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“There’s a contractor in my area that charges outrageously high prices!” That’s a quote I have heard in one form or another in conversations with some contractors who call me for information or assistance to improve their business results.
Countering that statement is another that I have also heard from contractors: “The guys in my area low ball their prices.”
There you have it – two different views. Some contractors claim the other guy’s price is outrageously high while others claim their competitors’ prices are extremely low.
It brought to mind a sage parental adage handed down to children when those children coveted something someone else had or did. “Look at your own plate.” In other words, be concerned about what you do, or should do, rather than what others do.
Neither of those view allows you to look at your own plate. The reason prices and opinions vary in the industry is that selling prices are incorrectly established and copy-catting leads to erroneous conclusions.
The biggest self-inflicted problem PHC contractors face is charging incorrect prices that are not properly calculated by appropriately using the fundamentals of mathematics and logic. Looking at the other person and emulating their mistakes doesn’t improve your business results. It just exacerbates your business problems.
Based on an annual maximum available revenue producing time of 1708 hours per tech (2080 hours in a 40-hour work week minus 372 hours for employee vacation/holiday/personal time/minimum non-revenue producing tech time equals 1708 annual maximum available revenue producing tech hours), if you pay your tech’s $30 per hour (for 2080 hours), your true cost per revenue producing hour inclusive of labor and proportionate overhead burden (you remember overhead minus vehicles and vehicular expenses; insurances; administrative personnel; etc.) is minimally over $120 if you sell all your available revenue producing tech hours all the time. The word “minimally” means it could be higher. And, it probably is since no contractor sells all their available revenue producing tech hours all the time.
Regardless of whether you sell all your tech hours all the time or not, your annual cost per tech would be $204,960 ($120.00 x 1708 hours). However, if you only sell 70 percent of your available tech hours for which you pay, that $120 cost increases to over $171 per tech hour ($204,960 ÷ 1196 tech hours sold = $171.37).
Looking at the plate of your nearest competitor doesn’t help you. If he/she pays his/her techs $20.00 per hour, his/her comparable cost is minimally $105 per tech hour. But, at 70 percent of available tech hours sold, his/her true cost becomes $149.95. [($105 cost x 1708 available tech hours $179,340) divided by 1196 tech hours sold equals $149.95].
By subtracting his/her annual operational cost of minimally $179,340 per tech from your annual operational cost of minimally $204,960 per tech, it’s easy to see you would start off with a $25,620 disadvantage that will make it more difficult to get where you want to go. If you base your prices on your competitor’s prices, you have a problem that you created.
Your competitor who thought his/her true cost was $105.00 per tech hour but does not consider an unapplied labor factor, shortchanges his/her business by $44.95 per tech hour if only 1196 hours were annually sold per tech ($149.95$105.00 = $44.95). Annually, that’s $53,760.20 per tech. Following a fool only makes you even more foolish than him/her. Look at your own plate!
There are four major enemies of business: ignorance, ego, fear and anxiety. Ignorance is not a shameful trait since all humans are ignorant about something because no human knows everything about all things. However, when anyone is not sure of the proper way to identify and calculate their true operational cost, and they sell their services at or below their true operational cost, that person is turning their ignorance into foolishness.
The first step in solving any problem is realizing there is a problem, while not letting your ego blind you from seeing the problem.
Once you have properly identified and calculated your true operational cost, you must not allow fear of losing jobs to overshadow the fear of losing money by performing tasks at below cost prices.
You must not be hindered by the anxiety associated with the fear of losing jobs. Instead, you must be concerned that you are selling your services at properly profitable prices that will allow you to recover your cost, and give you the opportunity to earn the reward you deserve for the delivery of excellence to consumers.
When contractors call to ask me a question or seek information about the coaching/consulting services and products I offer so they can have the opportunity to improve their business results, I ask them to describe their business operations so I can get handle on whether or not that which I offer can help them.
I recently had a conversation with a contractor who was the latest to claim another contractor’s (in his area) prices were outrageously high. I told him, in my opinion, 95 percent of PHC contractors sell their services at incorrect prices. He said it couldn’t be that high. As the conversation proceeded and we spoke about the way he arrived at his prices, I proved to this guy who thought his prices were properly profitable that his prices were actually below his true cost. His silence on the other end of the phone told me my point was made.
Instead of this contractor looking at his own plate, his ego (one of those four major business enemies) kept him from seeing his flawed pricing protocol, and led him to the erroneous thought that his competitor’s prices were outrageously high rather than the fact that his prices were foolishly low.
Even though I believe in giving consumers the price of any task before starting the task so the client can approve and authorize the task to be performed at the agreed price, I refer to cost per hour. Regardless of whether or not you use time and material pricing or contracting pricing, the prices you arrive at are calculated on the time and material you spent; estimated time and material you will spend for a specific job; or, the average cost you incur for tasks of the same type.
With T & M pricing, the consumer doesn’t know the price it will cost them until you’re done. The downside of this pricing method is the sticker shock you give the consumer after you have spent your resources to perform the task. This leads to the propensity of an argument regarding the price after the job is done.
With contract pricing, the price is agreed to before the consumer authorizes you to perform the task. There is no legitimate reason for the consumer to argue about the price.
The selling price chart herein indicates the selling price based on the cost to contractor per tech hour based on a range of $100 to $250 if all tech hours are sold all the time. You might think that at a 10 percent profit the price would be $110, if the cost was $100 per tech hour. That’s true if you implement a markup on cost method of calculation. But, the chart shows a selling price of $111.11 at a 10 percent profit margin.
A profit margin is the relationship of the profit to the total selling price. Using a profit margin of 10 percent, you would divide your $100.00 cost by 90 percent to arrive at a selling price of $111.11 ($11.11 ÷ $111.11 = 10 percent of the $111.11 selling price). The benefit to using this method is that in the example you would have brought to your business $1.11 more than using the markup on cost method. And, as you know, every dollar counts.
Another factor in calculating your selling prices is that there are days you will sell all your available tech time, days when you sell no tech time and days when you sell some tech time. That’s the reason you must look at your plate and calculate the average tech hours you sell annually.
If you only sell 70 percent of your available tech time and your cost is based on selling all tech hours all the time, you need a 30 percent profit margin on labor and overhead to break even. At a $100.00 of cost to you, your breakeven selling price must be $142.86. But, remember that does not give you a profit. $100.00 per tech hour x 1708 potentially productive hours per tech equals $170,800 of annual cost per tech. If you divide that amount by 1196 hours (70 percent) [actually 1195.6 is 70 percent of 1708] sold you get a true cost of $142.86 per tech hour. At $175.00 of cost, the breakeven sell price is $250 per tech hour. And, at $250, it’s $357.14.
It’s so easy to look at someone else and crave what they have, or, criticize how they operate. Before assuming the prices of other contractors in your area are outrageously high, make sure your prices are not foolishly low. If they do charge more than you, keep in mind their operational costs may be higher than yours.
It’s much wiser to look at your own plate, calculate your costs, choose and apply a proper profit margin that will get you where you want to go and learn how to sell honestly at properly profitable selling prices.
If other contractors in your area charge more than you and deliver excellence to their clientele like you do, you might consider the possibility that you are not receiving the reward you deserve for the excellence you deliver.
Calculating your true cost requires observance of a commonsense rule. Two plus two always equals four. It never equals less; it never equals more.
My Contractor Profit Advantage programs and books show you my logical and mathematically correct theories and methods for the contracting business, and, how to have an opportunity to obtain your reward. If you have an opinion or question on this article, or, want more information on my programs, books, price guides and coaching/consulting services, give me a call.