Fear and misunderstanding
When contractors call me seeking my business coaching assistance, we engage in a conversation that gives me the opportunity to understand their situation. At the same time, they can determine whether they think I make sense and know about that of which I write and preach.
Then, dependent upon my understanding of their situation, I inform them of the methods I can show them to attain their contractor profit advantage. But, since they are the ones who must run their business I always emphasize they have the responsibility to heed, understand and properly implement the theories and methods I reveal to them.
They call because they have come to realization they are doing something wrong and are not satisfied with the results their business renders. Most are not content because they are not recovering their true operational costs. In turn, their ability to earn a proper profit above their cost is diminished to a level of non-existence.
The cause of this malady is misunderstanding the mathematical consequences associated with business management. Their selling prices emanate from places where the sun does not shine rather than from proper calculation of their true operational costs.
To further exacerbate their problems, they allow fear to control the way they manage their business rather than controlling their fear and running their business in an intelligent manner which offers an opportunity to succeed.
That fear causes them to act foolishly. They copy the erroneous procedures of their competition who are ignorant when it comes to proper business management. To establish their selling prices, they look at their competitor’s selling prices (which are probably below cost), then, they’ll charge that amount, or less, with no regard to whether that selling price affords the opportunity to recover their cost and earn a profit. After all, in their mind it’s the going rate.
I have yet to meet a contractor calling for my assistance who does not have some trepidation at the prospect of changing his/her prices and business’ modus operandi. Fear is very powerful and ambiguous. It can steer you in the right direction toward success because of fear of losing money. Or, it can take you down the road to failure when fear controls you instead of you controlling it, and, you fear losing work more than losing money.
When you are not content with your business results, logic dictates you must change your ways if you want to change the results you get from your business. After all, repeating the same methods and expecting different results is surely a sign of foolishness. To change so you can improve your business results you must address certain realities.
Realities to address
The theories and methods for the contracting business that I preach can help you improve your results and attain your contractor profit advantage by addressing the following realities with common sense and mathematical correctness.
It is imperative to deliver excellence to consumers. Excellence initially costs your business more to produce than mediocrity. But, the delivery of excellence will allow you the opportunity to grow your business through an exceptional reputation as the contractor to use for those consumers who want value for their dollars. Excellence might cause your prices to not be the cheapest. But, at the same time, it also causes your prices to be the least expensive for the consumer in the long run.
Two plus two only equals four — never less or more. Your prices must allow you to recover the true cost you incur in the delivery of excellence while giving you an opportunity to earn a profit above that cost. This requires cognizance of your true cost, and, the intelligence and courage to charge proper profitable selling prices.
If you don’t recover your cost, you are partially paying for the services you render to consumers. If you don’t arrive at your selling prices by properly calculating your true cost and applying a proper profit margin, you don’t belong in business. You should be in the employ of a contractor who knows how to properly manage a PHC contracting business.
Yes, you have competition. But, if you allow your competitors to dictate your business policies, and they are implementing flawed business procedures, your procedures will also be flawed. When your prices are based on the faulty (below true cost) prices of others, the going rate is really the going broke rate.
You must have confidence that the excellence you deliver to society is worth the price you charge. Keep in mind the plumber’s motto, “The plumber protects the health of the nation.”
Excellent plumbing contractors are very important to society. If you allow fear to control the way you run your business, your prices will be below your true cost; your workmanship will become mediocre because you won’t have the financial ability to absorb the cost demanded by the delivery of excellence; your business procedures will be defective; and your business results will be full of stress and frustration.
Negative effect of fear and misunderstanding
A contractor recently told me he dropped his minimum service call charge (a fee to cover travel expenses to consumers) from $75 to $35 because another contractor in his area was charging $35.
The irony of this move is that he was getting no resistance from consumers at his $75 minimum service call charge. And, that $75 covered the $67 travel expense he incurred while giving his business an $8 profit. When he went to $35 he lost that profit and in its place absorbed a $32 loss per service call to his business. His action can only be described as foolishness caused by fear and misunderstanding.
To put this in perspective, if, in addition to the other work he performs for consumers, he did just one call a day where he only received his minimum service call charge of $75.00, that minimum service call charge would annually bring in to his business $18,300 (244 workdays x $75) to accommodate the requests of the window shopping public. In this instance, his cost for this travel time would have been $16,348 (244 minimum service call charges x $67). Therefore, he could have earned a $1,952 (244 service visits x $8) profit above his cost for those visits to consumers.
With the reduction to $35 per service call, his cost would still be $16,348. Instead of having $1,952 of profit, his fear and misunderstanding of proper business procedures would only allow him to bring in $8,540 (244 service call visits x $35). Thus, he would incur a $7,808 loss (cost of $16,348 – revenue of $8,540). That’s a $9,760 ($1,952 + $7,808) swing in the wrong direction. That’s how fear and misunderstanding can cost you money.
Another contractor using T & M pricing, who called as I was writing this article, quickly told me he charged $85 per tech hour when I asked. However, when I asked him how much that one tech hour cost him he didn’t have a clue. When I suggested he probably charged the going rate of other plumbers in his area he admitted that was how he arrived at his rate.
There are three options to choose from when arriving at your selling prices:
- sell at your cost
- sell below your cost
- sell above your cost
None of those choices refer to your competitor’s cost. In over a quarter of a century of contractor business consulting, I have noticed that contractors who arrive at their selling prices by copying the prices charged by other contractors, who sell at or below their true cost, minimally sell their services by $30.00 per tech hour less than it costs them to produce that hour. And, that’s if they sold all their tech hours all the time. In this instance, fear and misunderstanding minimally cost them over $50,000.00 per tech annually. If they didn’t sell all their available tech hours all the time (and none do other than the liars), their loss was greater yet. And, that’s how fear and misunderstanding turn the going rate into the going broke rate.
When you sell at or below your true cost your clientele, employees, family and yourself will all be cheated. Since excellence costs more to produce, your clientele will not receive consistent excellence. This will cause the loss of customers.
Your employees will not be properly compensated. Then when you lose them, you will state, “You can’t find and keep good help.”
Your family will not enjoy the fruits of your labor because the fruit will be rotten.
And you will wonder, “What the hell is wrong with this industry?”
The answer is that fear and misunderstanding are the tools used by the person you see in the mirror.
If you would like me to help you understand and control your fear through common sense and mathematical correctness so you can have a contractor profit advantage, give me a call. If you need assistance but do not seek it, you will continue to get the same results. And, fear and misunderstanding will have beaten you down.
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; email email@example.com; or mail to R & G Profit-Ability, Inc. P.O. Box 282, West Nyack. N.Y. 10994.