5. Take the total dollar amount of delivery costs you ate during the
month and divide by the number of orders on which you in-
curred those costs. This gives you an average cost per order.
6. Multiply the average cost per order in #5 by the solution to #4,
the estimated total number of orders per year on which you ab-
sorb delivery costs. This is how much your quick turnaround
time strategy is costing you.
Staffing Costs
When you provide additional services, whether its phone support, free
installation, or a myriad of other services, you have to add staff. The
question is, What does it cost to provide these services?” Here’s one way
of answering that question:
1. Calculate the number of people it takes to provide these ser-
vices; its okay to have fractions, as some people split their time
between other duties and these additional service offerings.
2. Calculate the annual rate of pay for these individuals (to make
the math simple, I typically multiply their hourly rate by 2,000
3. Divide your total benefit package costs by your total labor dol-
lars to determine what percentage your benefit costs are to labor
dollars; dont forget to include your matching social security
costs, worker’s compensation insurance, and similar costs, along
with the health care and retirement plan costs
4. Multiple the annual pay calculated in #2 above by 1 plus the
percentage from #3 (if your benefit cost is 20 percent, multiply
by 1.2 to get the combined labor and benefit costs). This is what
you’re paying for providing these additional services.
Quality Costs
A printer taught me this lesson very early in my career. He asked me
whether I thought that his customers wanted a good print job or a great
print job. “Great print job!,” I said. He gave me one of those gotcha’ grins
and said, Most people cant tell the difference between a good print job
and a great print job. Plus a great print job is very expensive. My cus-
tomers want a good print job.”
14 Pricing for Profit
Are there aspects of quality that you’ve built into your offerings
that your customers don’t value – that they wouldnt be willing to pay ex-
tra to get? If so, heres how you can calculate the cost:
1. Determine what equipment is involved in adding the quality.
Then calculate the acquisition and operating costs associated
with that equipment. Acquisition cost is the purchase price of
the equipment plus installation costs and financing costs over
the life of the equipment. Operating costs include regular
maintenance, major overhauls, utility costs, insurance, and so
2. Convert the acquisition cost to an hourly cost by dividing the
total acquisition cost by the anticipated hours of life the equip-
ment has. Equipment lives are typically stated in some measure
of time—such as years or hours of operation—that make it easy
to determine the number of hours of you can expect from the
3. Convert the equipment operating costs to an hourly cost.
4. Use the staffing cost formula above to calculate the hourly rate
your employees are spending on quality development (design),
production, and assurance (testing).
5. Add the hourly rates for equipment acquisition cost, equipment
operating costs, and staffing costs.
6. Multiply #5 by the number of hours of operation of the equip-
ment. This will give you a reasonable estimate of the cost of
quality you’re incurring, but not recovering, in your pricing.
Once you’ve calculated these hidden costs, you can add them to the
results in Table 1-7, which shows the bottom line benefit that can be
gained by:
1. Increasing prices by 10 percent.
2. Replacing 10 percent of your work force with A players.
3. Replacing the wrong customers with those who value your
As you can see, we’re simply summarizing the data from earlier tables.
Ignorance Isn’t Bliss: It’s EXPENSIVE 15

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