I recently had an epiphany of sorts. I’m beginning to realize that I’ve been laboring under some conceptions and ideas that are just wasted effort. It takes too much grief and effort to implement the business-building fundamentals that I typically recommend. Knowing your costs and how to price for profits is just too much work. This month, I’m going to take a break from all that hard work and simply offer the advice that many of you ask for.
First, let me say that I’m rather pleased with the positive impact our flat rate price books have delivered to contractors all across the country. I’m even pleased with our initiative to make it as easy as possible to price your contracting services. But apparently, even our simplified pricing methods don’t hold a candle to the good old, tried and true “Going Rate.”
This is why I’m considering a new product - a price book with blanks instead of prices. Simply call around to learn the rates charged for various services, fill in the blanks and there you have it. No need to figure costs or estimate your operating budgets. Just fill in the blanks and go. I can’t believe I didn’t come up with this before.
Downward CreepYou may have to get creative with your research because even though you won’t have to deal with formulas, there actually is a formula used in calculating the going rate. I call it the “declining median quotient.” (Sounds pretty fancy, eh?) Here’s how it works:
At $150 an hour, Contractor A is the highest-priced contractor in town. Contractor B comes in at a close second with $140 an hour, while Contractor C hovers near the bottom at $100 an hour. C thinks A is a crook, and A thinks C has oakum for brains, but that’s irrelevant to our formula.
So, you come along as Contractor D and decide to call around to figure out the going rate for your town. You make three calls and in spite of the fact that there are five contractors in the “C” range for every one in the “A” range, you still manage to call Contractors A, B and C, respectively. The average rate for these three is $130 an hour.
Since you have a totally unbiased opinion of your own business capabilities, you are confident that you’re better than Contractor C. No way will you work that cheaply. But your trucks aren’t as pretty as those that Contractor A drives, so it’s obvious that you’re not as good as A. Contractor B seems a little closer. You know you’re above-average, but since B has been around for a few years, you determine that the best pricepoint for you will be just below B - you price your work at $135 an hour.
Congratulations! You did, in fact, price yourself above the average. I would be rich if I had a dollar for every time I’ve heard, “We’re not the cheapest and we’re not the highest, but we do great work.” You’re worth every dime of it.
A month or so later, before you’ve gone out of business by working below cost, Contractor E comes along, makes some phone calls and finds you, as well as Contractor A and Contractor C, resulting in an average price of $128 and change. Contractor E says “I can’t charge as much as A, it has a huge phone book ad. I’m probably as good as D (that’s you!), but since D has been around a while, I’ll charge a little less - $130 an hour, just to get my foot in the door.”
Contractor E is charging “higher than average,” but the average is creeping downward. When you combine this tendency for a downward creep of the going rate with the never-ending flood of new contractors seeking to make their mark in the industry, what you find is that the going rate never goes anywhere, except maybe down.
But this formula doesn’t really matter. Contractors are jockeying for their position in the subsistence vortex by comparing themselves to each other. In the meantime, the price-sensitive consumer has a better idea. He calls the realtor he and his spouse bought their house from. The realtor has a bunch of rental property, so he recommends whom? Contractor C, of course. “He’s the lowest guy in town, when you can get him to show up.”
That crashing sound you hear in the background is the going rate taking yet another hit.
The Secret RevealedThe “Going Rate” is a powerful force. It is not unusual for me to help a contractor calculate a reasonably profitable price only to have him succumb to the pressure of the going rate. For years I had a hard time understanding how this could work. How could a contractor go into business at the going rate even if it didn’t offer enough revenue to earn a profit? But all that was before I had my epiphany. I now understand how it works and here, for the first time ever published in Plumbing & Mechanical, I will reveal the secret to contracting at the going rate.
It’s just like bass fishing.
Think about the typical bass fisherman - the boat (which costs about as much as a service truck) has enough horsepower and electronics to be a sub chaser. There’s always something to buy for the boat and let’s not forget the tackle box full of the latest $7 bass baits. (Hey, I’m not making fun of you bass fisher people - I have a Harley and that’s no different when it comes to opportunities to spend money).
Once in a while, the faithful bass fisher brings home a stringer - maybe even 20 pounds of fish or so. Over the course of time, those bass really add up. If a pencil were put to use, it would reveal that bass meat costs, on average, just under $5 per ounce. That’s why bass fisher people don’t bother to calculate the cost. They do it because they enjoy telling fish stories.
Contracting is the same way. You don’t have to worry about whether or not you make a profit. Just do it because it’s fun. As long as you can keep the supply house bill at or below the 90-day range, you should be free to have all sorts of fun without having to explain why you need the Wiggle Weevil Bass Killer in all seven shades of chartreuse.
The key to making all this work (whether contracting or bass fishing) is to make sure that your spouse has a great job with excellent benefits. Over the years, I’ve found that nursing is among the top professions of spouses who support their contractor partners. Nursing offers excellent benefits, flexible schedules and plenty of overtime. If I ran a supply house, I think I would offer a 2 percent discount to contractors who were married to nurses just because I know I’d see my money within a month or two.
Another excellent method for supporting your going rate contracting business is to make contracting your second career. If you follow a military career path, you should be retired by age 45 or so. You’ll be able to draw upon your retirement check, as well as healthcare and tax-free shopping at the base exchange. Besides being an excellent strategy for keeping your contracting bushiness afloat, you get special privileges on Veteran’s Day.
There’s another similarity between bass fishing and contracting at the going rate: Try not to do too much of either. If you find yourself at the lake all the time, your spouse may decide to set you adrift. This is not good, especially if you’re still making payments on the bass boat. In the going rate contracting business, you also need to be careful not to work too much since you’re losing money on every job. Perhaps it would be best to have a bass boat as well so you won’t be tempted to spend too much money on your contracting habit.
So there you have it - my new, simplified method for becoming a contractor. I’ll bet you never knew it could be so easy! Now, go out there and catch a big one!