Don’t fool around!

BY RICHARD P. DiTOMA,
contributing writer

When you do foolish things, you fool yourself. One problem with fooling yourself is that, once you start, it’s hard to stop, because you don’t realize you are doing it. Sometimes, in the interest of being competitive, you might fool yourself into thinking you can perform a service faster and cheaper than your competition, while still delivering excellence, recovering your costs and earning a profit. If you think this way, you will eventually start competing with your own ability to perform any service. It is imperative that you be aware of your point of diminishing return.

You must be able to discern that which is possible from that which is not. You can’t fit a square peg in a round hole without cutting corners. Excellence is the first casualty of corner cutting. Once excellence is gone, your clientele can’t receive top quality and best value for the dollars they pay you. You lower your worth in the mind of your client. This will definitely lower your ability to reach your goals. That, in and of itself, is very foolish.

The temptation to be foolish

When it comes to your selling prices, you have only three choices. You can 1) sell below true cost; 2) sell at true cost or 3) sell above true cost. Obviously, choice one and two are for fools, since the only reason business exists is to make a profit. Because there are only three choices and two are foolish, you have twice as many opportunities to fool yourself than you have to earn a profit.

If all contractors charged above their true cost, you might be able to do the job faster and less expensively, while still recovering your cost and reaping the reward you deserve. But, by not identifying their true cost, many contractors sell their services at or below their cost. Their bad choices make them fools. They don’t do it consciously; they do it because they don’t know how to identify their true cost. Their existence in the industry makes the chances of your being less expensive than all your competition while still earning a profit about the same as the odds of your seeing pigs fly.

Add to that the fact that, when economic conditions are bad, you might be tempted to lower your prices. If your prices are truly profitable, you can lower your profit. But your cost is your cost and, when things are slow, your hourly cost actually increases, due to unapplied labor. If your prices are not truly profitable in the first place, you will only exacerbate your problems.

A foolish example

Even intelligent people can fool themselves. A very intelligent PHC contractor I know recently told me about a new service he started to offer because of the bad economy. He told me that he started cleaning clothes dryer vents for $150. My initial response was that this price seemed foolish because of his cost of operation in his service area.

His average travel time is 30 minutes. That takes into consideration the times when his tech is next door to the next job and the times he is at the furthest reaches of his service area. Once at the jobsite, his tech must do the following: speak with the consumer regarding his/her request; set up and, at completion, clean up the work area; clean the vent; test the work; do the paperwork and get paid. Figure 1 shows a breakdown of the minimum, average and maximum time it should take to perform the service. Please note that certain circumstances could make the maximum time allotment higher. The minimum time allotment can be no less if the job is done properly by a qualified technician.

In the USA, the minimum cost to operate a service vehicle with a qualified service technician is $100 per hour, give or take a couple of dollars. (If you don’t believe that, I can prove it to you. Just call me at 845/639-5050). On that basis, and using the times in Figure 1, the minimum cost to perform that service in the USA is $117, the average cost is $183.33 and the maximum cost (noting that circumstances may increase the maximum cost) is $250.

The aforementioned contractor, however, services an area where the minimum cost of a qualified technician with a service vehicle is around $150 per hour. Therefore, his minimum cost for the job is $175.50, his average cost is $274.50 and his maximum cost is $375. That means that his $150 selling price is extremely foolish!

Compounding the foolishness

To further exacerbate his problems, he told me that, at the same service visit, he offers a package deal that includes the vent cleaning and the installation of a new washing machine valve, after the removal of two existing boiler drains, as a gimmick, for $300.

Since he’s already there cleaning the dryer vent, his gimmick deal doesn’t have an additional cost to him for travel, readying and cleaning up the work area with regards to the washing machine valve. That’s included in his $150 vent cleaning price. But this “gimmick” addition to the vent cleaning job still has costs attached to it. Assuming that all materials are on his truck, the cost of material will be somewhere between $50 and $100.

Figure 2 shows the extra time involved to install the new washing machine valve during that visit. Based on a minimum labor/overhead cost of $150 per hour for a qualified service technician with a truck, his range of cost for labor and overhead to him for the washing machine valve installation without material would be a minimum of $150, an average of $287.50 and a maximum of $412.50. (Remember, the maximum could be higher, dependent upon circumstances.
Adding material to the labor/overhead cost, the minimum range of cost to him for the washing machine valve at that visit would be $200 to $250. His average cost range would be $337.50 to $387.50. His maximum (dependent upon circumstances which could make the cost higher) cost range would be $462.50 to $512.50.

If we use the minimum cost possibilities of $175.50 for the dryer vent service and $200 for the washing machine valve, he minimally spent $375.50 to bring in $300. That’s a loss of $75.50 for his super duper gimmick price. Webster defines gimmick as “any clever scheme.” No matter how you slice and dice it, this contractor’s “gimmick” price is not clever. It is extremely foolish!

There are many ways to fool yourself. An old adage states, “Fool me once, shame on you. Fool me twice, shame on me.” When you are the person who fools yourself, you have no one to blame but yourself.

My advice to you is not to fool yourself like this contractor is doing. Before quoting selling prices, 1) identify and calculate your true cost of operation, 2) calculate doable time allowances that will give you the opportunity to deliver excellence and value to your clientele and 3) never consciously sell your services below your cost. It’s downright foolish!

If you need my assistance, coaching skills, etc, I’m as close as your phone. Call me at 845/639-5050. I can help keep you from doing that which is foolish. As always, I wish you good health and much wealth.

Richard P. DiToma is a contracting business consultant and active PHC contractor with more than 40 years of experience in the PHC industry. To receive more info about his Contracting Business, Coaching, Consultations, Business Books, Seminars with Solutions, Customized Price Guides and, Customized Business Forms, contact Richard by phone at 845/639-5050, via email at richardditoma@verizon.net, by FAX at 845/639-6791 or mail to R&G Profit-Ability Inc., P.O. Box 282, West Nyack, NY 10994.