It’s not what you say as much as how you say it that might put you in a bind. I’ve been watching advertisements claiming some item or service is free. Yet everyone with an ounce of common sense knows there is no such thing as a free lunch.
Anyone who works for a living does so with the intent of being compensated in some manner. Anyone who goes into business does so with the intent to recover operational costs and earn a profit above those costs.
Even volunteers offer “free time” with the intent of feeling good about their benevolent spirit. That good feeling is their compensation. But it didn’t come free. Those volunteers spent their time and money on volunteering.
You might wonder how they spent their money. At the minimum expense end, it costs money to travel to wherever you volunteer. Vehicles, gas, buses, taxis, trains, etc., all cost money. Therefore, although the service volunteers provide is offered at no expense to those who receive the benefit of their altruistic deed, it is not free to the volunteer.
In the PHC service contracting business, compensation comes in the form of bringing in more money to your business than it costs you to operate your business. It requires you to set your prices at a level that allows you to accomplish your goal. This truth holds for any for-profit business.
It also requires you to implement sound business protocols while you offer your services in an honest manner. That statement brings me to the point of this article.
The phraseology you use in offering your services to the public can keep you from putting yourself in a bind. When you offer a service or item to consumers, be honest and intelligent.
When identifying the cost of a service or item to the consumer, using the word free either makes you dishonest or foolish. If you put the cost of the free item or service in the price of another required item or service purchase, you would be deceitful. And, if you don’t, you would be foolish. What are you to do?
Instead of using the word free, use the phrase “at no additional charge” for the item or service. That’s being honest and intelligent.
If you do not include the cost of the offered item or service in the price of another required item or service purchase, you are making it difficult and more than likely impossible, for you to achieve the goal of your business —to recover your cost and make a profit above your cost. In which case, the item or service might be offered to consumers as free to them, but it is most assuredly not free to you. That’s foolish.
To avoid the possibility of being foolish, you must conjure up the strength to think intelligently. If you want to increase sales by offering some additional item or service with the purchase of another item or service, make sure you include all your legitimate costs in your package price. Then, you could offer the additional item or service at no additional charge to the consumer instead of stating it to be free. It’s part of the package.
When you estimate the cost to you to perform any task and the selling price to the consumer, calculate your selling price for the task with these four ingredients — labor costs, overhead costs, material costs and a profit above those costs.
Running a business always comes with risk. Properly identifying your true cost of tangible and intangible operational expenses is extremely important to developing properly profitable selling prices for your services. You must be certain you are using the correct numbers in your calculations because wrong numbers produce wrong results.
Another risk area you encounter is the functionality of the services and materials you provide to consumers. Selling services and products to the consumer gives you the responsibility of an implied limited warranty that the services will offer the consumer a benefit under the terms and conditions of your agreement and that the product(s) you supply will function. Warranties are necessary and risky.
If there are any warranty problems that you must address during the warranty period, your profits for the task further decrease until the profit is exhausted and the cost to you for the job rises. Taking on risks entitles you to earn a profit, which happens to be the reason you take on the risks.
Another risk is the constant state of flux regarding your overhead costs. As an example, one day fuel for your vehicle is $2.50 a gallon and the next week it’s $3. The price you quoted before the increase remains the same for the consumer. But your cost to do the job just increased. The fluctuation of operational business expenses is a risk all business owners incur.
Then there is the risk you take waiting for the phone to ring. The amount of service calls you receive fluctuates. You experience slow and busy times. When you are busy, you wonder how you will get all the work you have done. When you are slow, you look for ways to increase your business.
As an example, if you want to increase the number of water heaters you sell, you could offer a new supply valve, pan or safety shut-off system at no additional charge with your water heater replacement installations. But remember to include your cost of the item or service with your initial job costs before quoting the selling price of the job.
Or you might want to increase your furnace or boiler replacement sales. You could offer a price for the replacement installation that includes a new technological thermostat(s) or one system inspection the year after the installation with the purchase of your new furnace or boiler. But here, too, remember to include the cost of the item or service in your price before quoting the price.
Calculating task cost
When calculating your cost to perform the task, include all labor, overhead and material expenses of the water heater or furnace. Then apply your profit margin to the costs to arrive at your selling price. Next, add the cost of the extra item to the aforementioned selling price to arrive at your new package price. In this manner, you would recover your estimated cost of the initial job with a profit as well as the cost of the additional item or service with no profit.
Let’s say you buy a water heater for $500 and the additional material necessary to install the replacement water heater such as piping/tubing, fittings, venting, solder, acetylene, flux, sealant, etc., which costs you $100. Your material cost would be $600. Keep in mind that material costs vary. You may pay more or less. The aforementioned numbers are for example’s sake.
Next, you must find the labor/overhead cost of the task. The items to consider are travel time to the consumer and the time the tech(s) will spend to perform the task, inclusive of material pickup, if any. In the Readily Available Pricing Information Digest I publish for contractors, it shows the time to perform this task is three tech hours if the water heater and all other material has been delivered to the jobsite; four tech hours if your tech must pick up the water heater or other materials.
For example, I’ll use four tech hours. Then add your travel time to the consumer; I’ll use 30 minutes.
The next factor needed to calculate your labor/overhead cost to perform the task is the hourly cost to you for labor and overhead. This number will vary across the country, ranging between $100 and $250 per tech hour. Our chart above takes into consideration labor and overhead costs in $25/hour increments and profit margins from 10 percent to 50 percent in 10-percent increments for the task.
Add your labor/overhead cost to your material cost and divide the sum by the difference between 100 percent and your desired profit margin. To arrive at a 10-percent profit margin, you would divide your labor, overhead, and material costs by 90 percent.
The chart shows that at a tech hourly labor/overhead cost to you of $100, $600 material cost and a 10-percent profit margin, your selling price would be $1,166.67.
Proof: 4 1/2 tech hours multiplied by $100 is $450. When you add the material cost of $600 to the labor/overhead cost of $450, the cost of the job to you is $1,050. By dividing $1050 by 90 percent, you arrive at a selling price of $1,166.67. That gives you a profit of $116.67.
At the higher labor/overhead cost in Figure 1, if your labor/overhead cost per tech hour is $250 and you wanted a 50-percent profit margin, your selling price would be $3,450.
Now let’s say you decide to throw in a safety pan with the job that costs you between $20 and $45. Your cost increased and you have to make a decision. Do you want to pay for the safety pan or do you want the consumer to pay for it?
If you pay, eat the cost and offer the safety pan at no additional charge. If you want the consumer to pay, add the cost of the pan with no profit to your package price of the job. In which case, the aforementioned job selling for $1,166.67 would sell between $1,186.67 and $1,211.67, dependent upon the cost of the pan to you.
By adding a profit to the initial job costs other than the additionally offered item or service and then adding the cost of the additional item or service to the selling price of the initial job, you would recover the cost you incur for the additional item or service and you would be displaying intelligence. Since you are not making a profit on the additional item or service, the consumer is getting an added benefit at no additional profit charge to them.
That’s honesty and intelligence at no additional charge. Any questions? Give me a call.