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  1. #1

    Question How do you calculate approximate cost for a specific service?

    Hello

    To be able to specify logical prices for your services you will need to have a good estimate of the costs of specific services. How do you calculate cost of a specific service (a 10M+500M transfer account for example).

    We see many companies openning and closing everyday. Sometimes I see a company offers very low prices and a few months later they close their company.

    What is your plans to avoid such a thing?

    Mac

  2. #2
    Join Date
    Oct 2002
    Posts
    211
    start by looking at your available resources, mainly bandwidth and space. Figure out, based on your plan, which is the limiting factor. I would go by the assumption (for determining cost anyway) that your using will use all the resources you give them (yes, I know they won't but better to prepare for a worst case scenario). By limiting factor I mean base don your plans and resources which will run out first. If you have a total of 1Gb space and 10Gb bandwidth and you offer plans for 100MB space and 2GB bandwidth your limiting factor is bandwidth and it is 5 accounts. Determin based on this how many such accounts you could handle and then divide your cost by this number.

    Now, this will yield a higher cost than most other methods, so you can modify certain elements for more realistic scenarios. But this will provide you with a highest possible cost

    hope this helps

  3. #3
    In fact I think there are many many other factors. Yes before we open our office we used to do our calculations in that way.

    Now we have office costs, semployee salaries, oofice rent, tax etc. It has become very difficult to do correct calculations.

    More difficult is managing costs etc

    Mac

  4. #4

    Some simple calculations

    Take your standard server, account, or whatever you have. Determine how many of each account you offer you could get off it. Divide for actual direct costs per account. If you have any separate costs, such as a price for IP's, etc. add that. Example: I can get 50 of plan C on a Server costing me $300/month including bandwidth. Therefore, cost is $6/plan. IP's cost me an extra $0.50, making direct plan C cost of $6.50.

    Now, determine the costs of support. If you are doing it all yourself, put in a reasonable hourly or per account rate. If you don't, you will have built a model doomed to failure when you have to add people. Example: Each plan C customer has .5 tickets per month taking an average of 15 minutes for an average labor time per month of .125 hours. Average rate is $20/hour, so average customer support for plan C is $2.5/month. You determin average server support is $75 or $1.50 per plan C, so total support is $4/plan.

    Add an overhead amount for billing, office, etc. Let's say you determine a staff of one plus office plus phone can handle 1000 plan C customers. Average cost per month is $3,000, so overhead is $3/plan.

    Sales and marketing. Determine costs of acquiring each plan C customer. Let's say it is $48. Amortize over average length of customer stay. Let's say 12 months. So, sales and marketing is $4/plan.

    Total costs then total $17.50. Last, do not forget to deduct your credit card costs from your selling price before figuring gross margin. Example: Sell Plan C for $29.95 per month...processing is $0.50 plus 5% so net is $27.95. Gross margin is $27.95 - 17.50 or $10.45. Gross margin is 37%.

    Note: It would be equally acceptable to add the credit card fee to costs. In that case cost would be $19.50. Gross margin (29.95-19.50) still would be $10.45. Gross margin is 35%.

    Many also look at this on mark-up basis rather than gross margin. Mark up would be $10.45 vs cost of $19.50 or mark up % of 54%.

    Moral of the story:

    It is easy to turn a profit, although a small one, when you are personally handling all the sales, administration and support. However, you must plan for growth/success. How sad to see companies start well, make a little money, grow, lose money, shut down.

  5. #5
    Incognito,

    Thank you. It was exactly the type of answer I was looking for. While I still want more opinions I have another question.

    1- What if you calculate a $100/month price for a V10 account(10M Space + 500M transfer, considering that some companies offer these accounts for even $10/year). Will you start offereing V10 at that high price?

    2- I have about 15 resellers. I have sold V10 accounts for $21 to them for more than a year. If I see it will only be profitable if I sell V10 for $35/year what should I do. What if you were me? You would increase prices?

    3- If sales decreases then business profit will decrease and your business will not be profitable. What will you do in such a situation?

    I appreciate comments.

    Thank you,
    Mac





    It seems I need a business management course What do you suggest.
    Last edited by wmac; 10-26-2002 at 02:29 PM.

