When I was 10 years old, I wanted to be an actress. I've always loved the spoken word and being the center of attention. Funny how things work out.
In 1989, I was not an actress, but the vice president of a plumbing and heating company. I was up to my eyeballs in debt. How did it happen? After his partner died suddenly, I told my husband, Hot Rod, I would pitch in. I graciously offered to take over the bookkeeping, but I wasn't gracious for long. I struggled with accounting and computers. We were charging the "going rate" for our services - and we were starving.
Then I met Frank Blau on the pages of Plumbing & Mechanical magazine. At Hot Rod's urging, I wrote Frank a letter. That letter marked the beginning of a lifelong friendship with Frank. He taught me how to read financial statements. He taught me how to make money.
I fell in love with the numbers.
Not at first. At first, it made me sick to my stomach to discover how much money we had lost, and were losing. But once we raised our prices, we started to make money. How about that?
Hot Rod and I sold the company to our wonderful employees in 1995. (Working with your spouse is for folks of far better mettle than Hot Rod or me.) Now I teach bare-bones business basics seminars. I figure I'm not the only one who felt stupid trying to learn this stuff, so I teach basic accounting. What the heck is a balance sheet? An income statement? And why would you want to know these things? That's the stuff I teach.
Frank teaches seminars. He has been threatening to quit since I met him in 1989. But he won't quit. His mission in life is to help contractors enjoy the success they deserve for their significant contributions. In his seminars, Frank teaches you how to create a realistic selling price, based on your numbers. And just when you want to cry out, "It'll never work!" he impresses you with W2 forms - his, his sons', his top techs' and his dispatchers'. Great stuff.
Recently, I was on the phone with Frank. We were discussing life on the seminar trail. Interestingly, in every
town, at every seminar, the same questions always come up. While we share the same basic business philosophy,
Frank and I approach the questions differently. With that in mind, take a seat in the front row, raise your hand and
discover the answers to "How much should I charge?" and other frequently asked questions.
How Much Should I Charge?Frank: I never answer this question! How do I know the room isn't bugged? My seminar is no place for price fixing! Just kidding around. To answer that, set aside some time for yourself and your spouse. Talk to each other. Come to terms with what you think you're worth. How much money do you want (do you deserve) for the risky, essential work that you do? How much money would it take to compensate for the headache of running a plumbing and heating business? How much is appropriate for a professional with your skills and experience?
The point of being in business is to make more money and have a better lifestyle than working for someone else. Could you get a job driving for UPS? Sure. Easy! So, how do wages and compensation stack up for UPS drivers? Should you make at least that much? More than that? The variable with the most impact on your selling price is owner's compensation. The first step in developing a selling price is determining how much money you want to make. And that is a personal decision. Right now the average compensation for a nonunion journeyman plumber is $32,000-$35,000 per year. I think that stinks.
Ellen: I agree, Frank!
Why don't you crunch the numbers? Too busy? Don't like pencil pushing? Would you like me to do it for you? You know, I could go to your company, study your financial data, work out a budget for you and create a sure-to-make-profits selling price for you! Cool, huh? But you would never use that price. You wouldn't believe me. As soon as someone looked at you funny, you would chicken out and lower the price.
I know a contractor who purchased a flat rate book program and handed the book to his techs without customizing the information. One of the techs flipped the book open to the waterline replacement page. He started grilling the owner for a justification of the price. The owner had no idea where the number came from. From that point on, the flat rate books were placed on the shelf, and never used.
Nope, you have to figure out your own selling price, based on what you want to make for your salary and what you
will spend to run a responsible business. The basic formula for creating a selling price? Add up all your costs of
doing business, and divide by the number of billable hours. Inflate for profit.
How Much Profit Should I Aim For?Frank: Again, this is a personal decision. These days, I spend time each day on the Internet, looking over my investments. Today, I looked up McDonald's Corp. Consistently over the last several years, McDonald's has recorded between 18 percent and 25 percent net profits. McDonald's loads up your kids with sodium and cholesterol. For this it is rewarded with $0.18 to $0.25 for every dollar in sales? Decide for yourself what net profit you plug into your selling price. But, certainly your contribution to society is greater than McDonald's.
