I’m sure you've often wondered about how your competitors came up with their prices. They may have beaten you out of a job you wanted. Or you heard that So and So Plumbing & Heating Co. charged a ridiculously low price to replace a water heater.

On the other hand, you may have felt the absurdly high price (in your opinion) Mrs. Jones was charged to replace a water heater was price gouging.

If you try to tell me that you never had any thoughts about your competitors’ prices, I’d say you were fooling yourself. But you are not fooling me. It’s only natural for business owners to check the prices the competition is charging.

The truth is that it doesn’t matter what they are charging. What you should be concerned with is what fair price you must charge to deliver excellence to consumers, recover your true costs — and earn the reward you deserve for the delivery of that excellence so you can have a successful business.

To accomplish this, you must know the parameters of the word “fair.” I believe fair is a two-way street, meaning everyone involved must be considered. That includes you, your family, your clientele, your employees and their families and your creditors.

If you and your family are not happy with the results you get from your business, it’s not fair to you and them.

If your clientele did not receive excellence regarding the services you provided for them, it’s not fair to them.

If your employees are not compensated in a fashion that will allow them the opportunity to live comfortably and contently, it’s not fair to them.

And, since there is a cost to money, if your creditors are not paid in a timely fashion, it’s not fair to them either.

Searching for fairness

To establish fair prices, you must first identify and calculate your total annual true operational costs for labor and overhead. Then, you must apply that information proportionately to the tasks you offer to consumers. In the PHC industry, that labor and overhead proportion is usually calculated in estimated hours to perform tasks.

You must add the cost of material to be used to perform any task to the estimated labor and overhead cost for that task to arrive at your estimated cost of the task. That is the cost to you, the contractor.

Next, you must choose a profit margin that takes into consideration the return you want on your investment in your business, unapplied labor factors, and whether you plan on offering discounts on your services.

Unapplied labor factors are always in a state of flux and have a direct fluctuating effect on your true hourly labor/overhead cost for techs.

Discounts are OK as long as you don’t discount the price to the point where you lose money to perform the task before you even start it.

If you haphazardly choose your profit margin without considering those factors, you very well may not have a true profit. Using improper or flawed factors will give you wrong prices. And wrong numbers can only produce wrong results.

When searching for fairness, you must consider all tangible and intangible costs. This includes fairness to your technicians, administrative personnel and yourself regarding compensation and benefits, as well as the number of hours worked to receive said compensation and benefits. 

Also consider your creditors as far as how quickly you pay them.

If you don’t properly compensate your employees and yourself, your prices could hardly be considered fair. If you don’t pay your creditors in a timely fashion, fair just went out the window. And, if you miss out on family time, you lose because once that time is gone, it’s gone forever.

Pricing methodology

Assuming your cost calculations are done properly and fairly, it’s time to choose your pricing methodology. There are only two options: time and material pricing and contract pricing, which also is known as flat rate or upfront pricing.

At this point, there are two fields of thought — this goes back to my opening statement about your competitors’ prices.

Contractors who are predominantly time-and-material contractors often look at contractors who use upfront pricing as crooks. Yet ironically, even T&M contractors often give out contract prices for items such as water heater replacements. 

Flat rate contractors often envision T&M contractors as foolish people in business because they don’t have the intelligence to see that upfront pricing is fairer to everyone concerned.

Is it fair to the consumer not to tell them the price they must pay for your services until after you perform the task for them? Anyone with a modicum of intelligence knows that’s not fair.

So, if you charge consumers using the T&M pricing method, you should know that you are not fair. Therefore, all your prices are not fair. 

Those prices are not fair because the consumer never agreed to pay those prices before authorizing you to perform the task. Those prices are not appropriate because an incompetent tech (and we all know they exist) will cost the consumer more in the long run while delivering mediocre results. In comparison, top-quality technicians provide excellence for the same type of job. 

So, if you are a T&M contractor, never complain about the prices of your competitors since those who live in glass houses should never throw stones.

To those who think contract-pricing contractors are gouging consumers, allow me to clarify. As long as contract-pricing contractors are honest and upfront regarding all prices, terms and conditions of their contracts with consumers, and consumers agree to the prices, terms and conditions before service is commenced, and the prices, terms and conditions have not been increased from that which you normally charge due to some catastrophic occurrence such a very bad storm, hurricane etc., there is no price gouging. 

At this point, you might have guessed that I believe in contract pricing. After all, the word contractor is in your title. You are a contractor. No contractor refers to himself/herself as a T&Mer.

Slow, average, top-quality techs

To arrive at your contract prices, you should establish the average costs (as previously described) you incur for any task performed by the average technician. 

If you have slow techs, consumers don’t pay more for the slowness. If you hire and cultivate top-quality techs who are more proficient but cost you, the contractor, more, the consumer doesn’t pay more because the task was calculated on the average tech. That’s fair.

Since proficient techs will probably be faster than average techs, you can make up for the difference in the top techs’ salaries. You also can make up for your slower techs. And if all you have are top-quality techs, you are on the road to great success. 

Since the consumer agreed to the price before authorizing you to perform the task, discussions and arguments about fees will be extremely limited when compared to T&M prices given after the job is done. 

And as long as your business is honest and fulfills its obligations under the contract if those discussions or arguments arise, the consumer’s point of contention will be illegitimate. It is easy to see that fairness abounds when you describe a task with prices, terms and conditions to consumers before commencing service. 

There you have it — the ingredients for fair prices. If you need my assistance arriving at the prices that are fair to your business, you, your family, your clientele, your employees and creditors, call me. After all, fair is the two-way street on which I live.