Think before choosing your profit margin

 

BY RICHARD P. DiTOMA, L.M.P.

contributing writer

 

Numbers don’t lie or make mistakes. Humans do! When you lie to yourself, you are not only making a mistake, you are acting foolishly. When you, as a phc contractor, use selling prices that do not allow you the opportunity to recover your cost of operation and attain the reward you deserve for the value you deliver and the risks associated with the delivery, you are indeed acting in an absurd manner.

 

Your selling prices are numbers. You and you alone are responsible for the results you get from the numbers you use. You can only establish your selling prices at one of three levels. You can sell your services 1) below your true cost; 2) at your true cost; or 3) above your true cost.

 

Obviously, options 1 and 2 are for fools. Those options will add stress and frustration to your life. If you choose either option 1 or 2, you will find yourself working longer hours for no additional compensation and missing out on your life while you fool yourself into thinking that’s the way this industry is. Additionally, option 1 is foolish because it also subtracts money from your bank account. Neither option 1 nor 2 gives you the opportunity to reap your just reward. Many, if not most, contractors utilize options 1 or 2 because they don’t realize they are selling at or below their cost since they do not know how to identify and calculate their true cost, and, take into consideration the factors that affect their cost. Therein is the reason more contractors are miserable rather than happy and content.

 

Option 3, selling above your true cost, is obviously the only option that gives you a chance to be wise and not to be foolish. However, since there is a difference between selling your services above your estimated cost and selling them far enough above your estimated cost to attain your goal, you must think before choosing your profit margin.

 

After four decades in the phc industry, as a phc contractor since 1978 (and currently) and as a contracting business consultant since 1990 (to date), I have an innate sense that allows me to know when a contractor is fooling him/herself. Unless someone can show me through the correct use of numbers that I am mistaken, I make the following conclusion. Based on the sale of all available hours all the time for all technicians, there is not a single phc service contractor in the USA with a cost of operation per journeyman/service vehicle of less than $100.00 per hour. The cost per tech/vehicle hour to many could be much more. In some parts of the country that cost could exceed $200.00 per tech/vehicle hour.

 

When I state the word “cost,” I mean the cost to the contractor not the customer. The cost of any service to the consumer (the contractor’s selling price) should obviously be higher than the cost of that service to the contractor. Since your costs should be calculated on the potential sale of all available hours your profit margin per job will have to be higher than you might think to cover your actual cost and attain the reward you deserve. When all annual potentially available hours are not sold all the time, your true cost of operation per hour as it pertains to any job actually rises.

 

However, for the last two decades, in the process of helping to put many contractors on the path that will give them an opportunity to succeed I have noticed a phenomenon among contractors which actually adds to their frustrations. Many, if not most, sell their service for at least $30.00 per tech/vehicle hour less than it costs them. That’s because they do not correctly calculate their costs. In turn, their potential annual sales per tech/vehicle will be minimally be shortchanged by $51,240.00 (based on a maximum of 1708 potentially available hours). Ouch! No wonder there is stress and frustration in the industry. $51,240.00 per tech/vehicle annually would certainly ease their pain. But, by fudging the numbers, they cheat themselves, their employees, creditors, and/or clientele as they try to make their faulty numbers work. That doesn’t decrease stress and frustration. It just exacerbates it.

 

When you charge the “going broke rate” that many contractors charge in order to compete with the ignoramuses who don’t know how to, or choose not to, use correct numbers for fear of losing work, you will wind up buying jobs, partially at your cost, rather than selling your services profitably. You will have to work longer hours with no extra compensation. Your employees can’t be compensated in a manner commensurate with their contribution to your business. In turn, this creates the problem of getting and keeping good help. Your creditors must wait to get paid as you borrow from Peter to pay Paul. Your clientele receives mediocre performance rather than the excellence they deserve and which could be provided at correct and properly profitable selling prices. And, everyone’s stress and frustration just mounts higher. All because your selling prices were too low because the numbers you used were incorrect.

 

To show the importance of using correct numbers to arrive at your selling prices and give you some insight as to the proper choice for your profit margin, I have created the chart in figure 1. The numbers used in the chart are based on that aforementioned minimum $100.00 cost to you per tech/vehicle hour. At a maximum annual 1708 potentially productive hours per tech/vehicle you have an annual estimated cost (to you) of $170,800.00 per tech/vehicle. Your total cost and cost per tech/vehicle hour may very well be higher.

 

I have broken the chart into seven scenarios. Based on that minimum cost to you of $100.00 per tech/vehicle hour, the green bar in the chart indicates your maximum annual potential sales per tech/vehicle for each scenario. The red bar designates your minimum annual cost to operate one tech/service truck, and is at the same level in each of the seven scenarios. That’s because you always have that cost, for the most part, regardless of the amount of hours you actually sell. The blue bar shows the actual revenue brought into your business per tech/service truck if you only sell 70% of your available 1,708 hours.

Scenario 1 shows that when you sell your services for less that in really costs you, you can never recover your cost. Duh! You can never make a profit. Double Duh! You actually pay, in part, for the privilege of servicing the public. In this scenario stress and frustration levels are extremely high.

 

Scenario 2 shows that if you sell at your calculated cost you can only recover your cost if you sell all your available hours. In this scenario, profit can never be attained. If you sell less than all available hours you can’t recover your cost. In either of these cases, you are only fooling yourself. In this scenario stress and frustration levels are still extremely high. It should be noted that since no contractor sells all their available tech/vehicle hours all the time, selling at your cost means you are really selling below your cost.

 

Scenarios 3 to 7 show the results you will get at different profit margins starting at 10% and incrementally rising by 10% for each subsequent scenario.

 

Scenarios 3 and 4, at 10% and 20% profit margins respectively, show that you make a profit if you sell all your hours. But, you can’t even recover your cost if you sell only 70% of your available time at either of these margins. As a matter of fact, at 90% and 80% of your available time sold respectively, options 3 and 4 still present extremely high stress and frustration levels since at 90% and 80% you can only recover your cost.

 

Scenario 5 at 30% shows you make a profit, and, if you only sell 70% of your available time, you can at least still recover your cost. Once again, at 70% of your available time sold, stress and frustration are still extremely high.

 

Scenarios 6 and 7 at 40% and 50% profit margins respectively show that you recover your cost and make a profit whether you sell all your hours or only 70% of your hours. Stress and frustration levels drop dramatically. Obviously, if you sell less than 70% of your available hours you will decrease the potential for profit. Option 6 at 60% and option 7 at 50% of potential hours sold will allow you respectively to recover your cost of operation, but, not make a profit. At 60% and 50% you will again increase your stress and frustration levels.

 

By taking this information into consideration, you can begin the thought process before choosing your profit margin. Keep in mind that the $100.00 cost I used is, in my opinion, the minimum cost. Your cost can be higher. If you need assistance in calculating your cost; choosing the right profit margin; or, any business matter which will give you an opportunity to succeed, give me a call at 845-639-5050.

 

Make the year 2010 better for the industry which includes you, your family, your employees, your clientele, and your creditors. When you don’t use correct numbers, you have no chance at success. But, when you use the correct numbers the industry is better off because:

 

1. You and your family will have the chance to make a profit and lower concerns about getting the bills paid.
2. Your employees will be more content to stay in your employment.
3. You will be better able to serve your clientele.
4. Your creditors will be paid in a timely manner.