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Before you can know if your prices are silly, you must understand the meaning of the word silly. Merriam-Webster defines “silly” as: having or showing a lack of thought, understanding, or good judgmen; foolish or stupid; not practical or sensible; not serious, meaningful, or important.
No one wants to charge prices that are foolish or stupid. But, the propensity for humans to make mistakes due to fear, ignorance and ego can lead them down the path which ends at silly prices which do not allow them an opportunity to earn a profit or even recover the total cost they incur for their services rendered.
Fear costs you money
If you are fearful, as most humans are, make sure your fear is well-placed. The tendency to perform services for silly prices that are below your true cost emanates from fear of not having work, or, losing work to your competition — who by the way, are fearful and selling their services for silly prices below their true cost.
In turn, a circular firing squad is created by contractors in your geographic area causing your business and theirs to wallow in a pit of low-ball pricing which precludes you and your competition from maximizing profit potential and retaining the resources necessary to deliver excellence to consumers on a consistent basis.
Instead of being fearful of losing work, you should be afraid of losing money with selling prices, which are below the true cost you incur to perform any service. After more than a quarter of a century of business consulting with contractors, I have noticed contractors minimally charging $30 an hour less than the true tech labor/overhead cost they incur being in business.
Assuming a maximum potential of 1,708 annual revenue producing hours per tech in a 52 week, 40 hour per week year (2,080 hours – 128 hours for personal, vacation and holidays – 244 hours for non-revenue producing hours), that $30 shortchange would give you an annual minimum loss potential of $51,240 per technician. And, that’s just plain silly.
If you must be fearful, be fearful of charging prices which do not allow you to recover your cost and earn a profit above your cost. And, just because I stated that I have noticed contractors charging minimally $30 per-tech-hour less than their true cost, I am not suggesting that adding $30 to your cost will remedy your pricing situation. Each contractor’s true cost must be calculated based on their individual true situation.
Lack of knowledge keeps you from maximizing profit
Ignorance is nothing to be ashamed of. It is just a lack of knowledge regarding a subject. All humans are ignorant since no human knows everything there is to know about the universe. Developing properly profitable selling prices requires the knowledge of your true operational cost, which is the first and foundational step you must acquire to maximize your profit potential.
I often hear some contractors, who have called me for coaching assistance, tell me they are profitable. Some are, but they are not maximizing their profit potential. Thus, they are shortchanging their businesses. Most are inaccurately looking at their numbers, which gives them the false view of profitability. All of them are calling me because they are not happy with the business results they are getting from their enterprises, and they are looking for solutions.
Merriam-Webster defines profitable as making money; and producing good or helpful results or effects. If you do not know your true operational cost, you are missing the foundational factor needed to arrive at properly profitable selling prices which will produce good results that allow you to make the amount of money you deserve for the excellence you deliver and the risks you take in the delivery.
An example of a common mistake contractors make in their pricing policy is not budgeting a salary for themselves or their spouses regarding the labors they supply to their businesses. Then, they refer to the money left after they pay their bills as profit. Sorry, that’s not profit; that’s foolish behavior.
Why do I say that? You wouldn’t work for others without being paid. If you are willing to work for your business for no salary compensation, while incurring the angst associated with the bills you incur being in business and the sometimes nerve-racking interactions you encounter with unreasonable consumers, you are creating the silly prices that are causing you to not be happy with the results you are receiving.
If you are not including your and your spouse’s salary compensation in your pricing calculations, consider working for a contractor who will actually pay you for your expertise and labor.
If you do not include a salary for yourself or your spouse for labors performed in your business, you might think you get an advantage by keeping your prices low so you will get more work. However, low prices that do not recover true operational costs allotted to tasks performed don’t give you an advantage. Those prices give you a loss. The person who gets the advantage, assuming that you have performed the service in an excellent manner, is the consumer because the price charged to the consumer was foolish and not practical since that price does not give you the opportunity to recover your cost and earn a profit.
Ego blinds you
Ego keeps you from thinking you could possibly make a mistake. When you do not recognize any problem, or the inclination for problems to arise, you cannot solve or avoid those problems when encountered. You would be wise to keep in mind the old phrase “to err is human.”
When setting your prices, you should be devoid of emotion. Look at the person you see in the mirror and ask that person what the goal of your business really is. Is your goal to pat yourself on the back and claim you never make mistakes or to maximize your profit potential?
If it is to pat yourself on the back, as you look in the mirror realize you have met your worst enemy. Change your ways. For profit businesses must sell services/products with the intent of recovering cost and earning a profit above that cost. Start acting like a business person rather than just another person in business.
Arrive at your prices wisely
Prices that do not allow you to recover your true cost while giving you the opportunity to earn the reward you deserve for the excellence you deliver and the risk you take in the delivery lack thought, understanding and good judgment. Those prices are foolish, stupid, impractical and not sensible. Those prices hurt your business because those prices are silly.
Do your homework. Merriam-Webster defines advantage as a benefit or gain. To attain your contractor profit advantage, you must identify all your legitimate tangible and intangible expenses. Then, allot those expenses into hourly units that consider tech time off and non-revenue producing duties.
Next, you must choose and apply a profit margin that takes into consideration your desired rewards and the risks you take, such as an unapplied labor factor, so that you give your business the opportunity to get where you want it to go. Only then can your selling prices be properly profitable rather than silly.
Once you correctly develop your pricing protocol you must have the courage to sell your services with intelligence and integrity.
If needed, seek the help you need to properly identify and calculate your true cost so your prices will be rewarding rather than foolish. But, make sure that help is aware of the proper way to implement the numbers as they pertain to the actual rigors and problems you as a contractor incur in business.
Often contractors rely on information supplied by accountants. The accounting field is necessary due to the complex rules and regulations placed on business by government. However, most accountants do not know how to deal with the nuances you as a contractor incur on a daily basis.
Using the game of football as an example, accountants can best be described as scorekeepers of the football game. They know how to add the scores as the scores are made. However, they do not know how to score. Coaches must know the strengths of their teams and players and must devise game plans that can give their teams a chance to win the game.
The help I am suggesting you seek comes from people who are coaches of business techniques who are intelligent and have a logical and actual grasp of the numbers, both tangible and intangible, as they pertain to your business.
To that end I have created my contractor profit advantage programs that can help you attain your goal. Call me for information.
Richard P. DiToma has been involved in the PHC industry since 1970. He is a contracting business coach/consultant and an active PHC contractor. For information about the Contractor Profit Advantage or to contact Richard: call 845-639-5050; e-mail firstname.lastname@example.org; mail to R & G Profit-Ability, Inc. P.O. Box 282, West Nyack. NY 10994.