If you are a digital marketer or a business owner looking to take your business online, the “Digital Made Affordable” workshop is a definite way to succeed in your venture.
In the Online Business Intellectual segment of the breakfast workshop, averaging the office overhead with the online overhead cost has triggered many questions. When a virtual office, a website or any other online activity operates properly in addition to our online objectives we aim to drive the fiscal office overhead and overhead Factor (will explain) down and reduce the hourly cost. That allows aggressive and competitive pricing, a good reason to attract new clients online and offline.
Overhead cost is a part of fixed office cost. Efficiency, the lifeline of a business can be measured by the Overhead Factor. While overhead is a fixed cost that remains constant, Overhead Factor is a variable number measured in percentage.
Overhead portrays the fixed cost paid to maintain a business regardless of the number of clients or sales. Overhead cost includes Phone, Electric, Tech support, Equipment lease, Rent, Insurance, etc…To that we add the cost of employees who are not directly productive but are essential for daily business operations. That includes secretaries, accounting and other employees who hold a support position. Sometimes the percentage of the President cost may also be integrated.
Along with the Overhead cost we have the cost of Producers plus the cost of martial/promotion/ advertising used to assist with the sales.
Producers are those who actively talk, meet and acquire business and/or perform the service. Producer cost should not be a fixed cost to the business. Producer salary and/or commission should be based on the sales he/she generates. That is one of the reasons most businesses set a sales goal (it’s a must so that we can reach projected sales) to each of their sales associates.
To each unit sold, product or hour, we add two costs:
- The cost of a product/or the cost of an hour of work
- Portion in percentage of the overhead cost – This percentage is described as the OVERHEAD FACTOR.
Overhead Factor is equal to: Total cost of the Overhead divided by the total cost of sale (producers plus other costs related to the sale PLUS 100%)
Overhead cost = $100,000 a year
Producer cost =$160,000 a year (this amount is a total of salary + commission + other related cost of sales items or materials)
Then the Overhead Factor = 100% + (100,000/160,000) = 162.5%
On a small scale this is how it looks. (To download the excel spreadsheet click here) It will allow you download the file and make changes that apply to your situation.
|Overhead Cost Table|
|Producer Cost||$3000 – sales personal plus sales materials|
|Overhead Factor||100% +($2000/$3000) =||167%|
|Monthly Units Sale Goal||196|
|Overhead Cost Pre Unit OCPU||Producer Cost * Overhead factor divided to monthly Units sale goal($3000*167%) / 196 (units) =||$25.53Based on the overhead we must add $25.53 to the cost of the unite or hour|
|Cost of a Unit or Production||$30||$30|
|If Sales Price is Fixed as||Sales price is dictated by the market in many cases||$72|
|The Profit Margin is||100%-((Total cost*100%)/ sales Price))100%-((55.53*100%)/72))= **||22.8%|
**Profit percentage is calculated from the sales price down, not from the cost up. (72*(100%-22.8%) = 55.53 = product cost. Calculating the sale price of the product given set percentage margin: (Product cost* 100) Divided by (100-Profit Margin) (55.53*100) divided to (100-22.8)= 5553 / 77.2 = 71.93. In the sample above I round it to $72.
If we reduce the Overhead Cost and/or increase the number of units sold, you will drive your Overhead Factor down, Cost per Unit will be reduced and the profit margin will increase.
That precisely is one of the tasks you should assign to your website!
Your job is to develop a website based on business objectives, target market and user interaction, allowing the existing consumer to communicate using your website while attracting new consumers.
If your website is not or was not developed based on business principles then you have a website that is just a large format of a business card or is like an empty show-room. It then becomes an expense center rather than a profit center.
Unfortunately in today’s business environment and in a market that grows digitally over 200% a year, one can’t afford not to be aggressive online.
Besides this, take one moment and find one reason why anyone should agree to miss the greatest advantage of the internet. It allows you to:
- Have an office anywhere there is Internet.
- Have an office open 7 days a week, 24 hours a day (no sick days or vacations)
- The greatest source of new clients and
- The fastest way to grow your business organically.