How much do you keep out of each consumer dollar?
Consumers often make snide remarks about how much money PHC contractors make, as if contractors incur no cost in servicing consumer needs. Further exacerbating this public misperception, contractor ignorance of true operational cost allows this erroneous thought to perpetuate.
I remember a conversation with a consumer many years ago. I sent a technician to her home for a plumbing problem. She was at work and her adult daughter was at the home. My tech checked the situation and quoted a price to remedy their problem.
The daughter called her mother to relay the information. The mother suffered a severe case of sticker shock when she heard the price. With her misperception of the full price quoted going in my pocket, and her unwillingness to pay for any luxuries I might enjoy with her money, she told her daughter not to authorize the work until she spoke to me.
She immediately called the office and spoke with me. She went on and on about the unfairness of the price we quoted. I let her blow off steam. Then, I informed her the average PHC service contractor gets to only keep 3 cents of every consumer dollar (at that time) after paying for the operational costs incurred being in the business of serving consumer needs. She immediately replied, “That sucks!”
To enlighten her further and defer any thoughts she might have I was telling her this to justify our price, I explained we had to pay salaries and salary related expenses for the tech at her home as well as administrative support personnel; licenses; insurances; vehicles and vehicular expenses; and a myriad of other business related operational costs which include government mandates, rules, regulations and tariffs. To put it in perspective, I added that a national hamburger chain gets to keep 25 cents of every consumer dollar.
She thanked me for the information and authorized the work to be performed at the price my tech originally quoted to her daughter.
The reason the average PHC contractor, at that time, only kept 3 cents of every consumer dollar is the same reason average profits in the PHC industry suffer to this day.
Most contractors do not know the true cost they incur in business. When blended with the propensity to check the prices of other contractors who do not know their true cost and copy their absurd and stupid pricing policies, averages are dragged down.
For truth, the defense of our noble industry and your own business, you have a duty to educate consumers to the reality of business life when they question your prices. The information contained herein should give you insight to counteract the misunderstanding consumers have regarding the prices you must charge them to service their needs. But, for you to truly be profitable and financially strong you must identify your true cost; choose a proper profit margin; and develop properly profitable selling prices. If you don’t, just look in the mirror when you want to find who is to blame.
Whether you believe it or not, the operational cost of labor and overhead for one service technician/truck in the U.S. falls between $100 and $250 per hour, at this time, if you sell all your available regular business day hours for all your techs all the time. If you sell less, your actual cost per hour rises. The width of that cost range is due to many expense variables.
As is with any hypothesis, a benchmark must be established. To that end, the following is based on a one tech/truck shop in which the master plumber, John, and his spouse, Patty, are the only employees. He takes care of the technical duties while she takes care of all administrative duties.
The example budget used is one of minimal costs. Their gross salaries are a combined $81,000. They have one family health insurance plan and one service van. They work from their home which they do not include as a business expense. Their desired profit margin is 10 percent. As you look at the numbers, keep in mind they are rounded up or down and will vary from company to company. Yours will differ. But, Figure 1 should give you an idea of how to explain where the money goes so you can make your point.
The example is based on one consumer dollar. Therefore, each cent value also equals a percentage of the same value. It should be noted that if John doesn’t sell all his hours, the profit will dissipate until it disappears. This will alter the percentages.
As I was writing this article, a contractor called. He wanted to know if I knew of any computer programs that could help him control technician efficiency. He seemed highly intelligent and reliant on electronic gadgetry. He used flat rate pricing and actually had put together his own pricing manual. But, his own efficiency was severely lacking.
When I asked him the rate his pricing guide was based on, he quickly responded. But, when I asked what one tech hour cost him to produce he didn’t know the answer. If he doesn’t know the answer, his pricing guide is flawed. We discussed a few task times he calculated. The times were short. This can only add to the inaccuracy of his pricing guide and protocols.
If you are going to rely on computers, remember the acronym GIGO, which is “Garbage In, Garbage Out.” Wrong numbers produce wrong results, much stress, unending frustration, and eventual failure.
I beg each of you to check your true cost of operation after you read this article. Examine your business and implement a sound business plan. If you are not sure or need help, give me a call.
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