How Do You Know If the Price Is Right?

October 17, 2000
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TORONTO, ON, Canada — What was your profit margin last year? Did you make 5%? Was it more or less?

If your profits are too low and not up to your standard, you are not charging enough for your services.

This was one of the many topics discussed at the 15th annual Mechanical Service Contractors of America (MSCA) conference held here. “The Price is Right: The Art and Science of Job Pricing” was presented by Art Guilmet, of Guilmet and Associates, Norcross, GA. Guilmet, a 40-year veteran of the hvacr industry, brings his informational courses to contractors across the country.

“We’re in an industry that doesn’t have a great track record for profit,” Guilmet said.

He suggests the reason for this is because too many contractors do not know how to price a job.

If your sales are steady or growing, but the profit is dropping, your price is probably too low. Also, it could be too low if there are very few complaints about your price and you are very popular with “price shoppers.”

On the other hand, your price is too high if 20% of your prospects complain about your prices, your sales are declining, selling gets harder and harder, and buyers ask you to justify your cost.



The Solution

There are several ways to get where you want to be as far as price and profit goes, asserts Guilmet, who suggests that the first step is to educate your technicians on money issues.

“Techs feel awkward about putting down a large number for customers,” Guilmet says. To be more specific, techs are afraid to sell a job for what it is worth, and they are afraid that customers will not want to pay a large bill. This is why Guilmet suggests holding a pricing class for all technicians. He says that too many service techs do not know where all the money they charge goes.

Guilmet says that contractors must explain to their technicians “the right price is the price that satisfies the financial constraints of the business.”

This means explaining that the money made off a service call must go to a number of things, including job costs, such as equipment, material, labor, permits, etc. The company also needs the money to pay for overhead and labor.

When all of these things are paid for, the profit is what’s left. And if the job was underpriced, the profits will be way down. The customer will benefit from such low prices, but you can’t keep doing what you are doing if you can’t pay for your equipment and materials.

Guilmet urged contractors to master the mathematics of job pricing and teach the system to technicians (see sidebar at left). With a little understanding, your techs will learn to price jobs themselves, and won’t be afraid to charge the necessary price, even if it seems a bit high.



Sidebar: Crunching the Numbers

Guilmet used this example to illustrate how to price a job properly:

Step 1: Figure out how much the labor, materials, and equipment will cost for the job. Let’s say the cost will be $2,000. After establishing how much the job alone will cost, figure out the price of your overhead and the desired net profit.

Step 2: Determine the percentage of labor, materials, and equipment costs (in this case, the $2,000) in relation to the price of the whole job. For the sake of the example, let’s say you your overhead will cost 28% of the entire job, and the desired net profit is 8%. Together, overhead and profit will total 36% of the job. This means that the $2,000 cost for labor, materials, and equipment represents 64% of the job.

Step 3: Now it is time for the dreaded algebra that we thought we would never have to use. Place $2,000 over 64% and place the unknown right price over the whole job, represented by 100%. The calculations look like this:

The next step is to convert the fractions to decimals.

Now do the math.

Divide 2,000 by 0.64 and you will have your correct price.

Once you have mastered the math, according to Guilmet, you should have no trouble charging exactly what is needed for each job — and justifying the price to your technicians.

Publication date: 10/23/2000

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