More often than not, prices you pay for the products and services you need to run your PHC service business rise rather than fall. Upsurges in vehicular costs, salary related expenses, a myriad of ancillary products and services needed to run your business, and, the cost of government regulations continually affect and increase your operational costs.
It is imperative to understand that knowledge of the business costs you incur is the foundation of proper profitable selling prices. At the present time, the cost to any contractor in the U.S. for one qualified service tech and service vehicle ranges between $100 and $250 per tech hour, if all available tech hours are sold all the time. That cost range increases if you sell less than all available hours all the time. Your prices must be based on your true operational costs blended with a proper profit margin to get you where you want to go.
Too many contractors sell their services at prices that are below their true cost. This problem arises because the prices many PHC contractors charge are guessed rather than properly calculated, and/or, the result of using the “going broke rate” of competitors who don’t know their true cost.
Realizing there is a problem is the first step in solving a problem. The second step is understanding that which caused the problem and formulating an intelligent and doable game plan that can fix the problem. This may, and often does, require seeking the assistance of a good business coach. The third step is to properly execute and monitor the plan.
A PHC contractor I’ll refer to as Sam realized he had a problem. He called to find out about my coaching programs and how I could help him improve his business results. He told me his $89 labor rate per tech hour had not changed in 10 years. That fact alone should have told him where his problem was. After all, his operational costs today are higher than 10 years ago. But, as it’s said — it is difficult to see the forest with all those trees in the way. A good business coach is a guide through that forest. The first issue I had to show him was how to properly identify and calculate his true cost of operation.
To do this, I suggested and explained my Contractor Profit Advantage programs that would show him the logical and mathematical theories and methods of which I preach, and, warned him that contractors who want to improve their business results must understand and properly implement those theories and methods. Those who have understood and properly executed those theories and methods all minimally increased their revenue by 30 to 70 percent more than they would have brought in using their old management protocols.
He chose a Contractor Profit Advantage program that included two telephonic seminars — one on pricing properly and profitably for those in his business responsible for developing his selling prices, and the other on addressing consumer questions for his techs and administrative staff. This program also included texts, price guides, an invoice/contract layout and brochure layout to assist his techs in selling.
I sent him my book, “Solutions Management Theories & Methods for the Contracting Business.” After he read it, I conducted the seminar on pricing. After calculating a budget based on his costs, we found his time and material pricing rate of $89 per tech hour was $14 less than his true cost, if he sold all the tech hours all the time. That means he couldn’t make a profit on his labor and overhead costs. And, labor and overhead are the main products contractors have to sell.
In his tech year with two weeks personal time, six holidays, and 244 non-revenue producing hours, he has only 1,708 potentially revenue producing hours per tech. That $14 deficit means that he is minimally shortchanging his potential revenue by $23,912 ($14 x 1,708 hours) per tech annually.
He has six techs; that’s a potential revenue shortfall of minimally $143,472 ($23,912 x 6 techs). His true cost if he sells all hours is $1,055,544 ($103 x 1,708 hours x 6 techs) while his revenue potential is $912,072 ($89 x 1,708 hours x 6 techs). That math proves a $143,472 loss. Those numbers only reflect the $14 per tech hour cost deficit to him, and, do not take into consideration the profit he deserves for delivering excellence to consumers.
Since his true cost was $103 per tech hour if he sold all his tech hours all the time, at a 10 percent profit margin, his selling price per tech hour should be $114.44 ($103 ÷ 90 percent). With 6 techs that number becomes $686.64 ($114.44 x 6) per hour. If all tech hours are sold, that amount would produce $1,172,781 ($686.64 x 1,708 hours). But, with the $89 rate he was charging, the best he could hope for in labor/overhead revenue is $912,072. That’s a deficit of $260,709.10 annually. Ouch!
Since contractors do not sell all their available revenue producing tech hours all the time, that 10 percent profit margin may not be high enough to get him where he wants to go. Only selling 90 percent of available revenue producing hours, increases the $14 hourly deficit per tech to $15.56. At 80 percent sold, it’s $17.51. And, at 70 percent, it rises to $19.99; sell less hours, and the cost per hour rises higher yet.
