Keep a close eye on your hourly rates
By Tom Grandy
Many years ago, a good friend in the industry told me something I will never forget: “Never abandon what got you to where you are.” That statement can mean lots of things, but when it comes to being successful within the trades industry, the meaning is pretty clear.
At some point in building your trades company, a little light bulb went off. Actually, it didn’t just happen to go off, it was forced to go off because you had been working really hard, for a number of years. Sales were increasing, but profit was missing. If the company was growing — and it was — profits should be going up, but they weren’t. After exploring the obvious reasons for reduced profitability, you suddenly have a realization: “Maybe we aren’t charging enough to make a profit.”
This makes common sense as well as good business sense. Upon reflection, it all becomes clear. “I need to raise my hourly rates in each department.”
Since most owners within the trades industry used to be a technician before starting their own business, it can be tough to determine how much you need to charge per hour to cover real costs of doing business, all while generating a reasonable profit. The solution may have become obvious, but the process of reaching that solution is often unclear.
Over the coming weeks or months, the company owner does research, talks to industry colleagues, attends a seminar or two and/or reads books or articles on hourly rates. Armed with this knowledge, new profitable rates are calculated based on the company’s unique costs of doing business, not what Joe or Mary charge down the street. With fear and trembling, the new rates are instituted, and two amazing things happen.
First, the vast majority of the customer base never even realized rates went up, and the volume of complaints you expected did not take place.
Second, after the hourly rates were increased, there was a consistent profit.
Fast forward a few years. The company has grown and continues to grow. However, it seems harder to make a profit. The company has put systems into place, excelled in customer service and invested huge amounts of money into marketing. Staff has attended classes on leadership and teamwork; equipment and vehicles are in great working order; and the staff and techs actually seem to have bought into the company vision. The only thing missing is profit — again — which can be solved by adjusting hourly rates as things change within the business. Any time costs change within the company (overhead, price of materials/parts, hire additional employees, etc.), there is always a necessary change in what the company needs to charge per hour to maintain profitability.
As the new year begins, review your real costs of doing business from a cash-flow perspective. If costs have changed over the past year, your hourly rates need to be adjusted as well.
The company may be the best in the area. The quality of work might be outstanding, and your customer relations may be far above your competition. Everything from an operations standpoint might exceed your customers’ expectations. However, if the company is not priced for a profit in each department, it is going to go out of business sooner or later.
Tom Grandy is the founder of Grandy & Associates. An industrial engineer by training, Grandy has worked as general manager of a service company and was the director of company development for Dial One franchise. Grandy founded Grandy & Associates in 1987 to teach contractors to run profitable businesses.