Finance and Bookkeeping - Session 09

Client Profitability and Pricing

Calculate what a client contributes after the cost of serving that client. Explain which costs, service problems and contract terms the CEO should consider before changing a price.

The MSP finance task

A client pays every month, but the technicians spend more time on that client than expected. You need the contract, service records and delivery costs to explain whether the work earns enough to support the business.

Client profitability

Client profitability estimates revenue minus the costs assigned to one client. State the period and cost method before comparing results.

Direct and shared costs

Direct costs can be traced to a client. Shared costs support several clients. Show shared-cost allocations separately from direct contribution.

Labor cost rate

Practice example: $24,000 of loaded labor / 300 delivery hours = $80 per hour. Loaded labor includes pay and the employer costs specified in the calculation.

Unassigned capacity cost

At $80 per hour, 270 assigned hours use $21,600 of labor cost. Show the remaining $2,400 when reconciling client reports to the company's labor cost.

Client contribution

Practice example: $4,000 revenue - $700 tools - $2,000 labor = $1,300 contribution before shared overhead. Contribution margin is $1,300 / $4,000 = 32.5%.

Price and service scope

Check the work included in the contract. A recurring service change, a separate project and a technical repair have different costs and pricing consequences.

Margin and markup

Margin divides contribution by price. Markup divides the amount added by cost. Practice example: $2,700 cost / 60% = $4,500 price for a 40% contribution margin.

Client decision report

The admin manager prepares checked revenue, costs and assumptions. The service team explains unusual work. The CEO decides whether to change price, scope or delivery.

A client earns $4,000 in service revenue and has $700 of tools plus $2,000 of assigned labor. What is its contribution before shared overhead?

  1. $3,300
  2. $1,300
  3. $2,000
  4. $700 plus a share of office expenses

A report uses $24,000 of labor cost and 300 practical delivery hours. Only 270 hours are assigned to clients. What should the report show?

  1. A lower payroll expense for unused hours
  2. A higher revenue balance to match capacity
  3. All labor assigned equally by client count
  4. $2,400 of unassigned labor cost

Direct costs are $2,700. An exercise calls for a 40% contribution margin. Which price meets the requirement?

  1. $4,500
  2. $3,780 including a 40% markup
  3. $3,700 rounded for monthly billing
  4. $4,000 with a separate overhead allocation

Key terms

Client profitability
An estimate of profit attributable to one client under a stated revenue and cost method.
Direct cost
A cost reasonably traced to a particular service, product or client.
Shared cost
A cost supporting several clients or the business as a whole.
Client contribution
Client revenue minus the direct costs assigned to that client under the report's method.

Three points to remember

  1. Use a consistent cost method and reconcile unassigned costs.
  2. Separate service problems from contract and pricing problems.
  3. Support a price recommendation with future costs and contract terms.