Supply chains are being hit hard. Most manufacturers are having a hard time getting materials we need to take care of our customers profitably – refrigerant being the most publicized example. They are raising their prices.
So, you HAVE to raise yours too – why would you take less profit?
If your costs go up, those costs have to be passed on to your customers. You are NOT making more profit. You are keeping the same profit.
Even worse, some contractors believe in loss leaders – i.e. Maintenance programs. Pricing is less than the cost of providing the maintenance in the belief that you will “make it up” on service and replacement.
When you run the numbers you realize that you can’t afford loss leaders – unless the profitability of your repairs/maintenance/replacements are so great that you can overcome the loss.
First, let’s look at what cost really is. For projects and replacements, it is the direct cost of installing the product (labor, materials, etc.) plus the piece of overhead assigned to that product. Every project/replacement must have a sales price high enough to pay for your company’s overhead (rent, utility bills, gas, and other business costs you have even if you don’t sell anything).
For maintenance and service, total cost is the cost of providing the service (labor and materials) plus overhead costs. Most contractors don’t know their true overhead cost per hour – you need to know this to properly calculate your maintenance prices. Email me (rking@ontheribbon.com) if you want a spreadsheet to calculate your overhead cost per hour. You’ll need your year end payroll with hours and your year end P&L to make the calculations.
Now let’s look at the lost leader misconception. If you discover that your maintenance costs $200 to provide the service including overhead, and you are selling it for $190, you are losing $10 for each maintenance customer you enroll. Assume that you have a maintenance base of 1,000 maintenance plans. Your loss on maintenance is $10,000.
Here’s the misconception. You think that you just need to increase revenue by $10,000 to cover this loss. That’s not true.
If your net operating profit is 10%, you have to generate $100,000 in other sales just to make up for this loss.
If your net operating profit is 5%, you have to generate $200,000 in other sales just to make up for this loss.
It’s even worse for projects/replacements. Most projects don’t lose just $10 per project. They can lose thousands of dollars.
Assume that you lost $1,000 on a project and that your net operating profit is 10%. You have to sell an additional $10,000 in projects just to make up for that loss. If your net operating profit is 5%, you have to sell an additional $20,000 in projects just to make up for that loss on one project.
Losses are expensive!
Make sure you at least break even on your maintenance program.
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Ruth King is well known as “The Profitability Master.” She is passionate about helping small business owners become profitable and stay profitable. For over 40 years she has coached, trained, and helped contractors and others achieve the business growth and goals they wanted to achieve.
Contact Ruth by emailing ruthking@hvacchannel.tv.