Ellen: Do you share your profits with your employees? Nice idea, huh? Set your profit margin high enough to cut your team in on the action. It's interesting that this question might make you a bit nervous. You are starting to shift about in your seat, uncomfortable with the profit discussion. You might wonder if it is immoral and unethical to charge prices that are significantly higher than the competition.
Dan Holohan tells a wonderful story about a single copper fitting. The point of the story is to remind us that there are no boring stories, just boring people. Why, the most boring subject becomes fascinating when a clever person talks about it. Dan tells of the journey of a copper fitting from the mine to your hand. How many people touched it? What were they thinking about? It's a great story.
What struck me as I heard it, was that each person and his family depended on the contractor to set a selling price that would support them. Hundreds, thousands of people count on you to set a price that will allow them to feed their families, pay their bills and retire someday. Suppose your customer, Mrs. Fernwicky, spent more than budgeted on the imported Italian marble, and wants you to take a hit on your faucet installation? Are you going to speak for the whole line of distribution and say, "OK, I'll knock off 5 percent?"
Who is more ethical - the contractor who sticks to a reasonable, realistic, profitable selling price or the guy who
shaves 5 percent?
How Do I Raise My Prices Without Losing My Customers?Frank: I started in this business as a new construction contractor. No, thank you! I couldn't make any money, and I was sick to death of working like a slave for general contractors. Before I made the switch to plumbing and heating service, I crunched the numbers. Blessedly, I have always been a fanatic about the numbers. I am a businessman first, a plumber second.
What I found in my calculations is that my costs of running a service company were higher than a new construction company. When I came up with a selling price, based on my projected expenses and number of billable hours, I realized I was going to enter the market with a much higher selling price than my competition. This is why I came up with flat rate pricing for service work. Flat rate pricing is nothing new. I was doing flat rate on my construction jobs. And by flat rating the price of the repair, I could remove myself from the "How-much-do-you-charge-per-hour?" competition.
I actually polled my potential customer base. Ninety-two percent of the customers said they would rather know the price of the repair before any work was done. Flat rating de-emphasizes the labor hour rate, and gives the customer what they really want to know - how much.
When you make the switch to flat rate, start with the people who answer your phones. When the caller asks how much you charge per hour, reply with, "That's the nice part, Mrs. Jones. We don't charge by the hour. We charge by the job. Before our service technician begins any repair, he will explain all your options and give you a written price quote. No surprises." At the end of the request for service call, ask, "How will you be paying our service technician at the completion of his job today? Check, cash or credit card?" In fact, we even offer a Blau Plumbing credit card!
Ellen: If you raise your prices, you might lose a few customers. In fact, the first ones to go are your biggest
pain-in-the-butt customers. Would that be so bad?
While I am a huge fan of flat rate pricing, remember this: How you charge is less important than how much you
charge. Can you charge T&M and still pay yourself and your team wages and benefits commensurate with your
contributions to society? Great. Go for it. But, as a housewife, I have to tell you É before I let you loose in my
basement, I want to know how much it's going to cost.
How could I charge more than the going rate in my town? You don't understand the Midwest (region, state, big city, small town, medium size town - insert any locality).Frank: At this point I must ask you, "Why did you come to this seminar today?" Be honest. Didn't you come to this seminar to learn how to make more money? Do you have more money in your business checking account than you know what to do with? Of course not. The only way for you to make more money is to charge more for your services.
I know a contractor in Laredo, Texas who charges more than $200 per hour. And I've listened to a contractor from Greenwich, Conn., whine that he couldn't charge more than $45 per hour. It's you, not where you live.
Ellen: If you ask your accountant how to make more money, she will probably tell you to lower your costs. Hmmm. Could you call your insurance agent and announce that you will pay 20 percent less than your premium? Explain that you are lowering your costs. What would happen? No, the only one that would take less money is you!
Some small-town contractors argue that there is no way a price increase will fly in their neck of the woods. I live in a town of less than 1,000 people. Folks in Missouri take pride in their frugality, but most prices in my town are higher than in the big city a few miles away. FedEx has an additional charge for the remote pick up, gas is more expensive and anytime I buy a national brand I pay more for living in a small town.
I figure, if you aren't making your dreams come true with your business, why not try something else? Why not raise your prices? You just might make more money. Suppose you raised your prices and you lost all your customers. You could go to work for UPS! Would that be better than going into debt, or continuing as you are?