In 1859 Charles Dickens opened his book “Tale of Two Cities” with the following words: “It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to Heaven, we were all going direct the other way.”
He could have been writing about the state of the PHC contracting business today. Contractors have the best of times when consumers constantly seek their services, but, even then, they’ll moan and groan that they can’t find good help.
They experience the worst of times when their trucks and shops are perfectly clean and organized because there is no work other than cleaning and organizing. But, once the trucks are clean and the shop is organized, and there are no consumers seeking their services, morale begins its journey down the slippery slope. The employees complain they can’t make any money, and the owners complain that the employees are draining their resources.
The age of belief could refer to the way they run their businesses. They believe they are running their businesses correctly. Incredulity presents itself when they can’t figure out why they are not getting the successful results of someone who is running their business correctly. Then, they are tempted to turn wisdom into foolishness. Their season of light is shut out when they close the doors and shutter the windows of their minds to ideas, which can enlighten and show them their path to success. Then, the darkness of ignorance and foolishness fills their beings since the enlightenment of knowledge cannot penetrate their closed minds.
Then they scratch their heads trying to figure out why they are not happy with their business results. Whether they have plenty of work or none at all, the hope of success they had when they started their business turns into the despair associated with failure. Those periods when they had lots of work are overshadowed by the deafening silence of their phones. Then, instead of heading straight for the heaven of success, they are traveling toward the hell of failure.
To reach the heavenly result of success, you must make the proper choices. You can choose to deliver excellence to consumers, or, disappoint consumers with mediocrity. You can identify and calculate your true cost of operation. Or, you can put your head in the sand like the proverbial ostrich when it comes to selling your services at properly profitable prices that will allow you to recover your true cost and give you the opportunity to earn a profit above your true cost. But, keep in mind, when your head is in the sand your butt is exposed to the kicks of any and all passersby.
Properly calculating your true operational cost is as important to your business as preparing a building site for the foundation of the building. That foundation is the footprint and support of the building. The design of the foundation can be compared to your decision to sell your services at, below or above your true cost. The problem that arises is that if you don’t properly calculate your true operational cost you can’t know if you are selling your services at, below or above your true operational cost.
Selling at your true cost defeats the reason for going into business. Selling below your true cost suggests that you need help calculating your true operational cost. Selling above your true cost of operation is the only choice that can lead you to success. To find the only person who can make the decision that leads to your pricing policy, look in a mirror.
To put things in perspective, I thought it would be a good idea to look at three different contractor types. Let’s call them Tom, Dick and Harry. First, something I have preached in this column for quite some time; the range of true cost a contractor incurs to employ a qualified service technician and supply that tech with a properly outfitted service vehicle in the U.S., at this time, is between $100 and $250 per tech hour if all available tech hours are sold all the time.
When all tech hours are not sold, the range is higher. The range is vast due to the varied expenses contractors incur dependent upon the part of the country they serve. Then there’s the fact that no contractor sells all their tech hours all the time. If only 70 percent of available tech time is sold, the aforementioned range becomes $142.86 to $357.14 per tech hour.
In this scenario, Tom, Dick and Harry are the only techs their businesses have, and do all the tech work while all administrative tasks are done by their wives. Tom, Dick and Harry take two weeks off for vacation, six holidays, and lose one hour per workday to non-revenue producing tech duties, e.g. checking their trucks’ vital signs, restocking their trucks and turning in paperwork to be processed by their wives. That leaves only 1,708 available revenue producing tech hours in a 52-week, 40-hour work year to get revenue producing work done (52 weeks x 40 hours per week = 2,080 hours / 2,080 hours less 128 vacation-holidays = 1,952 hours / 1,952 hours less 244 non-revenue producing tech hours = 1,708 maximum revenue producing hours).
Using the low end of the aforementioned true cost to contractor range ($100), each has $170,800 annual true cost of operation ($100 x 1,708 hours) regardless of the number of hours they sell. That’s the amount of revenue they must bring in to just break even.
Since Tom doesn’t know his true cost, he decides to sell his services at his area’s “going rate” of $100 per tech hour. At this rate, it won’t cost him anything to run his business if he sells all his available tech hours all the time. Dick, who doesn’t have a clue as to his true cost, sells below his true cost at $90 per tech hour. That’s a dollar less than his nearest competitor who also has no clue. Dick can’t possibly win. Harry knows his true cost and decides to sell his services above his true cost at $167 per tech hour based on the $100 true cost and a 40 percent profit margin ($100 ÷ 60 percent = $166.66).
Now keep in mind that I have stated no contractor sells all their available tech hours all the time, so Figure 1 shows the business result each of our example contractors gets from their choice of selling price dependent on hours sold.
Figure 1 shows the green ink of success and red ink of failure for each. The best Tom can do is break even if he sells all his available hours all the time. Once he sells less than 100 percent of his available tech hours, he starts losing money. Dick always loses; it is just a matter of how much. Since both of these results defeat the purpose for which business exists, Tom and Dick can only experience the worst of times.
Harry earns more than it costs him, as long as he sells more than 60 percent of his available tech hours. If he sells less, he must consider a higher profit margin. By choosing a 50 percent profit margin, Harry will cover his cost if he only sells 854 hours annually. Selling at $200 ($100 true cost ÷ 50 percent = $200) per tech hour will bring in $170,800 ($200 x 854 hours sold). He certainly has the opportunity to experience the best of times.
So much for hypothetical contractors. Let’s look at the results a PHC contractor (TC) in the Southwest and a PH service contractor (RR) in the Northeast are getting after recently completing my Contactor Profit Advantage programs.
TC is a one-man PHC service operation, who completed the program in April 2017. He recently told me he has increased his business’ revenue by 35 percent after finding out how to calculate his true cost and apply a proper profit margin that will allow him to develop properly profitable selling prices. As a matter of fact, a week after completing the CPA program, he quoted a price of $19,000 on a job he did that he would have quoted at $12,000 (below his true cost) before taking the CPA program. That’s a 58 percent increase ($7,000 ÷ $12,000 = 58.33 percent) on just one job.
RR, a multi-person PH service business, completed the program at the end of May 2017 and has increased his revenue for the same workload by 30 percent.
I presented TC and RR with three of my seminars. “The Development of Properly Profitable Selling Prices” showed them how to calculate their true cost of operation; choose a proper profit margin; and develop properly profitable selling prices. “Addressing Consumer Questions” showed them how to intelligently, correctly and above all honestly answer consumer questions rapidly. “Logical Administrative Procedures” laid out efficient procedures that can make the administrative service business duties easier. RR, the multi-person business, also had me address his technicians with my “Star Tech” seminar to show them the proper way to fulfill their duties to the best of their ability.
TC and RR were supplied texts and Readily Available Pricing Information Digest pricing guides used in the seminars. TC had me design a contract/invoice form to fit his operational changes and a brochure to assist his selling abilities. RR had his own people perform those tasks. The manner in which I addressed their situation was customized to their needs and requests.
Figure 2 shows that TC and RR are experiencing the best of times because by implementing the proper numbers to recover their costs, and earn a profit as long as they sell more than 50 percent of their available tech time they will bring in more than it costs them to operate.
If you would like me to show you how to experience the best of times rather than the worst of times, give me a call.