Four steps to fix false perceptions about your prices
In order to solve a problem, you must first correctly identify the problem and develop a solution that will solve that problem. Then, you must properly implement the solution.
Most, if not all, of the problems contractors face are caused by incorrect pricing policies. Contractors blinded by the goal of signing up jobs at any cost do not solve their problems. They exacerbate their problems.
Price does not affect the number of jobs you receive as a contractor as much as perception of price does. That means the problem is erroneous perception of prices and the solution is changing that misperception by supplying facts.
The value delivered by excellence is more important to consumers than the lowest price. The following four steps should help you fix any misperceptions regarding your selling prices. You should strongly consider Steps 1, 2 and 3. Step 4 is an extra, which can help you if need be.
Solving the price perception problem starts with you the contractor. Your solution must include the delivery of excellence to consumers and the recovery of the costs you incur as well as the opportunity to earn the reward you deserve for the delivery of excellence.
To do so, you must properly identify and calculate your true cost. Identifying your true cost requires you to correctly implement the fundamentals of mathematics and logic. Once you arrive at your true total operational expenses for a fiscal period, you can determine your true hourly costs in order to develop properly profitable selling prices.
Next, you must choose a profit margin that will get you where you want to go. Although your cost should be based on all your potential revenue producing hours, your profit margin must take into consideration the fact that you will not sell all your available technician hours all the time.
Annually, you allow two weeks for vacation/personal time, six holidays, and experience one hour per tech per day for non-revenue producing activity. You have a maximum of 1,708 hours per tech for revenue producing tasks. But, since you will probably only sell 70 percent of available time (in normal economic conditions), a 30 percent profit margin on labor/overhead costs is needed to just break even.
After choosing your profit margin, you must correctly blend your cost and profit margin into properly profitable selling prices. This will allow you the opportunity to recover your true cost and earn your deserved reward. Once your prices are correctly set based on knowledge and common sense, you must improve your selling techniques so you can show consumers the excellence they will receive by choosing your contracting business for their requests.
Technicians are your front line sales force. Their first duty is to address the consumer’s problems and needs in a manner that will serve your client well and project your contracting business as professional and ethical.
Technicians are to buildings what doctors are to the human body. A doctor who sells unnecessary procedures the patient really doesn’t need to increase his/her bank account is a doctor without integrity. Technicians should never sell services just to sell services.
However, technicians should always offer options and prices to consumers for services the client may want. Then, let the client decide if they want those services. Integrity, excellent technical skills and salesmanship build up your contracting business. Poor performance and dishonesty will destroy your business just as below true cost selling prices will.
Most techs do not have business acumen. And, human nature being what it is, they might erroneously believe most of the money you charge to your clientele for the services they actually perform goes into your pocket. This misperception leads to low morale as well as lackluster sales results. Low morale can be addressed by correctly calculated profitable pricing as per step one. This will allow you to compensate technicians in a manner commensurate with their delivery of excellence, technical skills and sales talents.
To remove the misperception that most of the money goes into your pocket from the minds of your techs requires you to educate your technicians as to the actual cost of the tasks they perform for your business. You might think if you show them how to calculate cost they will leave you and open their own business. That is not an accurate assumption. Some may try, but you have no control over the entrepreneurial spirit of others. If you explain properly, most, if not all, won’t leave because they will realize you don’t put most of the money in your pocket. The bulk of the money goes to paying a multitude of business expenses such as their salaries and benefits, office staff, utilities, suppliers, vehicles etc., while 100 percent of the responsibility for paying those costs falls squarely on your shoulders.
Another issue to show techs is that costs are always in a state of flux. The cost of any similar task will fluctuate depending on variable circumstances. One of those variables is the amount of hours that are actually sold in any fiscal period.
Figure 1 shows the fluctuation of costs and results for the same task when total hours sold in the fiscal year differ. The hourly labor/overhead cost in the example is based on 1,708 potential revenue producing hours per tech year and a profit margin of 30 percent.
The numbers in red indicate an expense or loss. Green numbers represent profit (your reward above your cost). When techs see that if only 70 percent of time is sold, you make no money, and, if less than 70 percent of time is sold, money is coming out of your pocket, they will know most of the money does not go into your pocket.
And, as an extra benefit, they will believe your prices must be where those prices are in order for you to provide them with gainful employment. In turn, with this education, smart techs with integrity can sell more jobs while allowing the consumer to decide which jobs they want to purchase.
As a tool to help your techs in the process, my Readily Available Pricing Information Digest for Plumbing Heating Cooling Contractors (available to you) shows techs the selling prices of tasks. And, it shows cost ranges (based on your labor/overhead factors and profit margin) at different amounts of time sold so they can explain to your clientele that most of the money is not going into your pocket.
When a consumer questions your price, your tech will have the information necessary to explain that the cost to your business to serve their needs is minimally between X and Y dollars. This information, properly disseminated, in conjunction with step three should help tour tech address the consumer’s price misperception and sell more tasks profitably.
Educating the consumer requires your techs to be able to not only explain the minimum cost range your business will incur in serving their requests. Also list the types of expense items your business acquires to fulfill their needs.
By listing such business expense items as salaries for techs and office staff; salary related expenses such as workers compensation, disability, health, and liability insurances, as well as FICA matching funds; vehicles and vehicular expenses such as insurance, repairs, maintenance, inspections, registrations, and ever changing fuel prices; office/shop rent, utilities, office equipment and supplies; phones; bank charges; advertising; tool purchases, maintenance and repair; completed operations insurance; professional services such as accounting etc.; continuing education; and a myriad of unforeseen expenses, your techs will be able to inform the consumer of all those business expense items incurred in serving their requests.
To place the origin of a large amount of the costs incurred serving their needs, which must be reflected in your selling prices, where it belongs rather than on your shoulders, your techs could add the fact many of those costs are created by government tariffs, mandates, rules and regulations.
Techs can go on to emphasize to consumers the logical conclusion. Low prices do not include all the costs of a task and deliver mediocrity to consumers. Lackluster quality is too often the cause of premature failure of services performed and products installed. Businesses that do not recover costs cannot afford to stand behind their workmanship.
Step four, if needed
If you need help to implement the aforementioned three steps, call me. I can offer business coaching, personnel training, books, seminars, solutions, price guides, forms, and continuing support.
Richard P. DiToma is a contracting business consultant and active PHC contractor with over 41 years of experience in the PHC industry. To receive more info about his contracting business coaching, consultations, business books, seminars with solutions, customized price guides, business forms, etc., contact Richard by phone at 845/639-5050, email email@example.com, fax 845/639-6791or write R & G Profit-Ability Inc., P.O. Box 282, West Nyack, NY 10