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Have you ever wondered about the reason your price is so different from your competitors? The first and foremost reason is the majority of contractors are not aware of the true operational costs they incur in running their businesses. The result is that contractors don’t know if they are selling their services at, below or above the true proportionate operational costs they incur to provide said service.
You might wonder why I prefaced the term operational costs with the word true. The answer is simple. As a contractor, you incur business costs for the products and services you require to run your business. Trucks cost you money as well as the vehicle expenses you incur to operate them, regardless of whether you own one truck or several.
In addition to vehicular costs, you incur the cost of your salary and salary-related expenses and those of your employees, if you have any. If you don’t include your salary and salary-related expenses in your budget to calculate your operational costs and develop properly profitable selling prices, if you only take the money left over after other business expenses, you are making an enormous mistake. You are not considering your true operational business costs.
If you don’t consider the time you lose from revenue-producing hours to handle consumer callbacks, whether those callbacks are truly your responsibility or a consumer’s imaginary figment, you are not calculating your true operational business costs.
Then, there are the costs you incur renegotiating your prices after any task is done or the nonpayment for services that have been completed.
The list of items you must consider to arrive at your true operational business costs goes on and on. But one thing is for sure — not calculating your true business operational costs is one factor contributing to the difference between contractor prices for similar services.
The next reason contractor prices for the same services differ is ironic. Some contractors think that if they find out the prices their competitors charge for the same service and charge the same amount or a dollar (or two, three, four, etc.) less, they will at least be charging the “going rate.”
However, since the majority of contractors don’t know their own true operational business costs, the going rate is really the going-broke rate. Selling at or below your true operational costs to perform a service by copying another contractor’s selling prices will more than likely have you charging prices that do not reflect your true operational costs.
In turn, the results you get will make it difficult for you to recover those true operational costs as it pertains to any task. This leads to miscalculated adjustments to the going-broke rate that do not address the problem at hand — such as adding a dollar to the price when you should have added five dollars.
The solution to this problem is properly identifying and calculating the true tangible and intangible operational business expenses you incur as a contractor and not copying the prices of others.
Reason: Their prices may not, and more than likely won’t, allow you to recover your true business operational costs and earn the reward you deserve for the performance you provide to your customers.
The next reason prices vary among contractors is they may be using a flawed pricing methodology or using the proper pricing policy in a flawed manner.
In contracting, there are two pricing methodologies. One, the time-and-material pricing method, gives consumers the price of tasks after they are completed.
The result of using the problematic T&M method is obvious to anyone who opens their eyes, ears and minds.
Consumers erroneously think all techs are equal; therefore, you are forced to offer a labor rate similar to your competition’s. However, if your technicians are slower than your competition, they will take more time and your price will be higher. If your techs are faster, your price will be lower. It will certainly give cause to varying prices among contractors.
But the fact that most contractors do not know their true operational business costs means their rates are more than likely flawed for themselves, let alone you. Also, their business costs are not your business costs. Following their lead would be the blind leading the blind.
With T&M pricing, you might think you can make up for selling your services below your true proportionate labor/overhead operational business costs by selling materials at a profit.
Think again, and understand this: since consumers don’t know the selling price before you start the task, your bill can give them sticker shock after the job is done. They can do some internet research and conclude that the price you charge for material can be purchased for less.
That’s when the argument begins. You must then decide to stick to your guns and not get paid, stick to your guns and get paid but lose a repeat customer, or make an accommodation that doesn’t allow you to recover your true task costs and make the profit you wanted. In other words, the T&M pricing methodology leads to Going Broke Lane.
What’s the alternative? Well, the other pricing methodology is what I call contract pricing. Some call it flat-rate pricing, but I don’t like that term because the word “rate” brings to mind T&M pricing. Others call it upfront pricing; to me, it is better terminology to use.
I prefer to call it contract pricing because you are referred to as a contractor. I’m not quite sure what a “flat-rater” or “up-fronter” is. And your meeting-of-the-minds agreement with consumers is, in fact, a contract.
Whatever you call it, this pricing protocol allows you to quote prices before commencing tasks. You and the consumer understand and agree to all terms, conditions and prices without having the consumer suffer sticker shock after the task is done.
You are in a unique position of not only being a contractor but also a consumer. Ask yourself, “Would I give somebody a blank check to perform services for me?” If you are intelligent, the answer is a resounding “no.” However, if you want to justify your own practice of T&M pricing, you may choose to fool yourself by answering “yes.” In which case, if you want to see someone acting foolishly, look in the mirror.
Many contractors might think you can’t give a price for every task ahead of time. To that I say, although every rule has exceptions, the overwhelming majority of tasks can be priced before commencing them. However, be sure to include correct calculations, specific descriptions, terms and conditions in the prices you offer to consumers.
The next reason for varied prices for the same tasks is the quality of the techs in your employ. Top-quality techs must be properly compensated if you wish them to remain in your employ. Lesser-quality techs are more expendable.
If you want to deliver excellence to your clientele, top-quality techs are the ones you want. Some contractors are hit-and-run artists. They come — they charge — and they don’t get repeat business. If you want to maintain your clientele, you must deliver excellence. And you must realize that excellence costs you more to produce than schlock.
Once you blend your proper costs with your desired profit margin to get you where you want to go; have confidence in your business protocols, prices and abilities; add excellence to your intended service; hire star techs; and cater to your clientele in a satisfactory manner, allowing you to recover your true costs and earn your deserved reward, your prices will probably vary from the schlock contractors you compete with. However, so will the quality you deliver to consumers.
All new cars and trucks can get you from point A to point B, but all cars and trucks do not sell for the same price. More luxurious cars and trucks with all the bells and whistles are more costly to purchase than basic models. And there lies the only true reason for prices to vary.
But consumers don’t only look for the lowest price when buying cars and trucks. They look for the vehicles they want with the most value they can get for the dollars they have to spend.
Your true operational costs are different from your competitors’ costs and, I hope, your service is better. I’m sure you think it is. If so, understand that you have a legitimate reason to offer a higher price.
However, if the value you deliver is less than that of your competitors, no one will want to pay more.
Don’t be concerned about the prices your competitors charge. Instead, concentrate on the true operational costs you incur, the profit margin you want to attain, the delivery of excellence to consumers, your ability to accomplish your true goals, and your confidence in selling your services properly and profitably.
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