Why ‘I can’t’ is really saying ‘I won’t’
By Richard DiToma,
Ignorance of true operational cost and fear of charging properly profitable selling prices cause most of the business problems that contractors face. Contractors who close their minds to new ideas do not allow the light of knowledge to infiltrate their psyche with ways to avoid problems.
The following e-mail was written by Sam, an alias, to tell me the reasons he disagrees with my methodology. My response will show you why his views, are misanthropic and do not allow contractors to receive the reward they deserve for the delivery of excellence to consumers.
“I have been running one of the largest plumbing companies in the (deleted for anonymity) area for more than 40 years and have a lot of experience with advertising and marketing. The suggestions you write about regarding advertising and pricing will work only in an ideal world and for a few contractors who have established commercial accounts. All the large shops in (state deleted for anonymity) used most of what you suggest in the past, but these companies are sinking to the bottom of the ocean like lead weights because your methods do not work,” he said.
He continued, “What you wrote seems like the right thing to do, but consumers are spoiled and there are too many contractors willing to work for less than minimum wage. In an ideal world most customers would be decent enough to offer gasoline money, but in our world as it is most customers refuse to pay one penny for gasoline and I've even asked customers if they would pay a few bucks for the gas and answer was always, ‘no.’”
“I am 100 percent against your method for calculating the prices to charge customers. Every business in the world charges as much for their products and services as possible. Contractors do not set the prices that customers pay. It is the customers that set the price that they are ‘willing to pay.’ I can calculate a price so my profit is 11 percent and I may be 100 percent less than what the traffic will bear, or 100 percent more. It works this way with all products and services unless you offer something extremely unusual,” he said.
He continued, “Let’s assume that all contractors’ services are equal, like a loaf of white bread, and you want to start a bread factory. The first thing you are going to do is go to the store and look at the price of bread. It is $5 per loaf. You calculate your costs to make the bread and with your 11 percent markup you have to charge $7. The customer sets the price and you are not going to get $7.”
“The first thing a contractor needs to know is what the traffic will bear. I calculated the hourly costs several times at Plumbers Success International and we always came up with an hourly rate of $280 to $340 per hour, but getting down to the customer's level of thinking I will say we want to charge $120 per hour and this is our cost plus 11 percent. Suppose I get 1,000 leads and quote my $120 price. I need to know how many people hung up on me and adjust my price to get the best results. So, if 990 people hang up on me I do not get to set the price,” he said. “It is a cold world we live in and I would like to think that we could set the price, but the contractor using your method will most-likely not succeed and they will fit in with the national average of business that fail within the first five years (I think 85 percent).”
For explanatory clarity to Sam’s remarks, my response regarding my theories and methods is divided into the following issues.
Issue 1: Contractors only have three choices regarding prices. Sell services at, below, or above their cost to serve consumers. Two of the three defeat the purpose for which business exists.
Issue 2: My theories seem like the right thing to do, as Sam states, because they are the right thing to do. It is incumbent upon contractors to make their real world their ideal world. My methodology helps to improve contractor profitability and performance. Before you can make a profit, you must recover your costs to serve the public. Sam’s statement about gasoline shows he doesn’t recover all his costs.
Issue 3: Business failures are caused by 1) debt caused by below cost selling prices 2) poor business management 3) improper implementation, or lack, of proper business protocols.
Contractors who have properly implemented my theories and methods have initially earned minimally 30 to 70 percent more revenue than before they applied my suggestions. And, even in the current economic malaise, they continually enjoy the ability to make their businesses financially stronger, while lowering the stress levels associated with business management.
Issue 4: Disagreeing with my method of calculating prices is senseless. My method is a logical blend of fundamental mathematics, financial prudence and simple basic business 101.
Step 1: Identify and calculate your true cost of operation.
Step 2: Choose a proper profit margin that will help you attain your goals.
Step 3: Use those two factors to arrive at profitable selling prices.
Step 4: Deliver excellence to consumers.
Step 5: Sell above your cost.
Step 6: Give yourself the opportunity to maximize success while lowering stress.
Sam bases his prices on emotion rather than calculation. At PSI, Sam admits he calculated hourly costs several times and always came up with a selling price range of $280 to $340 per hour. But, he makes the irrational decision to sell his tech hour at $120. That makes Sam seem like one of the “too many contractors,” of which he speaks, who are “willing to work for less than minimum wage.”
Mathematically extrapolating his $120/hour rate and 11 percent profit leads to the conclusion he believes his cost per tech hour to be $108.11 ($120 ÷ 111 percent). There are only 1708 maximum annual available hours per tech to recover cost and earn a profit without incurring additional overtime expenses. Multiplying1708 hours by $108.11 gives Sam an annual cost to him per tech/truck of $184,651.88.
Figure 1 shows the error of Sam’s emotional pricing policy. His chosen $120/hour selling price will bring in $204,960, if he sells 100 percent of his available time. But, no one sells all their available hours all the time. If he only sells 90 percent or less of his available tech time, Sam’s revenue (in red) doesn’t cover his $184,651.88 operational cost. Therefore, there can’t be an 11 percent profit.
If Sam sold services at the lower price level he arrived at PSI of $280, he could bring in a range of $239,120 to $478, 240 (at 50 to 100 percent of time sold). He could recover his $184,651.88 operational cost and earn a profit. Sam must come to the realization that the use of wrong numbers will always produce wrong results. The same goes for pricing methods.
Issue 5: If Sam quotes an hourly rate of $120 on the phone, as he states, his business procedures are the reason “990 people hang up” on him. Time and material pricing is problematic.
1. Quoting rates over the phone gives consumers a false and flawed way of comparing contractors based on hourly rates rather than expertise and quality.
2. Consumers get sticker shock when the bill is presented.
3. The propensity for price arguments looms after the job is done.
An upfront contract pricing method is much better.
1. You don’t quote prices until you see and evaluate the circumstances of any task before commencing the task.
2. You calculate your price for the job based on your true cost.
3. You have a chance to earn the reward you deserve.
4. The consumer agrees to the price before you start work.
5. The possibility of legitimate objections about price is non-existent.
But beware. If upfront contract prices are quoted using wrong factors, problems can arise. The only price quoted over the phone should be for a minimum service call charge to cover the expenses (including gasoline) to send a qualified technician to the consumer to discuss the consumer’s request. If a paid task is performed at that visit, at a properly calculated profitable price, you can waive the minimum service call charge. Quoting task prices over the phone without seeing jobsite conditions is risky, inaccurate, foolish and problematic.
Issue 6: Sam’s analogy regarding the price of bread is absurd because when it comes to the delivery of excellence to consumers, all contractors are not equal. Excellence costs more than mediocrity. Contractor services are not a mass produced item such as bread and each tech can only do one task at a time.
Issue 7: Consumers don’t set prices. If they did, restaurant menus would not include prices because diners would just pay whatever they wished to pay; all new cars would cost less than $1,000; and Sam, following his theory, would be paying consumers for the privilege of serving them.
I want to thank Sam for his opinion, which is a good example of a bad example. For success and peace of mind remember: 1) Two plus two only equals four, never less, never more 2) Prices must be set above cost by business owners 3) A contractor who says, “I can’t” is really saying “I won’t.”
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