The “premium” price of having “peace of mind”

How can we identify an abstract concept like “peace of mind” in financial accounts?

• Some business services have no tangible result, despite being important to the financial health of any customer buying the services.

• Examples might include IT maintenance, Safety, Insurance (you can’t “see” or “touch” any finished product).

• Customers in need of these services must control their costs, but also be sure that their money has been spent wisely (in other words, that the service will “work”).

• In short, they need the “peace of mind” of a job well done.

Leeds Services Company Ltd

• Based in Leeds, Yorkshire (United Kingdom)• An electrical contractor, specialising in safety

testing and inspection.• We’re hoping to use Comwol to become “helpful

experts”• We are going to attempt to account for the

premium costs of your “peace of mind” when buying safety services.

What does provision of peace of mind “cost” the supplier?

• In order to reassure our customers that we are the best choice of electrical contractor, we incur certain costs– Some are a legal requirement (such as paying

salary taxes on full-time employees)– Others costs we choose to incur in order to

establish a “premium value” perception amongst our clients (such as membership of trade bodies or consumer protection services).

What do safety costs look like in the

Profit and Loss account of a supplier? • This is a summary P&L to

show the sorts of costs we incur in order to ensure our clients have “peace of mind”

• These are example (guesstimate) figures. The actual amounts would vary per year, per industry or per location.

Accounting for safety and peace of mind

Profit and Loss accountFor the year ended 31 December 2008

Sales £500,000.00

Cost of salesLabour costs (Skilled engineers) £250,000.00

Employee Costs

Employers National Insurance £30,000.00Training £10,000.00

General Administrative costs

Membership / costs of professional bodies £1,200.00(for bodies such as the NICEIC)Insurance £20,000.00Total costs for "peace of mind" £311,200.00

The “extra” costs that an electrical contractor might incur in order to ensure peace of mind

include: • Paying salaries for highly trained and qualified engineers

• Paying employers tax on those salaries (direct employment of staff allows all work to be traced)

• Training fees - Staff know all current safety regulations

• Membership of trade organisations (subscriptions costs)

• Membership of NICEIC (a consumer protection body for the electrical industry – includes an insurance backed warranty scheme to protect customers should any member firm cease to trade)

• Insurance protection (£5million)

How different is the Profit & Loss

account of a “cheaper” supplier? • Less money spent on salaries

(less highly skilled / less knowledgeable staff)

• Consequently less employers tax and probably less insurance

• No costs of membership to professional bodies

• Consequently no requirement for high levels of insurance cover.

• Supplier can afford to be cheaper because “peace of mind” costs have been ignored or reduced

Costs incurred by a "cheaper" competitor

Profit and Loss accountFor the year ended 31 December 2008

Sales £500,000.00

Cost of salesLabour costs (basic wages) £175,000.00

Employee Costs

Employers National Insurance £21,000.00Training £1,000.00

General Administrative costs

Membership subscriptions N/AInsurance £2,500.00

£199,500.00

What does this mean for the customer? • That “peace of mind” costs are likely to be

distributed amongst a contractor’s customers (in the form of a peace of mind “premium”).

• Therefore, the “cheapest” price for peace of mind purchases or services, might not be the best price.

• What will this buying decision look like from the customer’s point of view?

Customer’s buying decision (seen from a Profit and Loss point of view)

• Required works include safety inspection on building (premises expense)

• and equipment (repair and maintenance expense)

• Even though these are invented figures, one company is definitely cheaper.

• Why? (Answer = the peace of mind premium)

Costs incurred by customer

Profit and Loss accountFor the year ended 31 December 2008

Sales £500,000.00

Cost of sales N/A

Employee Costs N/A

General Admin costs

Premises expenses £20,000.00 £18,000.00 £2,000.00Repair and maintenance £600.00 £540.00 £60.00

£20,600.00 £18,540.00 £2,060.00

Peace of mind premium £2,060.00

Costs via Cheaper supplier

Costs via Premium supplier

The Customer’s buying decision.• The Peace of mind premium is equivalent to an insurance product.• Imagine a problem arises out of the original buying decision…..• The costs of a worst case scenario (eg fire or injury caused by electrical fault)

might include: • Business disruption – (reduces customer’s revenue)• Additional costs – (to replace faulty equipment or lease of new or

temporary premises – reduces customer’s profit)• Increased Insurance premiums in future (reduces profit)• Legal / compensation costs to resolve injury (reduces profit)• Costs of time and effort to attempt recovery from “cheaper” contractor

(even if cheaper contractor proven to be at fault). • Worst case costs are likely to be far larger than the amount of the Peace of

mind premium.

Summary• Intangible concepts / products / services, and the business

decisions around them, can be traced in a company’s financial accounts.

• A peace of mind premium should reduce the chances of a worst case scenario

• Good suppliers should be able to produce evidence that they have provided for a customer’s peace of mind.

• A customer should be able to compare the risk of a “worst case” scenario against the price of any peace of mind premium.

• Leeds Services Company Ltd are always happy to demonstrate and explain the provisions we have made for your peace of mind.