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One of the questions many contractors wonder about is whether their prices are too high. Other contractors can’t figure out why they cannot make a profit above their true operational business costs.
Some contractors who can’t make a profit look at those who charge higher prices as crooks, while the contractors with higher prices look at the lowballers as extremely foolish. Those lowballers can’t recover their true operational business costs and earn a profit above their costs.
These two different outlooks contribute to the problems that contractors face and why prices for any typical task in the same area are varied and often very far apart.
The root causes are a lack of proper business management knowledge and the inability to understand how selling prices should be developed.
The remedy to this dilemma, which causes a wide variety of prices for the same service in the same area, can be found in the tale of “Goldilocks and the Three Bears” — if you blend it with the reality of what your true operational business cost is.
In the story, upon entering the home of the three bears, Goldilocks finds one bowl of porridge that is too hot, a second bowl of porridge that is too cold and a third bowl that she finds to be “just right.”
The same thing happened with regard to the chairs and beds in the bears’ house.
The story illustrates that circumstances fit different people’s situations in varied ways.
The fact is that all people do not all like the same thing. Some people like chocolate ice cream, while others like vanilla.
Right Mix of Employees
In the contracting business, you, as the contractor and decision-maker of your business, must realize that you must adhere to certain factors to run your business properly.
And you must come up with the just-right situation for your business regarding the realities of your true operation costs.
Before entering into business in any service area, you must determine whether that area needs the services you will offer for your fit in that area to be just right.
Running a business in any area requires the right mix of employees to provide the services you will offer.
If you have more employees than you need for the area, you will increase true operational business costs for the wrong reason.
Having six service techs and properly equipped service vehicles, or six construction crews and equipment in a geographic area with work available for only two service techs or two construction crews does not fit the description of just right.
When you increase your operational business costs in a flawed manner, your prices cannot meet the just-right barometer and allow your business to be as profitable as you intended — assuming that it is profitable.
With more employees than you need, you will be tempted to develop lower prices in the hope of increasing sales in an area that doesn’t support the need or desire of the public for those services.
In turn, the idea of recovering true operational business costs is in dire jeopardy, while the hope of true profit is doomed.
If you have less than the right number of employees for the needs of your chosen service area, you will be unable to promptly fulfill the needs and requests of area consumers that will help you satisfy their requests when demanded.
In that instance, you will lose business to your competition, who may be those aforementioned lowballers. You will give consumers the impression you are a crook. What are you to do?
Be a Bean Counter
It’s simple! Act like a real business person, not just a person in business.
And like Goldilocks, know what is just right for your situation.
This requires you to realize that when you entered the business arena, you took on the duties of being a bean counter.
As a plumbing contractor, you must know how to determine the size of the pipe to meet the demands of the building.
As an HVAC contractor, you must know how to calculate the equipment size so that the building will be warm and cozy in the winter and cool and refreshing in the dog days of summer.
It is the same for electrical contractors: they must know the electrical load of the building. Properly installing an electrical system provides occupants with the benefits of the building’s electrical demands.
And builders must know the proper structural loads to keep the building standing.
Real business people know how to figure these things out because they count the beans. And the true operational business cost of running a business is one bean type that must be correctly counted.
Bean counting is not only needed in the building trades. If you owned a delicatessen, you would have to know the quantity of food you will sell in any period before it goes bad. You must be cognizant of how much ham to put in a sandwich so that your customers keep coming back. And you must know the cost you will incur to make the sandwich.
Once you find your true cost of any item or service, apply a proper profit margin so you can accomplish the reason you are really in business: to recover your true costs and earn a profit above those costs.
Running any business requires counting the beans associated with the business in a mathematical manner.
Using a PHC service contracting business as an example, you must know what your labor and proportioned overhead cost is for one qualified technician and one properly equipped service vehicle in totality for a fiscal period.
Since you probably use hours to determine how long any task will take, divide that total cost by the number of hours you have to sell to arrive at your cost per tech/truck hour.
Next, you must choose a profit margin that will allow you to attain your goals. This requires you to consider that you will not sell all your available tech hours all the time.
If you only sell 70 percent of your available revenue-producing hours, you need a 30 percent profit margin to recover your true cost of labor and overhead. In that event, the profit margin would have to be higher if you want to make a profit.
Justify Business Procedures, Profit Margins
Don’t take this information as a license to just willy-nilly charge prices that could be considered unconscionable because you have not set up your business to run proficiently.
For your prices to be just right, you must be able to justify your business procedures and the profit margins you apply.
The national debt as of December 2022 was more than 31 trillion dollars. The politicians on one side of the aisle want to increase our debt limit, while the other side wants to cut spending.
However, neither side seems to want to do what is imperative to solve the debt problem. After all, a credit card limit cannot exceed the ability to pay.
Both sides seem to have the inability to solve the problem. There is no doubt that we, the people, must pay for what is necessary. And there is no doubt that we, the people, shouldn’t be paying what is not necessary.
However, you and your business cannot print more money and increase your collective debt.
Ensuring your prices are just right so you can recover your true operational business costs and earn the reward you deserve for delivering excellence to consumers is paramount to your ability to succeed.
And you must do it within the means you have at hand. If you don’t, your prices may be too high or low for you to succeed.
If your prices are too high, consumers may not call you back. And the fewer customers you have to serve affects your prices because your costs per tech/truck hour will increase.
If your prices are too low to recover your true cost and make a profit, you will end up paying for part of the services you provide for the consumer.
As a hint, the cost a U.S. service contractor incurs for one qualified tech and properly equipped service vehicle hour ranges somewhere between $100 and $250 if all available revenue-producing hours are sold all the time.
I realize that range doesn’t tell you your cost. If I had the factors that are just right for your contracting business, I could.
As the owner of your business, all responsibilities fall squarely on your shoulders.
Avoiding business situations that create undue stress and frustration requires you to realize the beans you should be counting so that, like the barometer Goldilocks used, your business will be set up to succeed because you are doing what is right for your business.