The PHC service contracting business is not the same type of business as a department store that sells many different products to consumers. Department store products are supplied by manufacturers under some type of agreement. The department store must sell those items in a timely manner at a price that will allow the department store to recover the cost of the product and their overhead expenses, as well as make a profit above those costs.
A PHC service contracting business must also recover its costs and make a profit. But, that’s where the similarity ends. PHC service contractors are not only vendors of products made by manufacturers, but they are also manufacturers of the labor needed to install, repair, replace or maintain those products. And, it doesn’t stop there. PHC service contractors are doctors of buildings. They must be able to discern situations, diagnose problems, and offer solutions to those problems. Department stores don’t do that.
As a contractor, your main product is the time you spend delivering your expertise and ability to diagnose, install, repair, replace, maintain or service PHC systems in part or totality in addressing your clientele’s request when they need it. Once time is gone, it’s gone forever, but, you still have the costs you incurred for that time whether you sold that time or not. Your time cannot be placed on a shelf.
The department store can move items that have not sold off the shelf at a later date by having a clearance sale. This allows them to recover the cost they incurred related to the item. But, time continually costs you whether you sell it or not. Once a potential revenue producing service hour, minute, or second passes that has not been sold, you must still pay for the cost of that time. That’s why it’s so important to know your true cost of operation, and, for you to apply a proper profit margin to the true cost you incur for any task.
It also should be noted that there is no true comparison of product prices with your competitors since your skills are unique to you, as theirs are to them. After all, as in all professions and trades, there are those who deliver excellence, and those who only serve up mediocrity.
I had a recent conversation with Mike — a PHC service contractor I’ve known for years. We discussed the industry and the fact that the majority of contractors do not know their true cost of operation, and therefore, sell their services at incorrect prices that do not give them the opportunity to recover the costs they incur, let alone make a profit above their cost.
I told Mike that some contractors foolishly emulate department store loss leader sales practices. Department stores use loss leaders (selling items at a loss) to get more consumers in their store in hopes of selling other items they can make a profit on. By choosing to sell specific tasks like checking an HVAC system or clearing a drain stoppage at ridiculously low prices that do not allow themselves to recover the true costs they incur for the task, PHC contractors are only fooling themselves.
The PHC service contractors who implement this strategy believe if it works for department stores, it will work for contractors. Wrong!
One of the differing factors is that many consumers can browse the many items offered by department stores. Percentages, and the impulse to buy, make you think some consumers would buy other items sold at profitable prices. Contractors’ technicians, however, can only serve one consumer at a time. Techs are the sales people, and, their trucks are their stores that have to be driven to each consumer individually. That differs from the possibility of many consumers coming to the department store at any given time. Add to that fact, consumers don’t usually buy PHC services they don’t really need.
Loss leaders do not necessarily recover costs or increase profits for department stores. Many consumers, especially in our internet connected world, compare prices of production line items, then cherry pick those loss leader items without purchasing anything else from the vendor.
When PHC service contractors use loss leaders they cannot recover the costs of unapplied labor/overhead because that time has passed. Additionally, they would be selling their present time at yet another loss. Loss leaders in the PHC contracting business can only lead to more losses and a decrease in profits on jobs that were done at a properly profitable level.
To prove my point, let’s say a department store purchases 100 pieces of a type of item from a manufacturer for $100 each and sells that item for $200 each. They sell 90 percent (90 pieces) at the $200 price. Now they need the space to display other items.
Those 90 pieces gave the store $9,000 ($100 markup on cost x 90 pieces sold) in gross profit (overhead costs will give them additional costs). But, they still have 10 items that cost them $1,000. If they don’t sell that 10 percent, their profit would only be $8,000 ($9,000 profit on the sale of 90 pieces less $1,000 paid to the manufacturer for the unsold 10 percent).
Conducting a half-price sale for that yet unsold 10 percent could recover the cost the manufacturer charged them. Then, they could still enjoy the $9,000 profit. But, if they sell the items for less than $100 each, they would now be decreasing the $9,000 profit.
The same theory does not apply to PHC service contractors. At the present time, the cost to a PHC service contractor per technician in the U.S. for one qualified technician and service vehicle is currently between $100 and $250 per hour — if all tech hours are sold all the time. In Mike’s area (New York/New Jersey Metro area) that range is between $150 and $250 if contractors sell all tech hours all the time.
At the low end of $150 per tech hour (if all tech hours are sold all the time), contractors who don’t sell 10 percent of their annual hours, based on a potential maximum of 1,708 hours per tech year, would not have sold 170.8 hours for each of their techs. The contractors’ cost for those unsold hours would be $25,620 (170.8 x $150) for each tech.
Since once time is gone, how can contractors make up for this cost? They can’t sell that time at a cost like the department store sells the remaining 10 percent of items since they can’t sell that which no longer exists. And, since loss leaders result in losses, they would now lose money on present time services — further exacerbating their problems.
Their choices are limited. They can absorb the loss. But, that’s foolish. And, if their other services are sold at prices that are not properly profitable, they may not have made enough money to absorb their loss leader losses. In which case, they’re off to the bank to deplete their personal accounts or to borrow the money.
They could make up for that 10 percent of unapplied labor by including this factor into a properly calculated cost structure blended with a properly profitable margin so that all their prices reflect the true cost they incur to be in business serving the public, and, the proper profit they deserve. That’s the intelligent way to address unapplied labor.
The intelligent way to deal with the flawed practice of using a loss leader for PHC contracting business services is to do away with it.
Contractors in Mike’s area offer loss leaders to tune up HVAC systems for $85, and, clearing drain stoppages for $149. Let’s look at the costs contractors in his area incur for these tasks minimally. For the cost to contractor per tech hour in his area, I’ll use three levels — the low end of $150, the mid-range of $200, and the high end of $250.
In every case, there’s travel to the consumer, which has to be minimally 15 minutes on average. Then, there is at least 15 minutes speaking with the consumer; explaining procedures; quoting prices; writing up invoices; and getting paid. That’s 30 minutes of minimal cost to the contractor. It is imperative to realize and include that time and all other legitimate costs you incur serving the public in your prices.
Drain snaking (sink, lavatory, tub, shower etc. — not sewer) minimally takes 1 hour (on average some are longer while some take less time) with setup, snaking, testing and cleanup. Add the aforementioned 30 minutes and the contractor has used up 1½ hours. Checking an HVAC system could range between 30 to 90 minutes. With travel and procedural time, the range of time spent is 1 to 2 hours.
As you can see in figure 1, the costs/results (in red) attained from the usage of loss leaders in the PHC service contracting business are always losers. And, the example uses minimum numbers. It could be worse. Judging from its name, loss leaders certainly do their job. They lead PHC service contractors utilizing this method to succeed in losing money.
You might wonder how contractors who engage in the use of loss leaders deal with those losses. Truth is they can absorb the loss. Once again — foolish at best. Or, they could word their advertisements in a way that allows them to claim the consumer’s circumstances do not apply to the loss leader advertised. But, that’s not the way to win new customers. Then again, there is always the old bait and switch ploy that can, at best, be described as fraudulent.
However, the only legal, ethical and intelligent way to run your business is by following the laws of the land: being honest; delivering excellence to consumers; implementing the fundamentals of mathematics; utilizing common sense; and, charging prices that will give you the opportunity to recover your cost to perform any task and earn a reward above the cost of the delivery.
If the contractors utilizing the loss leader strategy can attain the best results for their businesses with this practice, I’d like to know how. And, if they prove it to me, I’ll share it with you. But, for now, legally, logically and mathematically, I can’t see it. My thanks to Mike for the time we had in our discussion.