Price for profit, in every department
Back to square one
Many years ago a really good friend in the industry told me something I will never forget. He said, “Never abandon what got you to where you are.” That statement can mean lots of things to many different people, but when it comes to being successful within the trades industry the meaning is pretty clear.
At some point during the journey of building your trades company, a little light bulb went off. Actually, it didn’t just happen to go off, it was forced to go off because you had been working really hard, for a number of years with sales increasing, but there was something missing in the mix of consistent growth. It was profit!
That’s right, the company was getting bigger and bigger, but reality was staring you right in the face as you looked in the mirror. The reality was simple, but profound. If the company is growing, profits “should” be going up — but they are not. After exploring all the seemingly obvious reasons for reduced profitability, the answer suddenly became clear. “Maybe we aren’t charging enough to make a profit!”
Now that sounds like one of those duh moments. “Gee, if I charge more, I will make more money!” That is common sense as well as good business sense.
After an extended time of reflection, it all becomes clear. “I need to raise my hourly rates, probably in each department.”
Since most owners within the trades industry used to be a technician prior to starting their own business, the question of “How much do I need to charge per hour to cover my real costs of doing business while generating a reasonable profit?” is actually a pretty tough one. The solution may have become obvious, but the process of achievement is often unclear.
Over the coming weeks or months, the company owner does some research, talks to other contractors, attends a seminar or two, and/or reads some books or articles on how to set proper hourly rates.
Armed with the needed education, new rates (profitable rates) are calculated based on the company’s unique costs of doing business — not what Joe or Mary charge down the street. With fear and trembling, the new rates are instituted and two amazing things happen:
First, the vast majority of the customer base never even realized rates went up and for sure the volume of complaints you expected to occur, did not take place; and
Second, and this was truly miraculous, the new rates produced a consistent profit.
The eye-popping lesson learned was a true revelation. There must be a relationship between what we charge and the profit the company does, or does not, produce.
A step backward
Now fast forward a few years. The company has grown, and continues to grow. However, it seems harder and harder to make a profit. The company has put systems into place, exceled in customer service and invested huge amounts of money into marketing. Staff has attended classes on leadership and teamwork, equipment and vehicles are in great working order, and the staff and techs actually seem to have bought into the company vision. The only thing missing is profit, again!
Could it be the owner has spent so much time “building” the business that the key foundation stone that caused the company to make money is now missing? The missing foundation stone is the process of adjusting hourly rates as things change within the business.
Any time costs change within the company (overhead, price of materials/parts, the hiring of additional employees, etc.) there is always a resulting necessary change in what the company needs to charge per hour to maintain profitability.
Now is a good time to put things on pause for a short spell. Take time to review your real costs of doing business, from a cash flow perspective. If costs have changed over the past year there is a very good possibility that your hourly rates just might need to be adjusted as well.
The company may be the best in the area. The quality of work might be outstanding and customer relations can be far above your competition. Everything from an operations standpoint might exceed your customers’ expectation, however, if the company is not priced for a profit, in each department, it is going to go out of business sooner or later. RJ 2.0