breakdown of labour costs by person, function and department.

Tip 3. Ensure that you know how many productive hours are available over the year to each employee involved in delivering each service on the card.

Revenue modelling

The purpose of modelling the revenue is to check whether the existing rate card makes sense for your business in the context of its cost base and the skills and experience of its staff.

Tip 1. Create a new worksheet in the business model spreadsheet which contains the rate card data (see The next step ). Against each element of the rate card, set out the number of hours it takes to deliver the service. Ensure this is split between the seniority/skill level of person.

Tip 2. Bring the historic sales level of each item on the rate card into the spreadsheet. Use this to calculate the total value of sales and the total number of hours required for each item and in total for the business.

Are the rates profitable?

You can now compare the likely sales level, in total, for the business, against its cost base and staffing levels. You will also know which services deliver the majority of your sales and how many hours of labour are used by these services. If particular rates are too low, you’ll need to decide whether to increase them (taking into account competitors’ rates), stop offering the service or find a cheaper way of delivering it.

For a sample rate card revenue model, visit http://tipsandadvice-financialcontroller.co.uk/download (FC 06.10.04).