To create the wealth you’ve dreamed of and the profits you need to grow and thrive in the contracting world, you must be priced right. The right pricing will put your company on course for prosperity, while the wrong pricing will drive you straight to poverty. With one year coming to an end and a new year on the horizon, there may be no better time to evaluate if you’re prices still are relevant or need to be increased to attain the profit margin you deserve.
Why is pricing so crucial? Pricing is where your revenue comes from. Every service call you run should bring in not only revenue but profit, as well. If you aren’t priced correctly, you’ll be bringing in nothing but more debt with each call you run.
What Business Costs
Think about what it costs to simply get one of your technicians to a client’s door. It all starts with your client calling you. For that one call, you must pay for the phone service, the phone itself, the call-taker to answer the call, and the office where the call-taker is. You’ll also have to pay for the marketing that got that client to call you in the first place. From there, you may have to pay a dispatcher to send a technician on the call. Now, your technician has to get to the house, which means you need a truck. That truck requires gas, maintenance, and insurance. You’ll have to pay your technician for going to the house. You’ll have to pay for the training that technician needs to provide the best service and the tools and parts he will need to solve the problem. Finally, you’ll have to pay for the insurance, benefits, and taxes of all of your employees.
You incur all of these expenses before your technician even reaches your client’s driveway. To create profit in your business, your pricing has to generate enough revenue to cover all of those costs and leave you with a percentage left over to boost your bottom line.
What happens if you have the wrong pricing? You’ll run that service call, but you won’t generate the amount of revenue you’ll need to create a profit. In fact, you may not even generate enough revenue to cover the expenses you incur just getting to the door.
Most contractors go out of business because they weren’t priced properly, and they fell into a cycle of decay. They ran calls with their incorrect pricing; they generated some revenue, but it wasn’t enough to create a profit. As a result, they had no money to improve their business. They didn’t have the money to market or pay their employees. Eventually, that lack of marketing brought in fewer calls, and there were fewer employees to run the calls they did get. With fewer calls, they earned even less revenue, and the cycle continued.
Where does this incorrect pricing come from? Often, contractors guess about what their pricing should be. Many contractors determine their pricing by calling their competition and aiming their prices just a bit lower. What if that competitor you called is going out of business because his pricing is wrong? As soon as you price your services below his, you’ll be on the fast track to bankruptcy. This is the essence of pricing for poverty.
No matter how operationally excellent your company is, you will never make a profit if you’re priced improperly.
Pricing for Prosperity
A simple look at pricing starts by knowing your costs of doing business. Your pricing should be based on this and not what your competitors are charging. From there, you have to determine how much money you’ll earn as the owner, and add in the percentage of profit you’re planning on making.
From analyzing thousands of financial statements, most contracting business experts will tell you that it’s virtually impossible to be highly profitable by charging under $90 an hour. With the costs of running a company rising every day, this figure is illogical and unfair to the contractor.
Does your pricing make sense? Do your prices cover the costs of doing business and create a profit for you to grow? If they do, you’re on your way to prosperity. If not, you’re aimed for poverty. It’s time to give those prices a bump. You might be surprised to find that your customers don’t even notice, but your bottom line certainly will.