At his $89 rate, if he sold his material at a high enough profit margin, he could make a profit on material. However, the best he could hope for was to lessen the hit he was taking for selling his main product/service — labor and overhead — below his true cost. And, with the internet putting prices of all types of items before the eyes of the public, there wasn’t much room for making a profit high enough.
Once a consumer finds the lowest price for an item, they could tell him they would supply the material, and, just want him to install that material. In which case, he’s back to losing money on his labor and overhead. That fact alone should give contractors pause to reconsider the benefits of contract pricing over time and material pricing.
As of this writing, he has just begun my Contractor Profit Advantage program. He knows and is willing to do away with time and material pricing and embrace contract pricing. His attitude is positive and forward-thinking. While addressing the prices he must charge to be able to recover his true costs and hopefully earn a profit above that cost, he wondered how his existing clientele would feel about the metamorphosis of his business prices and protocols as he enters the highway to proper business management. His concern is understandable.
However, let’s not only address existing clients, but also new customers. The first step is to resolve to do away with time and material pricing and embrace contract pricing — that’s quoting the price of any task before commencing that task. Contract pricing is based on the average time to perform a task and the material needed to complete the performance. Note the word “average”. If your techs are above average and can complete the task in less time than an average tech, you stand to make more money than selling based on time and material pricing. If your techs are average and you apply a proper profit margin, you can still earn a profit.
If your techs are less than average, you probably should consider retraining them; and if that fails, looking for new techs. For their hard-earned dollars, consumers are entitled to value, which comes from the delivery of excellence. Below average techs don’t deliver excellence and unfairly inflate the bills you present to consumers. In turn, they impact your business negatively.
Consumers who have never availed themselves of your services as well as existing clientele should be informed of your pricing policies and the benefits they receive from your upfront pricing method that gives them different options, if any, and the price of any option before they tell you to do the job.
That’s a big advantage over your time and material competition, which doesn’t tell consumers the amount of their bill until after the job is done. Especially when the consumer gets sticker shock from a bill based on two hours while they thought the job would only take 30 minutes.
Next, you must identify and calculate your true cost of operation. Then, you must choose a properly profitable margin to arrive at properly profitable selling prices.
Quoting upfront prices for any given diagnosis, service, repair, replacement, installation, alteration, or consultation, while delivering excellence to consumers requires you to use a cost integrated factoring system; that takes into consideration the many costs you incur in order to service consumers properly and assure you are there to service their future needs.
In explaining your protocols to consumers, you could remind them that’s the way they make most of their wise cost-effective purchases — knowing the price before deciding to purchase.
Example: Regarding a dripping faucet, explain to the consumer the process of replacing the internal parts of faucet, and that replacing those parts may not stop their drip because the main body of the faucet may have a defect that does not allow the new parts to seal the drip. Then, quote a price for that service.
But also, give the client prices for replacing the same faucet as well as other models the client might be interested in. Let the consumer decide which task they want to proceed with.
If the consumer decides to gamble on the replacement of the internal parts, document the notification about the possibility of the drip continuing on your invoice/contract.
If you sense an existing client is still leery about the new pricing policy, give them an introductory discount (while keeping your costs in mind) to your new pricing policy for this task to show them you appreciate their past patronage and value to your business.
But, remember any consumer, new or existing, who does not allow you to recover the true costs you incur serving their requests is a consumer you don’t need and shouldn’t want.
To assist you in solving the business problems and situations you encounter everyday as a PHC service contractor, I have created business tools you need to succeed. These business tools consist of: books such as “Solutions Management Theories and Methods for the Contracting Business,” and, the “Readily Available Pricing Information Digest” with pricing suggestions customized to your labor/overhead costs and profit margins; seminars (in person or telephonic) to assist in understanding and implementing proper business practices; and, invoice/agreement forms and brochure layouts. My Contractor Profit Advantage programs offer packages dependent on your needs with these business tools included. And, continuing coaching support is available.
If you are interested in the possibility of improving your business results or have any questions or comments, give me a call. The improvement in your business results could give you the advantage you need to make more money.