“What should I charge per hour?” is the top question I get when talking to owners of service contracting businesses.
If this were you talking to me, know the first question I would ask is whether you are doing budgeting for your contracting business on a regular basis. (If your answer is no, don’t feel bad, that’s very much the rule rather than the exception.)
Let’s assume for a minute your current rate per hour is based on what you feel your “market can bear.” To get there, some service contractors (I know not you) ask their competitors what they charge. One of the many problems with that is it is illegal. Another problem is you have no way to know the actual condition of that competitor’s business. They could be going broke! Same with calling around pretending to be a prospective customer to or trying to reverse engineer an hourly rate from a flat rate price you heard about.
Whatever (legal) method you’re using — time and material or flat rate (better)—budgeting is the ONLY way to get to what your hourly rate as a service contractor really should be.
Here’s what I know: You need to charge for all of what it costs to be in your service contracting business and build in the profit you wish to make. Most contractors only account for the hourly salary they pay their techs and the cost of materials and equipment—and ignore all the other overhead costs required to have a business that is built to last.
The great service contracting business innovator Frank Blau says, “Charging the right price is in the customer’s best interest.”
Yes, everyone likes a good price. But, if you don’t charge enough, it’ll be hard to stay in business and you won’t be able to take care of the customer the way they deserve to be taken care of.
If you don’t charge the right price, and you go out of business, what good is the warranty you provide on what you serviced and installed? Also, if you’re not charging what it costs to operate your service contracting business and make a profit how can you:
- Willingly run a callback when it arises?
- Attract and keep good staff?
- Invest in the latest technology and ongoing training?
To get a taste of what a reasonable budget for your service contracting business looks like I suggest working through an exercise I call the 3 Column Fast Budget and Pricing Method.
Note: This is NOT a replacement for a full-blown budgeting process and other financial work BUT it’s a quick way to better understand what it takes to be in business.
Column One is all about what it took to be in business in the last year plus what you think the additional costs will be (if any) for those items next year, for example, vehicle insurance, medical coverage, rent, utilities, etc.
Column Two is about what you want to do differently next year that will make your service contracting business better and advance you toward your goals, for example, more marketing to get more calls from the right customers at the right time to keep business humming. Or sending people to training classes or upgrading technology, phones, computers, tablets, etc. You get the idea.
Now, add up Columns one and two. This is your new “breakeven.”
But wait, there’s more. Column Three is the profit you want to make. Nobody is in business to lose money or to just breakeven. We’re in business to make money because it benefits our customers, the company and all who work at the company—including ownership.
Let’s work this through for a fictional contracting company, ABC Services.
ABC Owner John Doe adds up columns one and two and gets $1 million. To that, he adds 20% profit or $200,000. That brings his total budgeted gross sales to $1.2 million.
John has six techs at his company so he divides the $1,200,000 by 6. He now knows that each tech needs to bring in at least $200,000 in sales this year. If they work 50 weeks a year at 40 hours a week (no OT) that is 2,000 hours.
John also knows techs are typically 50% efficient, meaning he pays them for 8 hours but they only bill out 4 hours. So, if each tech gives John 1,000 hours per year that means six techs give him 6,000 hours. He divides $1,200,000 by 6,000 and he arrives at an hourly selling price of $200 per hour.
This realization can be…eye-opening. Your first impulse may be to either cut things from Column 2 (investments and upgrades) or eliminate Column 3 (profit) altogether to get the selling price down. The problem with that is it also eliminates your ability to invest in your company and people so that they can provide the high level of service that will make the right customers more than willing to pay that higher rate.
My hope here is you take the time to do this financial homework, commit to doing real budgeting at your company and find out what the right selling price at your company should be so you can run your contracting business with less stress and way more success.
About the Author:
Serial entrepreneur and business consultant, Al Levi is the author of The 7-Power Contractor®, a proven system contractors can use to run their service contracting businesses with less stress and more success. Learn more at 7powercontractor.com/book.