This Pricing grid comes from the book “The E Myth” and “The E Myth Revisited” by Michael Gerber. I highly recommend this book, as it is very applicable to Piano Tuners, and will make you think differently about how your business works.
I know that I personally glaze over when I delve into financial stuff like this. I do not possess a “numbers” kind of brain, so if I can understand how this works, so can you and I promise it will be well worth your time. It could change your business forever for the better.
To start we will pick a fictitious salary goal of $70,000 per year, along with $10,000 in other “Variable Expenses” totaling $80,000. We will also pick a fictitious “Fixed Expenses” of $4,000 per month. These numbers are for example only. Realize that we are going to insert these numbers in a different way than if we were working with “real” numbers. I highly recommend doing this with what you would really like to be earning first, especially if it is more than what you are presently earning. This sets a powerful goal in your mind which you subconsciously move toward. (I personally prefer $140,000 per year, don’t you?)
Explanation of the terms used in this chart
Variable Expenses “vary” with the amount sold. A good example would be your car. If you have more tunings, you drive more, thus your expenses go up. Drive less, and your expenses go down. It “varies”. (Parts, Office Supplies etc would also go here.) Your target salary is also going in this total number.
Fixed Expenses are things like a car payment, rent, insurance and other things that remain constant regardless of how much you sell.
Contribution is what you “contribute” toward fixed expenses, after your variable expenses (your salary included) are paid.
Profit is NOT your salary. It is what’s left over after you pay your fixed expenses + your variable expenses which INCLUDE Your Salary. Profit is your BONUS to expand your business or go on a vacation to Tahiti.
Price per unit can be used as “tunings”, as they are actual units with a price tag on them but this is not specific enough in our world, as we generally sell other services or products while out tuning which would add to our daily quota. I thought it best to consider the “day” as the individual “unit” which you are selling. Your own personal financial goals become the driving force for your daily “target”, and your decision on what to charge for a tuning.
Take a brief look at the chart below for an overview of what numbers get plugged into which box. Don’t get bogged down with this, dont freak out about percentages, just look it over – explanations are to follow.
BOTTOM LINE PRICING GRID
Price Per Unit | $$ Per Day to meet your Goal | ||
Units Sold | 20 (5 days a week, 4 weeks in a month) | ||
Variable Cost Per Unit | Your Salary Per Day + Variable Costs Per Day (one day=unit sold) | ||
Percentages |
Per Unit |
||
Sales Revenue | Monthly Gross | 100% | $ Per Day |
Variable Costs | Monthly Salary + Variable Expenses | % of monthly gross | Divided by 20 =
Daily Variable Costs |
Contribution | Sales Revenue Less Variable Costs | % of monthly gross | Divided by 20 =
Daily Contribution to Fixed Expenses |
Fixed Expenses | Fixed Business Expense | % of monthly gross | Divided by 20 =
Daily Fixed Expenses |
Profit | Contribution Less Fixed Expenses | % of monthly gross | Divided by 20 =
Daily Profit |
////////////// | ///////// | //////////// | ////////// |
Break Even Sales Revenue | Fixed Expenses + Variable Costs | /////////////// | ///////////// |
Break Even Sales Units | Days needed to cover Fixed Expenses and Variable Costs | //////////////// | ////////////// |
Now, Let the fun begin and lets plug in the numbers to our example grid, using our own personal finance goals. Read through these quickly, and then take a closer look at how they calculate in the Pricing Grid below. In order to “get it” I had to look at these example numbers a few times with the explanation. This will take a little brain work, but IT IS WORTH EVERY MINUTE!
Variable Costs: Personal Target Salary: $70,000 + Estimated variable expenses of $10,000 per year divided by 12 months comes to $6,660. This would go into the “Variable Costs” box as shown in the chart below.
Variable Costs Per Unit – The Amount Per day to cover your Variable Costs: $80,000 per year divided by 12 months, divided by 4 weeks, divided by 5 days per week = $333. Per day
Units Sold – 20 (Days Per Month): The units in the example are work days in the month or 20 days, (4 weeks, 5 days per week) which goes into our “units sold” box.
