“Am I selling at the right price?” This was the start of a conversation I had with a plumbing contractor at the end of 2013. It’s how many of my first conversations happen with contractors I coach. My answer is, “I need more information.” The “right price” doesn’t mean a magical number is floating around that everyone should be using to sell their services. It does mean that for your business, the right price is based on specific financial assumptions to help you achieve business and personal goals.
I worked with this contractor to determine his right price. I’d like to share this process with you so that as you work through this year, you can start to apply it in your own business. You may want to have your 2013 financials available to apply what I did here to your own results. I started by reviewing his 2013 consolidated profit-and-loss statement. I’ve highlighted the actual numbers in the chart below.
When you look at the profit-and-loss statement, ask yourself what stands out to you. Yes, you’re right, this contractor is not making much money. Most people would start focusing there. However, the biggest item that speaks to me is owners’ compensation — or the lack of it — as this contractor only makes $48,000 per year, while his technicians make substantially more.
This is exactly what I don’t want to hear from owners. We’ll talk more about this in later columns, but consider just one thing. As owners, we take all the risks and we need to make sure our salary is more than we would make working for someone else. Otherwise, we might as well close the doors and give our extra time back to our family.
Now, back to the question at hand. Is this contractor selling at the right price? Of course, he is not. He doesn’t even pay himself for his work and he’s basically losing money. Here’s what I learned after a little more digging:
- The current selling price for 2013 was $150 per hour.
- The selling price included a built-in 10% profit on materials and labor.
- Ten thousand hours paid in direct cost equates to 4.81 full-time service techs (Hours sold/annual hours worked (40 x 52) = average full-time techs).
- Material costs were $297,356.
- Material sales (material costs + 10% profit) were $327,092 of total net sales.
- Sales remaining (after materials) to cover direct labor, permits and overhead was $523,864.
I know this is a lot of math, so take a little time here and make sure you understand each of the bullet points based on the profit-and-loss example. Then calculate what your company’s numbers would be, as these are some of the financial assumptions I modified to get this contractor closer to his right selling price.
Technician efficiency and selling price
One of the most impactful formulas this contractor, you, me or any contractor needs to understand and manage is technician efficiency. Technician efficiency is so critical to the success of your business that even small improvements can make a big difference to your top line, your bottom line and your take-home pay. It’s the key to hitting the trifecta.
Here is the formula I coach my contractors to use to calculate technician efficiency:
Sales Remaining/Selling Price = Hours Sold $523,864/$150 = 3,492
Hours Sold/Hours Paid = Technician Efficiency 3,492/10,000 = 34.9% efficient
When your technicians have a low efficiency, check to see if any of these items may be affecting your rates:
- Are techs milking the jobs?
- Do techs have enough calls to stay busy?
- Is your call center booking calls properly?
- Are dispatchers matching the right tech to the right call?
- Does your dispatcher know the city and how to reduce travel time?
- Do techs know how to maximize calls with the greatest sales opportunities?
- Do techs have adequate technical training?
- Do managers have the tools to coach techs for improvement?
- Are managers tracking the top three known performance indicators for their techs (conversion rate, average dollars per task, efficiency)?
- Are technicians, dispatchers and customer service representatives held accountable?
- Do managers have visibility into what is going on in the business?
But what does technician efficiency have to do with setting the right selling price for our services? In my contractor’s case, let’s consider what happens if this company’s efficiency improves from 34.9% to 38%.
First, that jump means the techs sold 308 hours more, reaching 3,800 hours for the year. When we take the extra hours sold by the selling price of $150, that equates to an additional $46,200 in revenue for the year and operating profit jumps to 5.5%, much better than the 0.04% previously recorded. But it’s not even close to where the contractors I work with strive to achieve.
So, let’s say my contractor can improve technician efficiency to 41%. This would require techs to record 608 more hours sold, again at the $150 selling price. Now the company would have earned incremental revenue for the year of $91,200 for a profit of 10.7%.
If I would have deemed this company to be simply inefficient and it could easily and quickly improve what was holding back its efficiency rate, then yes, I could say the selling price is right. However, most contractors I work with lack the operational acumen to make these improvements without time and coaching. Otherwise they would have already fixed their problems.
At this particular point in time, given the work still ahead to substantially improve technician efficiency, the selling price is wrong for this company. In order for it to make a 10% profit today, it must raise its price.
Calculating your correct selling price
To determine the correct selling price, determine your breakeven per hour:
- Identify all your true costs of doing business for the year; and
- Identify projected sold hours for the year.
Then add a fair profit.
It sounds simple, but let’s run this formula through my contractor’s profit-and-loss example:
Direct labor: $259,598
Owners’ compensation: $100,000
All other overhead: $242,422
Total cost: $602,020
To calculate total cost, you’ll see I recommended increasing owners’ compensation to a minimum of $100,000. This should be a good guideline for owners’ salary and will help ensure you most likely won’t make more working for someone else.
To the total cost, apply what should be your desired net profit, which is 25%. I have my reasons for this net-profit goal and I’ll write about it later this year. For now, trust that this is the net profit we all should be striving for.
This is what we get:
Total Cost/(1 - Net Profit %) = Net Sales to Cover Costs $602,020/0.75 = $802,693
Net Sales to Cover Costs/Hours sold = Selling Price $802,693/3,470 = $231.32
The advice I gave to this contractor was to raise his selling price by $81.32. Or, said another way, we discovered his selling price was more than 35% less than what he needed to make a profit to sustain his business long-term and pay himself enough to stay in business.
I can report that now, three months into 2014, this contractor is making more money than he has over the past 10 years combined. I’d say he’s a happy camper.
If your business is not producing the profits needed to be a long-term success, an extraordinary place to work and a lucrative personal investment, then the first step is to look at how you are priced. It’s a big jump for many of you, so let’s agree to make 2014 a year of change for your company.
Do your due diligence. Be honest with yourself (or ask a coach or peer to help). Price your services appropriately for the value you truly provide. Then get out there and keep smiling.