Income tax.
Wait, come back; I didn't mean to scare you! I just want you to think about it a bit. In particular, think about the way it's paid. For those of us in business, we painfully write checks to the IRS. What about your employees? They're usually expecting a refund check. They don't even think about the fact that the refund is merely the return of their own money - money that the IRS has been hoarding, without interest over the past year. Instead, they view it as a yearly windfall. Why? Because it's painlessly extracted from their checks before they ever get to see it.
The “out of sight, out of mind” process of withholding robs employees of the pain of writing out that check. Confronting that payment every month or every year would certainly change taxpayer perspectives but, before I get into political hot water, I want you to think about that “painless” withholding process. As a business owner, you may be unwittingly “withholding” from your own income because of your pricing. Part of my business is to help contractors break the “withholding habit.”
Consider that, according to the U.S. Census Bureau, in 1999 we spent nearly $30 billion at the movies. Other recreation totaled $78.7 billion. According to some conservative estimates, we spent over $150 billion at restaurants during this same period. This is beginning to sound like a bunch of money! Some of that money was “withheld” from thousands of well-meaning, professional contractors like yourself.
It's Just The Price Of A Movie
Let's use a movie pass to examine the effects of this practice of withholding. The Movie Pass standard works like this: We'll say a typical movie ticket costs $7.50. Most of us go to the movies with a significant other, so that makes it $15 to get in. Since we don't want our SO to think we're cheapskates, we shell out another $15 for a few ounces of popped corn and a quart of flavored water laced with CO2. That puts us at $30, which we'll call our standard Movie Pass (MP). (Note: Our example does not include Dots or Milk Duds because I hate pulling crowns off my teeth.)Now, pretend that you're a plumbing contractor who averages $200 per invoice. (Note: Some of you will say “Wow! I wish I could get that much!” and others will say “I'd fire anyone who couldn't sell more than that.”) Based on 750 invoices per year and a $200 average invoice, you're hauling in a whopping $150,000 per truck per year. What if you raise prices across the board so that your average invoice is now all the way up to $230?
Coincidentally, this is a raise of exactly 1 MP per invoice. In other words, you are now depriving your hapless customer of exactly one trip to the movies because of your “greedy” price increase! Did I say one trip to the movies? Actually, it's more like one trip sometime within the next two to three years since most folks don't even call a plumber more than once every two or three years.
But there's more. Let's examine the effect of banishing your self-imposed withholding. By raising your rates one Movie Pass, you're now bringing in an additional $22,500 per truck. In some markets, that's enough to pay an entry-level apprentice for a whole year and all you're asking for is a Movie Pass. Since Ahnold, the Governator, is out of circulation for at least that long, who wants to go to a movie anyway?
Raising rates an exorbitant two MPs equals an apprentice for each truck as well as a raise for each plumber. You might even upgrade last century's truck to a shiny, new, 21st century model. Am I making you feel bad for not charging an additional MP or two on your invoice? I hope so, but I'm not finished yet.
But You're Worth It
Since part of my business is creating up-front pricing systems for contractors, I regularly push and prod them to raise rates enough to do some good for their businesses, employees and profession. Occasionally, we'll practically double the rates they've been charging. This means that some of their customers will have to give up four or five movies just because their water heater sprung a leak. For the contractor, this may translate to health insurance, better equipment, better employee benefits and growth. As a bonus to the customer, they get longer warranties, faster service and higher quality.Of course, the downside for customers is that they may be stuck at home watching public television documentaries on the “Mating Habits of Tasmanian Tree Weasels” or “The Effects of Global Warming on Obscure Scientists' W2 Forms” - a small price to pay when you consider that they don't have to get a sitter for the little ones.
Make no mistake, my number one challenge is to convince my clients that they are worth more than a few Movie Passes. Often, after a couple of months with their rates at a sensible level, they'll call me back to let me know that people don't scream at them while slamming doors in their faces. In fact, since most of my clients are switching from T&M to up-front pricing, they're finding that their customers are actually happier than they were. Imagine that! Stuck at home watching TV and they're happier than if they went to the movies! You could be a hero!
Here's an exercise to drive home the point: First raise your rates at least one Movie Pass. Most of you can do more but that decision is up to you. Next, go to your nearest “wholesale club” and buy a case of microwave popping corn. Now, whenever you run a service call, let your customer know that they may have to skip the latest sequel to “Nematode Invaders” in order to pay for your services. Then, hand them a box of popcorn so they'll be able to make it through this difficult time. This way, you don't have to feel bad about depriving them of a movie with your “exorbitant” rates. Just don't let the Screen Actor's Guild know what you're up to. You might find Jack Nicholson staring through your window.
