A concrete example of calculation a fair price
To determine how to invoice for a service, the entrepreneur needs to take a whole series of factors into account. Here is a case study.
The graphic design company Design Durand has been approached to do the graphics and mock-ups for a mail-order catalog. Jean Durand (the company’s only employee, along with the partner) must work out a price. He estimates that it will take him around 230 hours. He must therefore multiply his hourly rate by 230 and add the costs of materials and a share of profit.
Calculation of hourly rate (all values are in CHF):
Calculation of operating costs:
Jean Durand has two current credit facilities which he is using to finance his company's technical equipment:
Jean Durand has purchased technical equipment (hardware and software) for the graphic design office for CHF 70,000. He wants to use this equipment for at least three years. However, this equipment sustains a loss of value which Jean Durand must include as a cost factor (depreciation). He divides the purchase price by three years and obtains an annual depreciation of CHF 23,300.
For his own salary (which cannot be incorporated), he calculates CHF 10,000 plus social security payments (18%). In total, the amount is CHF 153,400. He deducts his living expenses from this sum and pays income tax.
Now, Jean Durand totals up all of the costs:
Jean Durand now divides this total cost by the average number of hours which he and his staff can invoice over the whole year. After taking out Sundays and public holidays, holidays and other absences (illness, for example), he calculates around 1,700 hours per full-time person. He therefore divides CHF 400,740 by 3,400 hours. He gets around CHF 118 per hour.
Now, Jean Durand calculates the price that he will present to his customer when developing his offer:
Appraisal: Jean Durand can make an offer of CHF 41,524 (including VAT). This way, he has enough room for maneuver to negotiate the price with the customer. He could potentially reduce his profit margin to 15%, complete the project in under 230 hours or give part of the order to a third company agreeing to work for an hourly rate of CHF 118.