Smart business is less expensive than cheap business

BY RICHARD P. DiTOMA
L.M.P.

I’m sure you have received calls from consumers who have never used your firm. In an effort to soften you up, some say they called you because they were told you are a good contractor and good ones are difficult to find. In the same moment they complain about the last guy they used. Many of these consumers promise you all sorts of work if you do the right thing for them. If you believe those claims, next December 24 at midnight wait by your fireplace for a jolly bearded red-suited fellow to show up with gifts galore.

I don’t mean to say that all consumers who call are telling you what they think you want to hear in order to benefit their own cause. The majority are good people who need the services of a good contractor. But, when you hear accolades about your greatness and promises of more work if you do the “right thing” from those who don’t know you, beware! When someone starts with these phrases they often just want you to give them top quality service at the lowest possible price they are willing to pay.

In an industry where most contractors sell their services at prices based on their ignorant guesses with no financial reality, the lowest possible price in the caller’s mind is more often a price below the cost (to the contractor) for the delivery of top quality service. Excellence costs contractors more to produce than mediocrity. The consumer complained about the other guy because they only received one of the two things they wanted. The other contractor either gave them a low price and poor quality, or, a higher price and top quality. That other contractor did not know how to do the impossible.

Addressing the impossible

To paraphrase a concept that I think is attributed to the U.S. Marines, the difficult we do immediately, the impossible takes a little longer. In order to do the impossible, you must first see the reality of the situation.

Delivering excellence to your clientele is always the smart thing to do. You will get fewer costly callbacks and more profitable repeat and recommended business. But, you can’t sell your services for less than, or the same as, it costs you, and, be profitable. That leaves only one choice. You must sell your services for more than it costs you. That requires knowing your true costs and choosing a proper profit margin that will give you an opportunity to reach your goals.
You might feel that if your selling prices are above those of your competition you will lose business to those competitors. However, losing business, which costs you more money to produce than you bring in, is a good thing to lose. It gives you time to properly serve your real clients while having a chance to attain your goals.

If you constantly spend more money than you bring in, and make wrong decisions, you will eventually run out of money and/or the energy to keep up doing things wrong. Just ask the troubled banking institutions, big auto makers and other businesses on the brink of collapse. Wrong choices always produce wrong results.

Delivering top quality for the lowest price in the consumer’s mind is impossible. But, you can deliver top quality at a lower price if you calculate your numbers correctly. Start by determining your true operational cost in totality and per unit (tech hour), and choose a profit margin that takes into consideration the fact that a consumer who only uses your business once gives you more risk which, in turn, makes your attempt at success more difficult.

This will allow you to give yourself a benchmark price structure for your business that will afford you the opportunity to succeed. Make that profit margin substantial enough to address the risk you take, and give you the ability to offer discounts to your real clientele (those who actually use you all the time). This method will let you earn the reward you deserve for the value you deliver while rewarding your loyal clientele with lower prices.

By thinking out of the box, you can create and offer your clientele (both existing and potentially new) a service discount program with renewable annual membership fees. This can increase your revenue and can help offset a portion of the discount.

This program gives you the opportunity to continue to deliver excellence; charge the consumer a lower price for the delivery of excellence; commit to the consumer through your top quality performance; and have the consumer commit to your business through their acceptance of the service discount agreement. This type of program turns the impossible into the difficult, which can be done immediately after you set up the program correctly. But remember, if you do it wrong, you will still get wrong results.

Some consumers will only sign up for the service discount program once because it was cost effective for them at the time. When you correctly calculate your numbers you will still be ahead of the game. On the other hand, some consumers will commit to you for the long haul. For them to consider using your company to address their needs again they are obviously satisfied with your services. As an additional bonus to them, they know that a call to your company also gives them a discounted price. They are the people who keep you in business. I have clients who have been utilizing my contracting firm for 31 years. They are the ones who proved that by us doing the right thing, they have given us their business. Either way, my firm has taken care of both types of consumers for the right prices, which allow us to still be around 31 years later.

