Company analyzes its profitability and discovers that mistakes in pricing can be costly.
A year after founding the Delahaye Group, a $1-million Hampton Falls, N.H., company that tracks public relations' effectiveness, Katharine Paine was in the black. But when she analyzed its profitability, she discovered half her projects lost money or barely broke even. Without an accurate reading of her costs, Paine was misquoting projects. To price profitably, she now considers:
* How much time are we spending? Paine asked her 15 employees to keep detailed time sheets. The time sheets would tell her whether the company was spending more time on nonbillable tasks than anticipated.
* What are my future costs? Clients would put in requests for quotes on projects six months or more in advance. During that time employees might get a raise, rendering the price quote unprofitable. So the company had to improve its budget forecasting.
* What's my billing rate? There are different ways to bill customers profitably. Bob Peabody, a Newport, R.I., consultant who helped Paine rework her pricing structure, advised her to look at comparable industry statistics for sales and the cost of direct labor (labor that produces sales) to compute a markup factor -- the amount she needs to charge to cover costs and make a desirable profit. Paine now uses the markup factor, derived by dividing the cost of direct labor into sales, to compute her billing rate. If on average $40,000 worth of direct-labor costs produces $100,000 in sales, for example, the markup factor would be 2.5. Paine can then multiply projected billable hours by 2.5 to arrive at a price for a project.
"The moment you make a mistake in pricing, you're eating into your reputation or your profits," Paine says.
-- Susan Greco
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To analyze time spent on projects, Katharine Paine uses Timeslips time-billing software ($299.95 for DOS or Macintosh; 800-338-5314; in Massachusetts, 508-768-6100). Consult Gale Research's Encyclopedia of Associations at your library for trade associations that collect sales, labor, and overhead statistics.