First Thing to Do in 2007: Raise Prices
Even for a simple-minded person like myself, raising prices in 2007 seems like a good idea. Easier said than done, right? I’d like to call it first strike preventive measures or FSPM. This will be my first “Hall-ism” of 2007 and I’ll warn you right now, there will be several more to come. I believe that taking any type of proactive approach to what the market will do to your business in 2007 is the best way to stay ahead of the game and avoid loss of profits or loss of market share.
Businesspeople who simply react to changes in the market are at least one step behind those that take an active role in snuffing out problems before they exist. For example, take the ongoing problem of the shortage of qualified service techs in our trade. The HVAC contractors who don’t have this problem are the ones that offer good wages and benefits to keep people happy and productive. Sometimes it isn’t even necessary to offer a career path to a service tech - just offer him or her the best wages in your community and see if you still have a problem.
Oh sure, it matters if the working conditions are good and the rewards are there. But during uncertain financial times, which face many workers across North America, knowing that there is enough money to pay bills, pay for school, and put some away for retirement can be a huge advantage.
I understand that logic but it is a glass half empty argument. I tend to favor the glass half full position.
If you raise your prices, you should be able to raise your hourly wages without skipping a beat. You may lose a few customers, but those are the ones who shop for price and you are better off without them anyway. If you do quality work and stand behind your work (I believe everyone reading this column falls into that category), then you are not likely to lose any customers. In fact, you might gain a few. Not everyone is a price shopper you know. Quality comes at a premium price and many consumers understand that.
The trickledown effect may also come in handy if and when there is a spike in oil prices, which is almost inevitable. A slight increase in the hourly rate can eliminate the need for a travel charge or miscellaneous charge on the invoice, which tend to make a customer a little uneasy. And I don’t see the demand for raw materials going down anytime soon, what with China continuing to grow its industrial and commercial base. No doubt the price of steel or copper may take more jumps in 2007.
I like to fool around with a little software program I picked up at a trade show last year. I have mentioned it before but it bears mentioning again. It is called “Income Statement Projection System With What-If Scenarios,” developed by a guy right here in my neighborhood of Livonia, Mich. Gary Figurski developed this ISPS program that even a Neanderthal like me can understand.
I plugged in some numbers involving labor rates and service rates, using easy-to-round-off numbers. I started with a base number for both labor and service and then kicked up the service rate by $5 an hour. I then kicked up the labor rate by $1 an hour. The result was labor cost increase of $2 an hour, meaning a net revenue increase of $3 an hour.
This is very simplistic and all numbers exist in a vacuum, but it gives some idea of how a slight increase in service rates can give HVAC contractors the money to pay techs a little more per hour. And a little more per hour can mean the difference between keeping a good service tech or adding another one.
Simplistic? Yes. Reasonable? You bet. Think FSPM.
For information on ISPS, e-mail Gary at gary@tcgcpa.com.
Publication date: 01/15/2007
Businesspeople who simply react to changes in the market are at least one step behind those that take an active role in snuffing out problems before they exist. For example, take the ongoing problem of the shortage of qualified service techs in our trade. The HVAC contractors who don’t have this problem are the ones that offer good wages and benefits to keep people happy and productive. Sometimes it isn’t even necessary to offer a career path to a service tech - just offer him or her the best wages in your community and see if you still have a problem.
Oh sure, it matters if the working conditions are good and the rewards are there. But during uncertain financial times, which face many workers across North America, knowing that there is enough money to pay bills, pay for school, and put some away for retirement can be a huge advantage.
THE TRICKLEDOWN EFFECT
All of the cynics will say that paying top wages means having to raise prices or having to turn down work because an increase in wages may spark a decrease in the number of workers a contractor can afford to pay. Others may contend that other trades and Fortune 500 companies pay higher wages so an increase in a service tech’s wages may have little or no impact on bringing more people into the trade.I understand that logic but it is a glass half empty argument. I tend to favor the glass half full position.
If you raise your prices, you should be able to raise your hourly wages without skipping a beat. You may lose a few customers, but those are the ones who shop for price and you are better off without them anyway. If you do quality work and stand behind your work (I believe everyone reading this column falls into that category), then you are not likely to lose any customers. In fact, you might gain a few. Not everyone is a price shopper you know. Quality comes at a premium price and many consumers understand that.
The trickledown effect may also come in handy if and when there is a spike in oil prices, which is almost inevitable. A slight increase in the hourly rate can eliminate the need for a travel charge or miscellaneous charge on the invoice, which tend to make a customer a little uneasy. And I don’t see the demand for raw materials going down anytime soon, what with China continuing to grow its industrial and commercial base. No doubt the price of steel or copper may take more jumps in 2007.
IF GOOD HELP IS YOUR PRIORITY
You can list a lot of reasons why raising prices makes sense - and reasons why it doesn’t - but I believe the bottom line is to attract better workers to HVAC and in particular, to your business.I like to fool around with a little software program I picked up at a trade show last year. I have mentioned it before but it bears mentioning again. It is called “Income Statement Projection System With What-If Scenarios,” developed by a guy right here in my neighborhood of Livonia, Mich. Gary Figurski developed this ISPS program that even a Neanderthal like me can understand.
I plugged in some numbers involving labor rates and service rates, using easy-to-round-off numbers. I started with a base number for both labor and service and then kicked up the service rate by $5 an hour. I then kicked up the labor rate by $1 an hour. The result was labor cost increase of $2 an hour, meaning a net revenue increase of $3 an hour.
This is very simplistic and all numbers exist in a vacuum, but it gives some idea of how a slight increase in service rates can give HVAC contractors the money to pay techs a little more per hour. And a little more per hour can mean the difference between keeping a good service tech or adding another one.
Simplistic? Yes. Reasonable? You bet. Think FSPM.
For information on ISPS, e-mail Gary at gary@tcgcpa.com.
Publication date: 01/15/2007