Deliver excellence, not the shoddiness of mediocrity

You may not have prices comparable to those of your moronic competitors who charge numbers at or below their cost based on the direction the wind blows. But, by educating consumers to the fact that your company’s goal is to deliver to them excellence in performance, you can set up a protocol which will allow you to deliver top quality service to them at the lowest price at which excellence can be delivered.

If questioned on the difference between your price and the moronic price, remind them that a job well done will probably last longer and therefore be less expensive over time. Inform them that when you are financially prudent, you will be able to be there to stand behind the service you performed today, as well as take care of their needs of tomorrow.
I recently received a call from a consumer who had never used our firm. He had a water heater installed by one of my competitors who is a notorious price low-baller. His prices don’t allow him the chance to deliver excellence to his customers.

The consumer told me that the hot water pressure was low ever since the new water heater was installed by that competitor. When I asked him about the cold water pressure, he told me it was fine. This immediately told me that the first thing to do was to make certain that the cold water inlet to the water heater was fully opened.

I asked if he had called the other contractor back. He told me that he did. He went on to say that they told him on the phone that the cold water supply valve to the building was faulty and needed to be changed at an additional cost to that consumer. If they knew that to be true, why didn’t they offer to change it when they installed the water heater?
Answer: stupid business procedures. The consumer was a bit leery of this over the phone diagnosis. Even this lay person could figure out that if there was any truth to that diagnosis the cold water also would have a problem. But, it didn’t. Sure enough, when the consumer fully opened the valve his problem disappeared.

I don’t compete with low-ballers who don’t properly care for their customers. They sell mediocrity. We sell excellence. That’s the reason we don’t offer poor service at below cost prices. My contracting firm gives our clientele excellence in performance backed up by business and technical intelligence, ethics, and financial prudence.

When selling prices don’t give contractors the chance to do the right thing for their customers, they are taking the chance of losing that consumer to those contractors who run their businesses in a professional, competent and business-like manner. So, don’t be afraid of doing the right thing

Information is the power of smart business

Even after you have properly calculated your cost per tech hour the confusion of any business day can lead to mathematical mistakes; leaving something out; or figuring in that which shouldn’t be included in a task price. Any of these can cause problems.

Prices that are too low to earn a profit above your costs for the task defeat the purpose for which you are in business. If a task price includes cost items that don’t pertain to that task, you may have made that price too high to entice the consumer into purchasing your services. For example, if an average task of some type takes an average two hours for your technician to perform without problems and you include eight hours in the price you quote to the consumer, you may not get the opportunity to do the service at a profitable price.

Information is power. By giving yourself and your technical staff information you give your team the necessary power to avoid problems; make everyone’s job much easier and less prone to error; and give your business a greater opportunity to succeed.

Properly formatted price guides are a fantastic source of knowledge. Obviously, price guides should show your prices during your regular business hours. It would be wise to have them also include after regular business hour prices: discounted prices for your service discount program clientele; senior citizens discounts, etc.; and/or discounted prices for additional services performed during the same visit.

When your technicians have this pricing information at their fingertips they can rapidly and professionally give consumers the price information they need to promptly decide to give your firm their business. In the consumer’s mind, fast and intelligent responses instill confidence in your enterprise.

It should be noted that composing your own price guide is a daunting and time consuming task. You may not have, or want to spend, the time making a price guide. In that instance, you should look into purchasing a price guide composed by a company who takes all of which I speak into consideration. If you choose to purchase a price guide make sure that the price guide gives you guidance which will afford to you the opportunity to succeed.

Figure 1 shows a sample page from my Readily Available Pricing Information Digest for the Plumbing Heating Cooling Contractor. It is customized to the contractor’s labor/overhead costs, chosen profit margin, average travel time, and chosen discount rates.