  6. #6
    Join Date
    Dec 2001
    Location
    New Orleans, LA
    Posts
    581
    Your pricing is more set by the market than by calculations regarding costs. The market is saturated with suppliers.

    If you narrow your target market you have less competition, easier marketing & can charge higher prices

    Taking your prices & your costs - rather than calculate a cost per unit - calculate how many accounts you need to break even

    Once you have covered your costs with the breakeven number of accounts - every new account is profit until you reach a new physical limit that requires your costs to increase.
    Andrew McMaster
    http://www.FindMyHosting.com
    Compare Prices, Consumer Reviews, Help, Guides and More.

  7. #7
    Andrew,

    Thank you very much for your comment. I think your method of calculation is very logical and perhaps more reliable.

    Would you please look at my questions 1-3 (two messages above this) too. Would you please tell your opinion?

    Thank you,
    Mac

  8. #8
    Join Date
    Dec 2001
    Location
    New Orleans, LA
    Posts
    581
    question1
    - you cannot sell something for $100 if your competition offers the same at $10 and hope to stay in business long. I don't know how you have calculated $100/month so I can't comment further

    question2
    - you could try to increase prices but to go from $21 to $35 is a big jump. Again - I do not know the basis of your calculations so I can't really comment

    question3
    - If your sales decrease then you will stay in business so long as you cover your costs - if you don't you will go out of business. The reaction to losing sales is not normally to increase prices - it is to understand why you are losing sales.

    It seems the spirit of your questions are - 'Can I increase my prices?' - you can but you will probably decrease your revenues rather than increase them, that is unless you have incredible customer loyalty.

    The more pertinent way to look at it involves the following metrics

    - average cost to aquire a customer
    - average retention time of a customer
    - break even revenue

    You can make all the needed business decisions in your hosting biz with those 3 measures
    Andrew McMaster
    http://www.FindMyHosting.com
    Compare Prices, Consumer Reviews, Help, Guides and More.

  9. #9

    Follow up

    1- What if you calculate a $100/month price for a V10 account(10M Space + 500M transfer, considering that some companies offer these accounts for even $10/year). Will you start offereing V10 at that high price?
    Research your market. I have a list of 30 hosts whose pricing I check every month. I don't care about what the $10/year hosts are doing. I care about what the reputable moderately priced hosts are doing. I watch the hosts I respect. I will never offer a plan at a price that I will lose money. On the other hand, I will price competitvely as market does dictate price-just make sure you select the right market. (Not the WHT predatory pricing market).

    2- I have about 15 resellers. I have sold V10 accounts for $21 to them for more than a year. If I see it will only be profitable if I sell V10 for $35/year what should I do. What if you were me? You would increase prices?
    I would not pull the rug out from under my loyal startup customers. I would just not sell new plans for such prices. Also, I advise against building too much yearly business unless you have extremely good management skills. You deceive yourself with the early revenues and then find you don't have the revenue later to support them (See Cyberwings).

    3- If sales decreases then business profit will decrease and your business will not be profitable. What will you do in such a situation?
    You must take action to move forward and increase business through advertising, promotion, or other methods. If you are unsuccessful and can't increase business or reduce costs to achieve profitability, then it is time to get out. However, this business can be profitable. Find business advisors you trust and can rely on.

  10. #10
    People somtimes don't understand that an online business is a completely different thing than a store or a restaurant. Marketing is different, expenses are different, etc.

    As for web hosting, specifically, I think the best way to do is to analyze your competitions' prices and base your own service on the calculations you get. Keep your expenses according to the products you offer and the income you receive, rather than the other way around.

    Boris

  11. #11
    Andrew, Incognito and Boris,

    Thank you for your great responses.

    Actually I am trying to increase quality (I had two kind off accounts, very high quality and high bandwidth-cheaper, now I have moved those low quality accounts to high quality servers).

    I have hosted some sites freely in exchange to my banner on the bottom of their first page. It seems to me that I do not get very much from them. I may stop hosting them and pay the money to advertisement in magazines.

    It seems I must work on better business plan.

    Anyway thank you very much for your great help.

    Regards,
    Mac

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