Explaining Your Rip-off Prices to Consumers
How do you handle a situation in which pricing becomes a problem after the job is done?
Mrs. Smith calls you when her heating system stopped working. You inform her of your procedures and policies, including the fact that you will quote a price to her prior to commencing any task, for her acceptance and authorization to perform the task at that price. She accepts and you dispatch a service tech.
Upon arrival, your tech introduces himself to Mrs. Smith and discusses the situation with her. He goes to the boiler room and sees a hot water heating system with three zone valves and one circulator. He realizes the circulator had seized up, and explains the situation to Mrs. Smith while giving her a price to replace the circulator.
She verbally agrees. Your tech writes up a contract/invoice describing the task and the price to perform the task. Mrs. Smith accepts the terms, conditions and price, and, authorizes him, with her signature on the contract/invoice, to perform the task.
Your tech then proceeds with the task. He sets up the work area; brings in his tools and the new circulator. He shuts the system off, and, drains the system because there are no isolating valves for the circulator. He removes the existing circulator, installs the new circulator and fills and purges the system. He turns on the heat and waits for the system to reach temperature to ensure that the high limit control is functioning, and pops the relief valve to be certain the waterway is clear. Both of these safeties function properly. He goes through the house to see that heat is present in each room, cleans up the work area, puts his tools into the truck and completes the paperwork by getting her signature on the contract/invoice evidencing her satisfaction with, and completion of, the task. She pays and thanks him for a job well done. The time consumed for this task as described averages to be two hours plus travel time to her home.
Then her husband confronts you about ripping off his wife. Of course, you did not rip off anyone. You simply offered to perform a service, which his wife requested, for a price quoted to, and approved by, Mrs. Smith before performing the task.
That’s not a rip-off. That’s a contractual agreement. Remember, you are a contractor. Entering into agreements to perform your services is what you do. And, Mrs. Smith was not obligated to enter into that meeting of the minds regarding the service she requested. She chose to enter the agreement.
How to address the rip-off allegation
In addressing Mr Smith’s allegations, you must remain calm, listen to his claim, jot down notes to ensure you intelligently and honestly address all his allegations. Calmness, intelligence and integrity can go a long way to calming him. Intelligent conversations require the parties to be open to fact rather than charged with emotional ranting.
Empathize with him. After all, you too are a consumer and wish services and products you purchase left more money in your pocket. Explain the cold hard fact that your company does not get to keep all the money you charged for the job. You do incur costs to address their requests.
Explain to him that in addition to those operating costs governmental mandates, which are ironically supposed to help consumers, include rules, regulations, and taxes imposed on those expenses which are responsible for minimally 50 percent of the total costs your business incurs addressing his wife’s request. Illuminate him to the fact that all legitimate business expenses must be recovered from consumers in order for businesses to be able to serve consumer requests.
A visual informational aid (see sample) might assist you in getting your point across. Present him with a card showing the types of expenses for which you must pay to serve his wife’s request.
If he gives you the absurd argument that he went on the internet and found out the cost of the parts makes your installation price outrageous, tell him the egg story. He can buy a dozen eggs at the supermarket for $1.50. If he fried up two eggs, it would cost him 25 cents for the eggs. However, if he went to the local diner and ordered two eggs it would cost him several dollars plus a tip.
Speaking of cost, let’s see what it costs contractors to do that circulator job.
The cost contractor incurs for the task
Figure 1 shows you the minimum cost (in red) contractors incur to perform the task based on: 1) Hourly Labor/Overhead Tech cost range to contractors in $25 increments from $100to $250 per tech hour for two hours to perform the task plus initial travel time; 2) Selling all your available tech hours (1708 annually per tech) all the time; 3) Average initial travel time to the client in two increments – 15 minute and 30 minute; and, 4) Material cost allowance of $100.00 (you may pay a bit more or less).
NOTE: If you base your cost on selling all available tech hours, but sell less, your cost is actually higher. Example: Based on selling all your tech hours all the time and an hourly tech cost to you of $100, line 1 shows your cost for the task to be between $325 and $350dependent on travel time. That is the cost to you the contractor; you have made no profit.
However, no service contractor sells all their tech time all the time. During a normal economic climate, 70 percent of maximum tech hours are usually sold. That means you would need minimally a 30 percent profit margin to break even on your labor/overhead costs and make a few dollars on the margin applied to the material.
At the lower cost to contractor of $325, a 30 percent profit margin would give you a selling price of $464.29. Selling 70 percent of your available tech time your true cost per hour would really be $142.86 making the true cost to you to perform the task $421.44 ($142.86 x 2¼ hours + $100 material cost). A true profit of only $42.85.
At the higher cost to contractor of $725, a 30 percent profit margin would give you a selling price of $1,035.72. But, since you only sell 70% of your available tech time your true cost per hour would really be $357.14. And, the true cost to you to perform the task would be $992.85 ($357.14 x 2½ hours + $100.00 material cost). A true profit of only $42.87.
Since either scenario doesn’t give you a great profit and you might actually utilize fewer than 70 percent of tech hours annually, you might consider using a higher profit margin. If you only sold 50 percent of your total available tech time, your hourly tech cost of $100 would be $200; and, the $250 hourly tech cost would be $500. In turn, the respective cost to contractor would be $550 and $1,350.
Armed with this type of information, you could inform Mr. Smith that the cost you incur to fulfill his wife’s request minimally costs you between $420 and $550; or, $990 and $1,350 dependent upon which scenario applies. It could cost you more. Therefore, your price was not outrageous.
And, if it cost you more than you charged him, you would never claim that he ripped you off because you and his wife entered into a legal and morally ethical contract which was fulfilled by both parties.
If you have an opinion on this article; want an opportunity to attain your contractor profit advantage, would like information on the ways I can help you, or, would like to order a copy of my Readily Available Pricing Information Digest pricing guide which is customized to your true cost of labor and overhead, and, puts prices at your fingertips for rapid and profitable price quoting, give me a call.
Richard P. DiToma has been involved in the PHC industry since 1970. He is a contracting business coach/consultant and an active PHC contractor. FOR INFORMATION about the CONTRACTOR PROFIT ADVANTAGE or to contact Richard: call 845-639-5050; e-mail firstname.lastname@example.org; mail to R & G Profit-Ability, Inc. P.O. Box 282, West Nyack. NY 10994.