Understanding Costs

To price right, you have to know what business costs.

What are the costs of getting a technician to your client's door? First, your client calls you, but for each call, you must pay for the phone service, the telephone, the person who answers the phone, and the office where the call comes in. There's the cost of the marketing that got that client to call. There's the dispatcher to dispatch a technician to the call. Your technician has to get to the house, which means paying for a truck. That truck requires gas, maintenance, and insurance.

You'll have to pay your technician for going to the house and performing the work. You'll have to pay for the training he or she will need to provide the best service to your clients and the tools and parts they'll need to solve the problem. Finally, you'll have to pay for the insurance, benefits, and taxes of all of your employees.

These are the costs of doing business before you've even done your business. To grow your business, your pricing has to generate enough revenue to cover those costs and create a profit to boost your bottom line.

With the wrong pricing, that service call won't generate the amount of revenue you'll need to create a profit. In fact, you may not even generate enough revenue to cover the expenses you incur just getting to the door.

Nearly every time I see a contractor forced out of business, the primary reason is because they weren't priced right and they fell into a cycle of decay. They ran calls with their incorrect pricing. They generated some revenue, but it wasn't enough to create a profit.

As a result, they had little money to improve their business, pay their employees, and market their services. Eventually, that lack of marketing brought in fewer calls, and there were fewer employees to run the calls they did get. With fewer calls, they earned even less revenue, and the cycle continued.

Where does poverty pricing start? It starts by not understanding what it costs to do business. Often, contractors guess about what their pricing should be. Many contractors determine their pricing by calling competitors and aiming their prices just a bit lower. What if that competitor you called is going out of business because their pricing is wrong? As soon as you price your services below his, you'll be on the fast track to bankruptcy.

No matter how operationally excellent your company is, you'll never make a profit if you're priced incorrectly.

Pricing For Prosperity

To succeed, you have to know what prosperity costs. You have to know all of your costs of doing business, right down to your own salary. Then you have to plan for profit. What do you have to charge to cover your costs and create a profit? How many calls will you need? How will you get the calls?

We'll look at your plan next month, but for now, base your pricing and your plan on your prosperity, not your competitor's poverty.

After analyzing thousands of financial statements for contractors all over North America, I believe it's virtually impossible to run a highly profitable HVAC business by charging under $100 an hour. With the costs of doing business rising every day, pricing below this figure just doesn't seem to make sense.

Does your pricing make sense? Do your prices cover the costs of doing business and create a profit for you to grow on? If they do, you're on your way to prosperity. If not, you're aimed for poverty.

Next installment: Success doesn't just happen. You have to make it happen. As a business owner, that requires two very important tools - a budget and a plan.

Nicholson is president of AirTime 500. For more information on AirTime 500, call 800-505-8885. Nicholson can be reached by e-mail at tnicholson@venvestinc.com.

Publication date: 02/23/2004