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Make a New Year’s resolution to understand the amount of money you must charge for the services you provide to the public to recover the costs you incur providing those services. The right price also allows you to earn the profit you deserve for delivering excellence through those services.
Ignorance of your actual costs leads to the wrong pricing for your services. When your prices are wrong, your results will be faulty and unsatisfactory. In turn, your stress will increase and frustration will set in. To eliminate frustration and lower stress, you need to know what your true operational costs are — the foundation of attaining business success.
It is important to realize you only have three choices regarding the prices you charge for addressing consumers’ requests. You can sell your services at your real operational costs and defeat the purpose for which business exists. That is, to make a profit above your operational costs.
Another way is to sell your services below your true operational costs. In which case, you should consider leaving the business world since you don’t understand the concept of for-profit businesses.
Or you can be smart and sell your services above your actual operational costs. But selling your services above your actual operational costs does not mean you are maximizing your profits — just that you sold above your expenses.
To maximize your profits, you must understand the effects of many other issues on your operational costs and hopeful profit. Those issues include unapplied labor, unexpected price increases for that which you purchase to run your business, Murphy’s Law, the difference between tangible and intangible expenses, etc.
Some of these issues can be addressed in your operational budget plan. Others can be handled by choosing a profit margin that considers the risks you take being in business. It allows you to earn a reward for taking those risks as you deliver excellence to consumers. Choosing a profit margin is as important as calculating your real costs — if you intend to get the results you wanted from your business in the first place.
Don’t give in to panic and fear
As a business coach, I enjoy showing contractors how to identify and calculate their real costs. Together, we recognize, itemize and calculate their costs, line by line, using their numbers. We discuss the costs they have — as well as projected costs — so they can see their actual operational costs for the immediate future. Then we discuss what they should consider regarding the profit margins they will need to attain their goals.
Once these two factors are arrived at, the next step is to apply mathematical fundamentals to develop a selling price for any task. Those selling prices must be higher than their properly calculated true cost of the respective task to allow them to achieve the profitable goals they desire.
But when some contractors see what they have to charge to recover their real costs and earn the profits they want, panic sets in. Fear pops up its ugly head and attempts to suppress logic and the fundamentals of mathematics.
Since the price those contractors have been charging is so much lower than the amount they should charge to get where they want to go, the panic-driven fear makes them believe the price they must charge is unattainable. Initially, they illogically refuse to see that charging the properly calculated price allows them to attain their goals — while the prices they were charging do not and never will get to those goals.
When this feeling occurs and they convey it to me, I ask them if the operational costs we identified and calculated together are accurate. If they say no, we recalculate. When they say the numbers are as accurate as possible, I simply ask how they think they can recover their costs and earn the profit they want by charging less. Then, I emphasize the fact that the low prices they were charging have already proven they can’t get where they want to go.
Properly profitable prices are only higher when compared to the low prices that do not allow contractors to recover their true costs. When contractors do not adequately recover their costs, there is no real profit. Instead, there is increased angst, stress and frustration.
I’m proud to say that contractors who have sought my assistance and who have understood and properly implemented the logical and mathematically correct information I’ve shown them have increased their revenue for the same workload they had before contacting me. It’s the reason they contacted me in the first place.
Ignorance, inflexibility and fear in business lead to disappointment. Not knowing your real costs, resisting change and fearing that which is logically and mathematically correct results in hindering your ability to attain maximized profit from your business.
Knowledge, malleability and confidence present the opportunity to succeed in business. Knowing your real operational costs gives you a benchmark for your prices. It allows you to know how low you can go before you start losing money and at what level you start making money. Flexibility will enable you to adjust to everyday circumstances surrounding your business responsibilities.
And confidence lets you set aside fear and the anxiety associated with it. Confidence in the belief that your prices have adequately been calculated based on your true operational costs will allow you the opportunity to maximize profits and be less stressed, which will free you of frustration.
In the United States, one qualified tech and properly equipped service vehicle cost contractors between $100 and $250 per hour, dependent upon geographic location and the sale of all available tech hours. If you are selling your tech hours for less than your true operational costs, my opinion is that you are not only profitless, you are losing money.
I say that because no contractor sells all available tech hours all the time. Dependent on your geographic area, it costs you more than the minimum $100 to $250 per tech hour range when your costs are based on selling all available tech hours and all tech hours are not sold all the time.
If your contracting business has the proper balance of technical/administrative labor personnel, you probably only sell 60 percent to 80 percent of your total available tech hours. This is because you have no control when consumers need your services.
At 60 percent of hours sold, you need a 40 percent profit margin to break even on your labor and overhead costs. Seventy percent of available hours sold requires a 30 percent profit margin to recover your labor and overhead costs, while 80 percent of available hours sold needs a 20 percent profit margin just to break even.
Figure 1 shows what the cost becomes dependent upon average annual tech hours sold. The first column shows the cost when all hours are sold while the columns to the right indicate the amount it really costs dependent on the number of tech hours sold.
Realizing what a profit margin is helps you understand those percentages. Profit margin is the amount of money left, in relation to the selling price, after all business expenses except taxes on profit have been paid. Example: If you had a selling price of $142.86 per tech hour and your cost per tech hour when you sold all available tech hours was $100, you would have made $42.86 in profit. That’s 30 percent of the selling price ($42.86 ÷ $142.86 = 30 percent).
But if you only sold 70 percent of your available revenue-producing hours, that $142.86 would only allow you to break even. Knowing these factors is vital in choosing your desired profit margin and helping you to set aside fear.
Regarding fear, President Franklin D. Roosevelt said in his first inaugural speech on March 4, 1933, “The only thing we have to fear is fear itself.” These words were prophetic when Pearl Harbor was attacked on Dec. 7, 1941. Americans were horrified. President Roosevelt called it a “day of infamy,” and the American people rose to the occasion and defeated those who attacked us.
If you want to succeed, you too must rise to the occasion. Resolve to set aside the fear that can lead you to do what is illogical and mathematically flawed. Embrace the concept of maximizing your profits, lowering your stress and doing away with frustration by developing profitable selling prices. Understand you only have three choices when it comes to your prices — sell at, below or above your actual costs. It’s your choice. No one else can make it for you.
The only wise choice is to sell above your real costs. If you have been selling at or below those costs, summon up the flexibility to change your ways. You must recognize what your actual costs are to develop those properly profitable selling prices that can get you where you want to go. Then set aside your fear and quote those prices to your customers in a confident, caring manner.