Modern Pricing in the Sign and Display Industry: Part 1 – Full-cost costing
We frequently receive enquiries from our customers asking what price they should quote for an advertising service, such as vehicle graphics or textile finishing. In most cases, quotations are poorly calculated and end up being either too high – meaning the order is not secured – or too low – meaning that the cost of your own labour is not adequately covered. In this four-part series, we would like to explain the approaches you can use to calculate sensible prices for services and thus ensure your success.
In the first part of our series on modern pricing, we would like to outline the method of full-cost calculation. This is the simplest basis for price calculation and aims to cover all costs incurred.
Throughout the series on price calculation, we’ll use the example of a customer enquiry for vehicle lettering on a leased car. The requirement is to apply a single-colour film with lettering to an area measuring 50 cm by 2 m on both the right and left sides of the vehicle. The application will take place at your customer’s premises, which are 20 km away from you.
In full-cost costing, all costs incurred are added together on a pro rata basis, including an hourly rate for your labour, and a profit margin is then added at the end. It is also important not to overlook wear and tear on the machinery used, such as cutting plotters or drag cutters. Even if, for example, a computer is not subject to physical wear and tear, when carrying out a full-cost calculation you must assume that you will need a new computer after a few years and factor in a portion of the cost of this new purchase for each job.
For our example job, you will need several products:
- Approx. 5m of self-adhesive film with a lifespan of at least 5 years.
- Approx. 5m of application tape for transferring the lettering
- Weeding tools such as a scalpel, tweezers and a weeding needle
- a cutting plotter for cutting the film
- a computer for creating and preparing the graphic
- A spray bottle for wet application
- Cleaning agent and degreasing spray for preparing the vehicle’s surface
However, when calculating full costs, your fixed costs must also be allocated proportionally to the respective order. These include, for example:
- Heating costs for your production facility
- Rent for your production facility
- Fuel costs for travelling to the customer’s premises for on-site installation
- Licence fees for your accounting software, which is used to generate your invoices
- Costs for your tax adviser
- Advertising and sales costs incurred to secure this contract
The largest item in the services sector is working time. If you have permanent staff, you must enter the hourly rate you pay them here. As a self-employed advertising technician, you must decide for yourself how much your working time is worth per hour. In our example, we’ll assume 40 EUR per hour. The total actual working time for the job is 3 hours.
When calculating labour costs using full-cost accounting, it is important that you do not just consider the actual working hours for this job, but also allocate a proportion of the time you require for your general administrative tasks, e.g. bookkeeping, preparing quotations, preparing promotional materials, tax returns, goods receipt, etc.
Depending on the structure of your business, a whole range of other costs may also arise, each of which must be allocated proportionally to the individual order.
Below you will find a cost calculation for our example order. It also shows that, for the end customer, the film itself accounts for only 7 per cent of the total order. If you were now to offer your customer a 7-year Ritrama Cast film instead of the 5-year Ritrama Pro film, your material costs would increase by almost exactly 20 EUR. From your end customer’s perspective, however, the quote would only become around 8 per cent more expensive, even though they would receive a significantly higher-quality and more durable result in return.
| Position | Price | |
| Material costs | ||
| 1/2 roll of Ritrama, 61 cm x 10 m | €16.08 | if the second half cannot be used, the entire roll must be used |
| 5 m application tape, 61 cm wide | €3.10 | |
| Pro-rata fixed costs | ||
| Workshop hire | €1.50 | |
| Vehicle lease | €1.20 | |
| General wage costs for staff not involved in production | €5.20 | |
| Advertising and sales costs | €15.00 | |
| Depreciation of plant and machinery | ||
| Wear and tear on cutting plotters | €2.00 | |
| Depreciation of tools | €0.10 | |
| Depreciation of computers | €0.50 | |
| Software licences | €0.60 | |
| Working hours | ||
| Creating the graphics on the computer | €60.00 | 1.5 hours at €40 each |
| Plotting and weeding | €20.00 | 0.5 hours at 40 EUR |
| Call-out charges | €20.00 | 2 x 20 km at 0.50 EUR each |
| Installation at the customer’s premises | €40.00 | 1 hour, at 40 EUR |
| Total cost | €185.28 | |
| Miscellaneous | ||
| Provision for potential complaints | €9.26 | 5% of the costs |
| Profit margin for the company | €43.59 | 15% margin to enable business growth |
| Total price: | €228.87 |
In the second part of our series on price calculation, find out how to use the contribution margin method to calculate prices in such a way that the calculated costs better reflect the way in which fixed and variable costs are actually incurred. Unfortunately, full-cost accounting is not always the most sensible or accurate way to calculate a quotation.
Part 2: Contribution Margin Accounting
Part 3: Competitive Pricing
Part 4: Value-based pricing
