CALCULATING HOW MUCH TO CHARGE FOR PRECISION FARMING SERVICES
May 19, 2017
Source: By Tim Norris, CEO of Ag Info Tech, a precision farming dealership in Mt. Vernon, Ohio as published in Precision Farming Dealer magazine
This is the question that has haunted me all the years I've been involved with precision agriculture. I believe it actually followed me from my days of managing the local co-op. As farmers and consumers, we want to be charged as little as possible. As salespeople we tend to over-service and sometimes not even charge at all, because we want our customers experience to be good, and we want them to continue to do business with us.
Finally, we know we're charging the customer two or three times what the service technician's hourly rate is, so we're pretty sure we must be making money. Unfortunately, the end result of all these perspectives is that we typically charge too little for our service.
To know what we need to charge for something we need to know our true cost. This takes a little digging into your company's financials to figure out, but I feel it's an extremely worthwhile effort.
The following are examples of two different precision employees:
An entry level service employee, making $15.00 per hour, based on a 40 hour work week for 52 weeks would earn $31,200 per year. Taxes, 401K, insurance, workman's compensation and other employee benefits can be more than an additional 40%. This brings the benefits total to $12,480 and would make the total employee cost $43,680.
But we still have their vehicle, fuel, insurance, computer, tools and training expenses which, at our company, Ag Info Tech, totals an additional $12,705 per employee. This makes the annual expense for a $15.00 per hour employee $56,385.
A salesperson on a salary of $60,000 would cost $96,705 annually.
Next we need to convert these yearly costs to a per hour cost.
If each type of employee worked all 2,080 hours in a year:
•The $15.00 per hour employee would cost us $27.10 per hour.
•The $60,000 salesman would cost us $46.49 per hour.
However, of the 2,080 hours that are available, we need to take off 2 weeks vacation, 3 sick days, 7 holidays and 1 week of training. That totals 200 hours, 25 days - or 5 weeks - that our people are doing other things that our company cannot bill anyone for. That means that we only have 1,880 hours available to bill. So our costs now per hour are:
•$29.99 for the $15.00 per hour employee
•$51.43 for the $60,000 salesperson
So if we charge $65.00 an hour for our service we'll make money, right? I would say most likely, the answer to that question is a big, "NO." One factor that has yet to be figured in to our equation is downtime. Morning coffee, getting ready to leave the office, driving from place to place, extra trips because we don't have the parts we need, unpaid warrantee work and just down time when there's no work to be done.
When I looked at the hours we billed, vs. the hours our service techs had available, I was shocked to see that we only billed 32% of the billable hours. This was a real eye opener for me when I started to dig into Ag Info Tech's financial information.
This makes our break even on each of these two employees:
•$93.00 per hour for the $15.00 hour employee
•$160.00 per hour for the $60,000 salesperson
Granted, that salesperson should be far more efficient than that, as they should be selling when not servicing. But for the service crew, it's their job to service and they're not really doing other things to make the company money. One thing I've learned from this exercise is we need to be more efficient at billing our actual work hours. I also think, as business owners or managers, we need to know what our company's numbers are and share them with our service crew. When they realize how much their time costs, they'll be more likely to bill for their actual time and waste less time when on the farm. They'll see their own worth.
As business owners and managers we have the obligation to charge our growers a reasonable amount to ensure that we're able to provide them with good quality service well into the future, long after the sale. I don't think it's unreasonable to be charging $85 or $90 per hour and it's crucial that we get our percentage of billed vs. billable hours up to at least 60%.
I hope this helps give you the tools to figure out your true costs in determining what you should charge for your precision services.