A husband and wife team in the plumbing service business, who suffer from a business disease affecting many PHC businesses, recently contacted me. I was impressed by their congeniality, togetherness and honesty as we spoke. Here’s the gist of the conversation. See if it sounds familiar. I won’t refer to them by name because I believe client confidentiality is paramount.
This magnificent couple work together. The husband performs the plumbing services requested by consumers while the wife addresses the administrative responsibilities of the business. Both seem to be highly intelligent and want to deliver excellence to their clientele. But they both have realized that their pricing policy is deficient, causing the business disease called “myfundsarelow.” Poor business practices cause this hideous business disease.
The two live and work in a part of the country where the cost of living is high. They charge an amount that is higher than their estimated costs. They believe their hourly cost of labor and overhead to be $157 per hour while they charge $185 per hour. If the calculations were correct, they would enjoy a 15 percent profit margin.
However, instead of having a profit, they have a $2,700 deficit every month. Deficits occur when the money coming in is less than the money going out.
You might wonder how it is possible if they charge more than it costs them. When referring to the operational costs of a contracting business, I always use the term “true cost.” My business theories and methods are based on the fundamentals of mathematics and good old common sense. If you don’t implement mathematical fundamentals and common sense, your conclusions will be wrong. And wrong numbers produce wrong results.
Their estimated cost is lower than their true cost because their estimated cost is wrong. Their profit margin isn’t high enough to make up for the flaw in their miscalculated estimated cost. The result is a $2,700 monthly deficit.
Don’t forget the labor factor
A contributing cause to their situation is the unapplied labor factor. Estimated costs are based on selling a certain number of hours. If you sell less than that certain number of hours, the cost per hour increases. If your profit margin is low and you sell fewer hours than your estimated base of hours to be sold, it’s easy to attain deficit results.
To try to find out a quick range of their cost per hour, I asked them specific questions and ascertained that their minimum true hourly cost was between $135 and $210 per hour — if they sold all their available tech hours all the time. But no contractor sells all available hours all the time. If they only sold 70 percent of their available revenue-producing hours, which is within the realm of normality, that range of true cost is between $192.79 and $299.90.
At the low end of that range, selling at $185 per hour when it costs $192.79 would result in a deficit of $7.79 per sold hour. In a 30-day month, there are 4.29 weeks or about 150 potentially saleable hours. If you only sell 70 percent of available hours, you would sell about 105 hours; $7.79 multiplied by 105 hours produces a monthly deficit of $817.95.
At the range’s higher end, they are selling at $185 when it cost $299.90 results in an hourly deficit of $114.90, which interpolates into a monthly deficit of $12,064.50. The range of true costs in comparison to their $185 hourly selling price certainly makes their $2,700 monthly deficit plausible.
I asked how much his wife was paid for her labors as the business’ administrative staff. I heard the answer I so often hear — she doesn’t get paid. If the wife were paid a salary commensurate with her laborious contribution to the business, their deficit would be higher than $2,700 per month.
The disease of myfundsarelow in PHC service contracting businesses can only be cured by using common sense to implement the fundamentals of mathematics and rationality as those fundamentals pertain to your pricing protocols.
When determining your selling prices, identify and calculate all your legitimate tangible and intangible costs as those costs pertain to any task; choose a profit margin that can get you where you want to go; then apply it to your true cost.
Getting to that true cost
Obviously, the couple in question are using flawed numbers. I asked them what others in their area charged, but they said they were not aware of the answer. However, being a business consultant and familiar with the costs associated with an area like theirs, I know other contractors in their area, who are truly successful, are charging much more than they do.
I asked them if they thought those contractors delivered better service than their business does. The husband quickly said no. So, I made the point that if the other contractors don’t deliver better service yet charge more, then the couple infected with myfundsarelow should consider charging more money for their superior service than the other contractors charge for their inferior quality.
They admitted that neither of them knew how to identify and calculate their true cost of operation and needed my assistance. I told them of the ways I could help them so that they could rid themselves of the myfundsarelow business disease. But they must understand and implement sound business theories and methods to rid themselves of it.
I offered them my book, “Solutions Management Theories and Methods for the Contracting Business,” which delves into identifying and calculating true operational costs; choosing a profit margin to apply to true cost; and developing profitable selling prices to cure contracting businesses of the dreaded myfundsarelow disease.
The book also deals with addressing consumer questions in an honest, intelligent and rapid fashion so that consumers can come to trust what you tell them regarding the circumstances of their requests; easy logical procedures for everyday administrative protocols; and what to look for in technicians before hiring as well as how to evaluate and incentivize techs after hiring them.
I look forward to assisting this magnificent couple in curing themselves of myfundsarelow. When I have more information regarding their progress, I hope to pass it on. In the meantime, if you have questions, have the symptoms of myfundsarelow or feel the need for my assistance, give me a call.