Have you ever had the fear that your prices are too high? I am sure that 99.99% of contractors have experienced that anxiety because they know all consumers want excellent products and services at the lowest price. The other 0.01% of contractors are either very confident in themselves and their business acumen, oblivious to reality or lying.
Thoughts such as “If I charge that amount, I will lose the opportunity to serve the consumer, which means I don’t bring in money to my business” are only natural.
Then, you start to think about how you will pay for salaries and business operational expenses if you don’t get the job.
To add to your baffled state of mind, your competition pressures you by performing the same service for less.
This brings you to the start of your journey down the slippery slope, leading you to cut your price to get the job. Sound familiar?
Phobia is defined as an extreme or irrational fear of, or aversion to, something. If you suffer from price phobia, you will definitely hurt your bottom line.
Your responsibility as a for-profit business owner is to recover your true and legitimate business operational costs and bring in more money than it costs you to operate your business.
If you lower your price to get the job, you may very well be defeating yourself by ignoring the primary reason your business exists when you bring in less money than it costs you to perform any task.
You must understand that you only have three choices regarding your selling prices. You can sell at your cost to perform any service. You can sell below your cost to perform any service. Or you can sell above your cost to perform any service.
Selling at or below your cost is detrimental to you and your business, employees, family, customers and creditors. These practices do not allow you to make your business financially strong, pay your employees in a timely and commensurate manner that reflects the contribution their labors make to your business, reward your family with a great lifestyle, constantly deliver excellence to consumers and satisfy your creditors with timely payments for the services and products they supply to your business.
As a by-product of selling at or below your true operational costs, you get to enjoy high levels of stress and frustration.
Only one of the aforementioned price choices allows you the opportunity to fulfill your goal: selling your services above your cost.
However, before you can sell your services above your true operational cost with any certitude, you must know what your true cost of business operation is in totality and as it pertains to any service you intend to perform.
This is not such a daunting task. First, you must set up a procedure to itemize line by line each tangible and intangible cost you incur to run your business in a manner that allows you to deliver excellence to consumers and control your operational costs in a legitimate business manner.
Allow me to clarify the term “legitimate business manner.” Under the right circumstances, you can have a supervisory vehicle to conduct supervisory duties, but in the PHC industry, it shouldn’t be a Rolls-Royce or Bentley. These are luxury vehicles; their cost will definitely make your prices higher than they should be to compete legitimately in the marketplace.
You may have an opportunity, in your private life, to get your luxury vehicle after you become successful by running your business in a properly profitable manner.
Once you have established your true operational business costs, you have taken the first step needed in answering the question of whether your prices are right, too high or too low.
And, you have taken the first step in building your own confidence in the prices you must charge to recover your true operational business costs and make the profit you deserve for the excellence you deliver.
Profit margin vs. markup of cost
The only issue left in calculating your price for any proposed service is the profit margin you want to apply to your cost.
To choose a profit margin, you must consider what percentage you want to earn above your true cost of any service.
For example, if the labor, material and overhead cost of a task is $1,000 to your business, and you want to make a 10% profit margin, you must divide your $1,000 cost by 90% to arrive at a selling price of $1,111.11.
This would give you $111.11 above your cost. When you divide $111.11 by your selling price of $1,111.11, you realize a 10% profit margin.
However, if you use a markup of cost and multiply your cost of $1,000 by 110%, you will only make $100 profit because your selling price would be $1,100. This method involves a markup of cost, which yields a 10% profit margin.
If you use the markup of cost method instead of the profit margin method, you will only realize a profit margin of about 9%. In addition to denying your business an extra $11.11 of profit, you would lose more money if you offered discounts on your prices.
For example, if you offered a 10% discount on your $1,100 selling price, your discount would be $110. In turn, your selling price after the discount would be $990. In this instance, you would lose $10 since the cost to your business was $1,000. When you add $10 to the $11.11 you didn’t get with the markup of cost method, you have shortchanged your business by $21.11.
Each technician has 244 workdays in a year, after taking two weeks for vacation/personal time and six holidays. That means the shortchange amount, if you did the task once each workday per tech with discounts, would become $5150.84 per tech annually.
And that’s when your cost to perform the task is $1,000. If your cost, under the same circumstances, is $10,000, the shortchange amount would be $211.11 per occurrence. In that instance, $5150.84 per tech would rise to $51.510.84 per tech annually.
Therefore, discounting, as well as the profit margin you would like to attain, must be considered when choosing your profit margin.
Remedy for price phobia
I started this article with the question regarding price phobia: Have you ever had the fear that your prices are too high?
To remedy that uncertainty:
• Know your true operational business costs,
• Understand that although you control your business costs, there are expenses you incur for which you have limited control (those expenses are what they are),
• Realize that all consumers want excellence at the lowest price,
• Recognize that the delivery of excellence costs more than the price of mediocrity,
• Keep in mind that excellence allows you to grow your business,
• Have confidence in your prices because you know your true operational costs,
• Ask yourself a different question: Are my prices too low for me to deliver excellence and earn the reward I deserve for the delivery?
• Consider this question before you quote your prices to consumers: What are you more frightened of, losing the job because of your price or losing money because of your price?
