Your mindset, presentation and use of correct numbers are more important than low selling prices

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

contributing writer

I recently received a phone call from a contractor with a very interesting story regarding a bid he gave to a homeowner. In the interest of anonymity, I’ll only refer to him as PSC since he is a member of my Problem Solvers Club.

Before I relate his story to you, I would like to explain a few things about PSC. About five months ago after over a decade of using improper business protocols, being overworked, underpaid and full of stress and frustration because his burden of debt was increasing, PSC decided to turn his back on self-denial and seek my assistance in mending his business. Like so many other contractors, his problems could be easily solved with a bit of sagacious guidance.

Ignorance turned into stupidity, fear, ego and anxiety -- the four major enemies of business. Since everyone on the planet is ignorant about something, there is no shame in being ignorant. But there is shame and plenty of blame when you turn ignorance into stupidity. Unfortunately, this is a malady that many contractors possess. Ignorance of operational costs and proper profit margins is the reason contractors spend so much time buying jobs at, or below, their cost rather than selling their services profitably. PSC was no different. He was guessing at numbers and they weren’t giving him the results he needed to attain his goals. But at least he came to realize that fact and recognized he needed assistance.

The first issue that needed to be addressed was the identification and calculation of his costs. The next matter of concern was the choice of a proper profit margin that could be blended with his costs to allow him to attain his goals so that he could sell his services profitably.

By keeping in contact with him, I was able to take the edge off his fears, which served to lessen his anxiety. Every time he had a question, I gave him an answer that allowed him to understand the proper way of running a contracting business. Through the conversations PSC came to understand that it is wiser to be intelligent, positive and profitable than to have an ego keep him from attaining his goals.

When PSC became a member of my Problem Solvers Club, he started a process that would allow him to become more intelligent by virtue of eliminating his ignorance as it pertained to his numbers. Additionally, his self-assurance (due to knowing his numbers rather than guessing at them) would allow him to be able to recover his costs and earn the profit he deserves for the value he delivers to consumers. This allowed him to concentrate on his presentation to consumers as to the benefits they would receive by choosing his company to address their requests. If he had any questions, he would just give me a call.

In one of his calls, PSC cheerfully told me that he had just performed a job for a consumer. His bid on the job was just over $7,000.00. And he was confident that he earned a profit since I had shown him the correct way to calculate his costs, choose his profit margin and develop profitable selling prices. In addition to being cheerful, PSC was also sad. That’s because unbeknownst to him, before he presented his bid, he didn’t know he was going up against a colleague he knew. He felt bad that he had won the job because his colleague lost the job.

I tried to explain to him that winning and losing bids are the nature of the business. As in any sports contest, one person or team vies against another person or team to win the event. You might wonder about the old saying “It’s not whether you win or lose, it’s how you play the game.” To that I say, as long as everyone plays fairly and according to the rules, anyone who believes that axiom lives in a state of confusion and absurdity. It was probably made up by losers to ease their own pain.

But PSC didn’t lose the bidding game. He won. More importantly, because of his new-found ability to develop profitable selling prices, he knew the job would earn a profit. The story is interesting because after he did the job he found out that his competition was his colleague and there was a peculiar twist to the circumstances revolving around the bid.

PSC had outbid the other contractor [I’ll refer to him as NTB (not the bid)] by $2,000.00. When they found out that they had bid against each other, NTB asked PSC what type of equipment he was using, thinking that PSC was using equipment of a lesser value. NTB was in a state of shock and disbelief when he learned that the equipment was the same.

Most of you probably think that if PSC’s bid of $7,000.00 beat NTB by $2,000.00, NTB’s bid was $9,000.00, and the lower bid would win every time. If you assumed those were the circumstances, you would be dead wrong. NTB’s bid was $5,000.00. That’s right, PSC was $2,000.00 higher [40% more than NTB]. Not only did he get that job, the consumer subsequently called PSC back to perform other tasks.

That proves that it’s not the price that gets you a good and profitable job. It’s the blend of knowledge, correct numbers and presentation. PSC has grasped that fact and his burden of debt is decreasing and he is on his way to earning the reward he deserves for the excellence he delivers to consumers.

Also, like his burden of debt, his misery, stress and frustration are also decreasing because he decided to do something about his situation. His confidence is much higher now than when he first called. That’s because he sees the proverbial light at the end of the tunnel, which shines through the use of proper business protocols. He can mathematically see that his debt load will soon be zero. Then his profit will start to become a reality. He has become aware that following the lead of moronic, egotistical and fearful contractors who decimate this noble industry with their persistence in propagating “going rates,” which are at, or below, real costs is not only wrong, but also is the height of stupidity.

But I can only lead the horse to water. I can’t make the horse drink. PSC was thirsty enough and sufficiently smart to make the right choice. Because of his choice he is on the road to success. About two months ago, as of this writing, another contractor I’ll refer to as T & C [Troubled and Confused], who was having difficulty in meeting his payroll, called me for help. He called after reading an article I wrote in the June/July 2007 issue about a contractor named John Heine [another contractor I have assisted] who delivers excellence to consumers, acts in a financially prudent manner in running his business, and was chosen by consumers in his area as the best plumber two years in a row.

T & C wanted to emulate John and be the best in his area. But, T & C didn’t know the amount it cost him to operate. I told him that if he didn’t know his cost that, aside from luck, he couldn’t develop proper profitable selling prices that would allow him to recover his costs and earn a profit. The reason he couldn’t meet his payroll was that he was borrowing from Peter to pay Paul. From the conversation it was obvious that T & C didn’t have a clue. When you don’t know your numbers, you can’t be the best because you don’t know what you’re doing.

Contractors often confuse the gross revenue they bring in with the money they have to spend on whatever they want. That’s untrue. Gross revenue must pay the costs of operation before contractors reach the point where they can spend on whatever they want. All operating costs including, but not limited to, salaries, withholding taxes, trucks, gasoline, etc., must be paid.

T & C has 16 trucks. He is obviously bringing in a large amount of money. His problem is that it isn’t enough to cover his costs of operation. T & C isn’t charging enough money for the services he renders. When it comes to making money and you don’t bring in all your costs, I can only suggest that you “Fuggeddaboutit!”

T & C is playing a “ponzi game” with himself. If he’s charging less than it costs him, adding techs with trucks will only exacerbate the problem. It will never solve the problem.

T & C probably increased to 16 trucks by having the lowest prices in town. By keeping his prices low, he got more work. This meant he needed more people to get the work done, but for the wrong reason. This increased his costs for the wrong reason. He never needed 16 trucks to bring in the amount of money he was bringing in.

He needed selling prices that would take into consideration the relationship between expenses and revenue that would allow him to be able to pay for the costs of operation and earn a profit for his business. I told him that I could help him solve his problems if he wanted my assistance.

I’m still waiting for T & C to call. Maybe he likes doing it wrong. But the problem when you do things wrong is that you will only get wrong results. PSC was going to tell NTB to call me for help. I’d love to have the opportunity to help them. But, I know I can only lead the horse to water. It’s up to the horse to make the next move. That’s why the fictional movie character, Forrest Gump, says, “Stupid is as stupid does!”

PSC did make the decision to do the right thing when he contacted me a mere five months ago. If he hadn’t, he would be more miserable, stressed out and frustrated today. Instead, he is confident, delivering excellence to consumers, decreasing his debt, on the way to earning a real profit, and is part of the solution rather than part of the problem.

         

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