A very pleasant contractor who wanted to run a successful business ordered a copy of my book, “Solutions Management Theories and Methods for the Contracting Business,” as well as a copy of my pricing information digest. The book shows how to address business protocols while the pricing guide provides information on prices based on customized factors relevant to business such as true labor/overhead cost, desired profit margin, average travel time to consumer, premium pricing for after-hours service, and discounts if they apply.
Before the price guide could be customized to his factors, however, he had to first read the book as a guide so that he could get himself where he wants to go with his business. As part of the service I offer, I was available to answer any questions he may had after reading the book. He’s not alone in having questions about improving pricing.
Step by step to success
The most often request is for assistance in calculating true cost. This makes sense because knowing your true cost of operation is the foundation of a successful business. If you don’t know your true cost, you will not be certain that the prices you are charging are at, below, or above your true cost. And, since profit above your true cost is the reason you went into business in the first place, knowing these factors is vital to your business success. In this aspect, he was no different. During the conversation we discussed his true costs, profit margins, and prices that would allow him the opportunity to recover his true costs and reach his goal of success.
I use the term true cost because most people only see tangible costs. That is the actual dollars-and-cents cost to purchase any item or service. True cost is that which you really incur because it also encompasses intangible costs such as callback expenses, bad debt, breakage and loss, continuing education expenses, and unapplied labor costs’ unforeseen items. Selling at your cost does not give you the opportunity to reach a successful business goal. Selling below your true cost is the pathway to extreme stress and frustration as you journey toward business failure.
After calculating his budget, the contractor believed the prices he would have to charge to reach his goal might not be feasible because they were going to be much higher than what he was currently charging. It’s not that he thought his customers wouldn’t pay. He felt strongly that the increase was immoral. To determine the morality of your prices, you must first know the definition of the word moral, which Merriam-Webster defines as a) of or relating to principles of right and wrong in behavior; b) expressing or teaching a conception of right behavior; c) conforming to a standard of right behavior; d) sanctioned by or operative on one's conscience or ethical judgment; or e) capable of right and wrong action.
All those meanings seem to point to the fact that moral correctness requires acting with principles, integrity, and intelligence. Right is reasonable. Wrong is immoral.
Knowing right from wrong
It’s wrong to perform tasks in a mediocre manner when you can choose to deliver excellence to the consumer. I asked that contractor if he delivered excellence to his clientele. He said he does. I wouldn’t expect anyone to say they didn’t. But after speaking with him, I believed his self-assessment.
So, I asked him if any other contractors in his area were charging prices that he thought were immoral and he indicated there were. When I asked him if his excellent delivery of services was better than that which they offered, he immediately affirmed.
It’s human nature to charge more than your competitors if you deliver a better product than they provide. But let’s not look at the selfish side of the issue. Let’s look at right and wrong to determine the morality of prices that allow contractors to deliver excellence while recovering their true cost and earning the reward they deserve for the risks they take in the delivery.
Is it morally right for a one-person contracting business to have to deny their family of time spent because they must spend that time working to be able to force low, erroneous prices by diluting overhead costs and not receive extra compensation for doing so? In a multi-person contracting business, is it morally right to pay technicians less than that which is commensurate with the abilities they provide and contributions they make to your business?
In both these situations, the answer is, “Of course not.”
In line with what’s right
Regardless of whether the tech is the owner or employee, good qualified technicians who have integrity, are loyal, possess mechanical aptitude, follow orders, and deliver excellence to the business’ clientele are invaluable to the business. And, they must be properly paid commensurate with their contribution to the business. Top techs also want health insurance, vacation pay, holiday pay, and retirement funds.
Those items cost contractors more than what is paid to mediocre techs who are paid the minimum with no benefits. Therefore, to minimally recover your costs and be morally correct, logic dictates that you must charge more than low-ball contractors who do not offer their mediocre techs proper compensation packages. Furthermore, if you take risks in running your business, and all businesses take risks, you are entitled to a profit above your costs.
To run a PHC service contracting business you need vehicles that come with a myriad of vehicular expenses and must be properly equipped to deliver excellence. That fact surely costs you more than the costs of contractors who supply their techs with rust buckets on wheels that cannot provide excellent service to consumers because those vehicles are not properly equipped, inventoried, or maintained.
Even if you have the best techs and vehicles, is it morally correct to pay your administrative staff less than what is commensurate with their contribution to your business? Of course not. Without them, your techs would have no customer requests to address. Is it morally correct to perform a task that can be warranted and not offer the consumer a warranty commensurate with the task performed by you and the hard-earned dollars they paid to you for the service you provided? Of course not. Warranties are an intangible cost to your business.
All legitimate business costs must be paid by the consumer who is consuming your valuable resources. This is true not just for businesses, but also for other entities that provide services to the public. Even religious institutions pass the basket for donations so they can afford to keep their doors open to preach that which is morally correct.
Knowing your responsibility
When you entered the business arena, you took on the responsibilities of a businessperson. The first responsibility is to think like a businessperson, not just a person in business. You must correctly identify and calculate your true costs to be able to keep your doors open to the public. To attain the goal for which all for-profit businesses exist, you must make a profit above your costs to make your business financially secure.
If you think it is sinful to make a profit—at the expense of you thinking I’m preaching religion, which I am not—I refer you to Matthew 25:14-30. It’s the parable of the three servants. A man who was going on a trip gave his three servants bags of silver. One received five. Another received two. The third received one. The servants with five and two bags doubled the amount by the time the man returned home. The third, however, buried the one bag and returned it to the man upon his arrival. The two servants who doubled the bags were rewarded while the third who did nothing was chastised.
If you are going to do nothing, you shouldn’t own your own business.
High prices alone do not mean that high prices are immoral. Those prices may very well be the prices that must be charged in order to be able to do that which is morally correct regarding the services you provide. Low prices that do not recover your true cost are wrong because those prices do not give you the ability to constantly deliver excellence to consumers; properly compensate your employees; expeditiously pay your creditors; and reward you and your family for the risks and responsibilities you take being in business.
As to that contractor who was hesitant to raise his prices to where they had to be, after our conversation, he realized he doesn’t have any other intelligent and moral choice. Before you become erroneously righteous as to the level of your prices, understand that the first five letters of the word righteous spell the word right, and, you must first be right in your judgement to be righteously correct, and, for your prices to be morally principled, honest, and intelligent.