Things you should keep in mind regarding this sample page:

1. It is not actual size. The actual size of the price information page is 81/2"x11".
2. Sample page prices are for illustration only and based on the following hypothetical factors:a) a
   1. labor/overhead cost to the contractor of $150.00 per tech hour. You may have a higher or lower labor/overhead cost which can be used for your price guide.
   2. an average 1/2 hour travel time to the call location. Your price guide travel time would be based on your tech’s average time to take the information regarding the call; to plot the route to get to the call location; and the time to drive to the call location.
   3. a profit margin of 50%. This 50% profit margin allows the hypothetical contractor room to offer discounts to service discount clientele while being financially prudent and still able to attain set goals.
   4. after-hours task prices based on a 1.33 multiplier of the regular hour price Your multiplier can be the same, higher or lower. This option is not needed if you don’t perform after-hour services.
   5. There are two discounts columns. One is for 20% and one is for 10%. If you decide to give discounts your discount rates could be the same, higher or lower.
3. To the left of the page is the main item for which a price is needed.
4. Below the main item is a description of the task.
5. Below the description of the task is a list of additional potential material you may need for the task.
6. To the right of the main item is the cost allowance to the contractor for the main item (idc).
7. To the right of idc is the cost allowance for the additional potential material (apmc).
8. To the right of apmc is the average allotted time to complete the task at the location (th).
9. To the right of th is the average technician travel time (ttt).
10. To the right of ttt is the labor & overhead cost to the contractor inclusive of travel time (loc).
11. To the right of loc is the breakeven cost to the contractor for the task including task time, travel time and material, if any (bec).
12. To the right of bec is the task identification number.
13. To the right of the task identification number is the after regular hour selling price for the task.
14. To the right of the after regular hour selling price are two columns with discounted regular hour prices.
15. To the right of the discount columns is the regular hour selling prices for the task.
    1. Note that each item has four lines of prices.
    2. The first line of numbers is for the first task of the visit when all material is on your service vehicle.
    3. The second line of numbers is for the first task of visit when any material is not on service vehicle and must be picked up. Those prices are in red.
    4. The third line of numbers is for additional tasks after the first task of same visit when all material is on your service vehicle.
    5. The fourth line of numbers is for additional tasks after the first task of same visit when any material is not on service vehicle and must be picked up. Those prices are in red.
16. If you order this price guide, it will be customized to your labor/overhead prices, travel time, profit margin, multiplier and discounts. For information or help with numbers, give a call at 845/639-5050.

As you can see, a price guide of this type gives you and your technicians all sorts of information. Your team will have the power to rapidly quote to consumers different profitable selling prices for the same task depending upon the circumstances revolving about the task. You will be able to afford to deliver excellence to your clientele. And, be profitable while doing it.

Remember, smart business is less expensive than cheap business both for you and your clientele.

If you have any questions call me at 845/639-5050.

I wish you good health and much prosperity. Excellence deserves reward!

               

Richard P. DiToma is a business consultant and contractor with 36 years of experience in the P-H-C industry. He conducts seminars, evaluates business operations, publishes customized price guides for contractors and offers continuing support.

His book -- “Solutions Management Theories & Methods for the Contracting Business” -- deals with solving pr-oblems contractors face; identifying & calculating costs; developing proper profitable prices; addressing consumer questions; hiring and evaluating technicians; and logical management procedures

It’s also available as a “Workshop On Demand” for individual businesses (from one person to multi-person businesses); contractor groups  (organized or informal); trade associations; and wholesalers to the trade.

Date: Arranged according to your schedule

Location: Wherever you wish. Richard P. DiToma will come to you -- or you can come to him. Contact Richard to find out if there is a workshop coming to your area.

His other book -- “Readily Available Pricing Information Digest 2006” -- for the plumbing-heating-cooling contractor service price reference book is available with plumbing &/or heating &/or cooling section(s). To receive more info about his services, to order his books or to contact Richard at 845-639-5050, by fax at 845-639-6791 or via email at richardditoma@verizon.net