Well before the turn of the century, in the decade when I was in high school, I played quite a bit of chess. For much of my chess-playing career, my role was as an ego booster for nearly every nerd at school. I was just good enough to keep the game going for a dozen or more moves but could seldom muster enough intellectual resources to win. One day, the tables turned and for a while, I became fairly formidable on the board. I surprised many an opponent as I snatched away their expected victory.
My newfound proficiency wasn’t due to some new arsenal of tricky chess moves. Instead, I can only attribute my new prowess to a changed perspective in how I played the game. I simply decided to be more aggressive and that change in perspective is all that it took. Since high school, I’ve hardly touched a chess board, but that lesson about changing perspective has had a lasting impact on most of my decision-making processes.
In the mechanical trades, we’re primed to follow very specific guidelines. Plumbing and mechanical codes spell out standards for all facets of the installation of piping, equipment and, let’s not forget, appurtenances. It’s easy to let these standards fence in our thinking when it comes to what we offer our customers. Our tendency is to “meet the code” but not take it much further. More doesn’t necessarily mean “better,” as in the sizing of hvac equipment or water distribution systems, but it’s always possible to improve the finished product.
In order to rise above the run-of-the-mill standards that “everyone else” uses, we have to view the finished product from the perspective of one who will be enjoying your handiwork for years to come. In other words, don’t assume that your customer is only concerned about the cost of installation.
Tradesman Mind-Set
As business people, we can get caught up in other “ruts of the mind” which prevent us from achieving our business objectives. Most of us in this business began with our hands in the trade. If given free reign, we can focus so intently on “getting the job done” that we can forget the other facets of the business. With a tradesman mind-set, the consumer can end up being a secondary distraction as we focus on the mechanics of the project.We need to realize that customers don’t consider “code-mandated improvements” as value enhancements. Code improvements may be necessary but, from the consumer’s perspective, they’re more of a penalty, adding very little to the value of the project.
A tradesman might say, “We have to replace this flue because it doesn’t meet the code requirements.” From the customer’s perspective, this is as thrilling as receiving a speeding ticket. A service professional, on the other hand, would take the time to explain how a code-approved flue improves exhaust efficiency, fire safety and improves indoor air quality. This gives the customer an opportunity to see a tangible benefit, rather than a bureaucratic consequence.
The tradesman mentality also surfaces in purchasing decisions for tools and equipment. If a desire to get the job done supercedes the task of earning a profit, a tradesman can end up “tool poor.” Maintenance, storage and depreciation constantly eat away at the value of specialty tools that are acquired without much thought to their ultimate profitability. They devour capital and lead to cash flow problems, lower profits or higher prices. Either way, the company finds itself attempting to run with extra resistance. It’s not too difficult for the tradesman mind-set to get what it’s asking for: more work. But let’s explore another business perspective. How does a retailer look at profits?
Retailers And Profits
A retailer knows that it’s not merchandise on the shelves that puts money in the till. Retailers earn their profits on merchandise that comesoffthe shelves. “Turns” is a key term in the merchandise business and it refers to the number of times a particular item is sold, restocked and sold again. In the contracting world, before purchasing a piece of equipment, we should consider how often it will turn.Here’s an example that will demonstrate the effects of turns on the profitability of a piece of equipment. Let’s say a portable hole mover costs $1,000 to purchase. You can rent one from Fabricated Tools Inc. for $50 per day. You have a business goal of earning a reasonable 25 percent net profit before taxes, so if you rent a hole mover and charge it to a job, you’ll be charging $67 per day.
You happen to land a job where you know you’ll need a hole mover for at least 10 days. The tradesman would say, “Wow, 10 days of rental would get me half way to paying for one of those things,” (10 x $50 = $500) so the tradesman buys a hole mover. At the end of the job, the tradesman has a used hole mover and, instead of earning a profit on this part of the job, he is in the red $330, having earned $670 in rents but paying $1,000 for the equipment.
The retailer, on the other hand, sees 10 turns of a 25 percent net profit item so he rents the hole mover and collects $170 in profits after returning the device. (The retailer paid $500 in rent and charged $670.)
From a cash flow perspective, the retailer is $500 better off than the tradesman, but let’s not forget that the retailer doesn’t own half of a used hole mover either. The next time the tradesman gets to use that equipment, he won’t have to pay for it and it will begin earning profits, right? Not so fast. The profit goal is net 25 percent. So, with identical jobs, the tradesman won’t catch up to the retailer until the hole mover has been on jobs for a total of 20 days - $1,000 needs to be sold for $1,333.33 in order to yield a 25 percent profit. That’s 20 days at $67 per day.
The tradesman doesn’t even start seeing positive cash flow until about 15 days of equipment on the job. And this doesn’t even count the overhead costs of maintenance, storage space, warehouse damage and other expenses. When the supply house bill comes in, the tradesman can’t very well send a piece of the hole mover as payment, so he has to dig deeper into the cash reserves to pay the bill.
It would be nice if this was as far as the dilemma goes. Unfortunately, the tradesman, who is growing tool rich and cash poor, has to stay busy in order to keep checks churning. That’s why, on the next job that requires a hole mover, the tradesman says, “Since I have my own hole mover, I can improve my chances of landing this bid by cutting my hole mover price a bit.” That hole mover could find itself on 30 days’ worth of work before it ever gets into positive cash flow.
In the mean time, the retailer has been earning a reliable 25 percent on every dollar without having to hope that there will be more hole mover jobs in the future. Cash flow isn’t the looming monster for the retailer as it is for the tradesman, so the retailer doesn’t have to snag every job that comes along. The retailer can be more picky about the kind of work he accepts so that profit margins can be better.
Both contractors are doing the same kind of work, for just about the same amount of money, yet one is taking discounts at the supply house while the other is dipping into credit cards to keep the bills paid. The big difference is simply one of perspective. The retailer first considers the profit potential of a job while the tradesman sees an opportunity to do more work. Both contractors got what they were asking for.
Be careful what you ask for. You might get it.
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