Chargebacks Tutorial:
how to calculate rates based on the full cost of products and services

Abstract

Contemplating chargebacks? Or are you already charging for your services? This course presents a well-structured method to determine what belongs on your price list and how to calculate the prices.

Chargebacks should drive fiscally sound decisions about what customers will and won't buy from you. Chargebacks must be designed with this end in mind.

First and foremost, they should price items that customers can choose to buy, and present them in units which are understandable.

Furthermore, chargebacks should represent the true cost to shareholders of clients' purchase decisions. They should incorporate a fair share of the costs of things clients don't buy, such as overhead and infrastructure. However, they must not include things that competitors (outsourcing vendors) don't do, such as corporate-good activities. In other words, pricing calculations should be based on the concepts of activity-based costing.

This one-day course examines the process of calculating prices in detail, step by step.

Outline

1. The real objective of chargebacks: price signals in a marketplace.

This introductory session discusses the objectives of chargebacks, why prices should be based on ABC, the risks of fixed-fee pricing, timing of price changes, and the relationship of pricing calculations to the budget.

2. Selecting the units (the entries on the price list).

The first set of decisions to be made, before analyzing any numbers, is the definition of the items on the price list. If this critical step isn't based on the right principles, chargebacks may fail to impact decision making. This session describes the concept of "lines of business" to determine the number of different labor rates to be developed. It defines key criteria for the selection of items on the price list, and discusses the appropriate level of granularity and the treatment of compound prices.

3. Which costs go into prices, which don't.

The calculation of prices involves amortizing indirect costs to the right items on the price list. This session discusses which costs should and should not be amortized into prices, defining the layers of costs in activity-based costing.

4. Compensation costs: billable versus unbillable time.

The first set of calculations in determining labor costs is the billable-time ratio. The amount of time set aside for unbillable (overhead) work is a critical driver of the cost per hour. This session explains the concepts, the problems that occur if ratios are set too low or too high, and why different billable-time ratios are appropriate for different types of staff. It provides a detailed list of unbillable activities as a checklist for calculations.

5. Compensation costs: blended rate for contractors and staff.

Next, compensation data is combined with billable-time ratios to determine the cost per billable hour for each type of staff. These numbers are combined into a blended rate by analyzing the staffing strategy for each line of business.

6. Amortizing fixed and indirect costs.

Indirect (eg, fixed) costs must be amortized into the variable price per unit of each item on the price list. This session enumerates the sources of indirect costs, describes how to amortize them (without getting caught short on fixed costs), and discusses the treatment of direct costs which may or may not be amortized.

7. Putting the pieces together.

The final session explains how to synchronize a price list with a budget, and introduces an overview of the critical success factors in instituting chargebacks for the first time. It leaves ample time for questions about attendees' specific challenges.

Contact us to discuss your specific interests and requirements.