Fixed Expenses: As mentioned, we will use an imaginary figure of $4,000 per month.
“Note”…When you do this with “real” Numbers: Businesses have multiple departments that take care of individual tasks such as marketing, bookkeeping, receptionist, etc. Just because you or your significant other handle this, does not mean you are getting it for free. Calculate the amount you want to be paid for these tasks. Figure that your company pays for your work vehicle, your health insurance, car insurance, disability insurance, and gives you an allowance for using a shop/office in your home. Play with the numbers. Be generous to yourself, and think of yourself as an employee of a company, with all the benefits. Imagine the company pays you for all the personal stuff you let the company use.
Break Even Sales Revenue: Your Variable Costs plus your fixed expenses = Break Even Sales Revenue
Profit: Pick your “profit”. This is your imaginary pay as a business owner. As I mentioned before, one of the greatest benefits of this exercise is to think of yourself as a business owner who is not part of the daily “work”. If your company is profitable, there will be money left over after all this. We will choose $1000 per month Profit for this example. Profit is not your salary. In reality it is your “bonus” after your salary is made.
Contribution – Sales Revenue less Variable Costs: Normally when you track your real world finances, you would subtract your variable costs (your pay, auto, supplies etc..) from your sales revenue. In our example, we are “playing” with the numbers, moving backwards in this step. In our imaginary example, the “Contribution” to fixed expenses would then need to be $5,000 in order to come up with $1,000 profit.
Sales Revenue – Your Monthly Gross: In the real world, you would start here with your monthly gross income. For our example, “Sales Revenue” would be your Contribution + your variable costs, which comes to $11,660
Price Per Unit: Your price per unit would be your Sales revenue divided by your # of units (20). $11,660 divided by 20 would come to $583 per day (or per unit)
Percentages and Per Unit: Sales Revenue @ 100% would be $583 per unit (day)
Variable costs of $660 divided by $11,660 coming to 56%, and $333 for variable cost per unit (day) as before.
Fixed expenses of $4,000 divided by $11,660 = 42% $4000 divided by 20 =$200 per unit (day)
Profit of $1000 divided by $11660 = 8%, and $1000 divided by 20 = $50 per unit (day)
Break even sales units: Break Even Sales Revenue of $10,660 divided by units (days) of $583 is 18, which would bring $0.00 profit and everything paid, including your salary.
Bottom-Line Pricing Grid (Example) |
Price Per Unit | $583 | ||
Units Sold | 20 | ||
Variable Cost Per Unit | $333 | ||
Percentages |
Per Unit |
||
Sales Revenue | $11,660 | 100% | $583 |
Variable Costs | $6,660 | 57% | $333 |
Contribution | $5,000 | 42% | $250 |
Fixed Expenses | $4,000 | 32% | $200 |
Profit | $1,000 | 8% | $50 |
////////////// | ///////// | //////////// | ////////// |
Break Even Sales Revenue | $10,660 | /////////////// | ///////////// |
Break Even Sales Units | 18 | //////////////// | ////////////// |
The chart gives you a target. Once you run the numbers according to your own personal reality, you can see if you are making a profit, losing money, or simply making ends meet. You can determine what to charge as well. If you charge $100 per service, according to the numbers on our chart, you will need roughly 6 service calls per day on average to meet the salary goal of $70,000 per year. At $150 per service, you will need roughly 4 service calls a day to meet your financial goals. If you are losing money, the “profit per unit” column will tell you exactly how much you are coming up short per day.
If all you sell are service calls, and you are falling short, you have 2 choices. Raise your prices or cut expenses.
Another option if you are falling short is to sell more services and products. You can open up your own restoration facility or find a rebuilder that you trust and negotiate a commission. A full restoration commission will certainly raise your daily average, thus, less service calls are needed to make the goal.
You also might make an alliance with a piano dealer, and earn a commission by helping your customers find a good piano.
I hope this has been helpful, and explains the formula in a way that is practical and useful to you. Always feel free to contact me if you have any questions or comments.
Happy Tuning, and Price them Right!
Dave
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David Estey, RPT
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