When you’re in the early years of your contracting business or experiencing tight finances, it can be tempting to market your services with low prices. That’s because you can always find customers who are willing to pay less for what’s usually low-quality work.
But if you take this approach, it makes it much harder for you to run a profitable business.
Increasing your pricing doesn’t necessarily mean losing business. Most customers who want high-quality work will invest a little more to get it, and those are the customers you want.
If you’ve ever looked into HVAC business growth strategies, you’ve probably heard the following: “Want to make more money? Charge more money!”
That sounds like an easy solution, but is it one that actually works? The truth is, it can. If you’re on a flat-rate pricing system, then increasing your pricing isn’t as dramatic as you’d think.
Let’s Talk Numbers
If your internal hourly rate is $140/hour, then it yields a 15% net profit, or a profit of $21.00/hour.
Now, let’s say you have two service techs that bill out 50% of their time, or roughly 1,000 hours per year. That means your projected profit per year is $42,000 ($21.00/profit per hour x 1,000 billed hours per tech x two service techs = $42,000).
This calculation obviously doesn’t consider parts, sales, and the corresponding markup, but it does give you a general idea of where you’d be at.
If this is the case for you, you can easily bump up your hourly rate by $10.00/hour. Price changes can reflect overnight on laptops and smartphones, and the change can take place the very next day with no additional investment required. Then, the added $10.00/billed hour is all net profit.
With a simple price increase like this, your net profit can jump from $42,000/year to $62,000/year. That’s a huge difference!
If it’s a one-hour call, do you really think the customer is going to complain (or even notice) an additional $10.00? No! But you will notice an additional $20,000/year.
You can steadily increase your pricing every year so you can continually increase your profits. In the meantime, you can think about how the extra money will benefit your business. Consider the new equipment you could purchase, the tech bonuses you could give, and so forth.
An Alternative Way to Increase Your Profits
When it comes to increasing your pricing, it doesn’t all have to go back to labor. Remember, your overhead has to be covered by either labor or material markup, or a combination of both.
If you increase material markup, you can charge less for labor. If you decrease material markup, you have to increase the labor rate to make up that difference.
The problem comes in if you decrease one without increasing the other. When you do that, you just give away profitability. So if you need to increase your pricing to increase your profitability, consider raising one and leaving the other the same.
If you increase your material markup slightly without changing your labor rate, your
profitability will go up. If you increase your material markup by 1 or 2%, then increase your pricing 1 or 2%.Then, your pricing will go up by 2-4%.
When it comes to increasing your profits, it doesn’t have to be all labor or all material markup. You can use a combination of both for a quick and easy way to increase your profits!
Other Tips for Increasing Your Pricing
When you have loyal customers who have used your contracting business for many years, you don’t want to increase your prices without a word and run the risk of losing them. And if you’ve never increased your prices before, there are a few things you should know before you make the move and start improving your profitability.
Make sure the price increase is reasonable.
There’s a difference between upping your hourly rate by $10 and upping it by $20. Remember that your customers are people just like you, and you wouldn’t be happy if you were hit with such a huge price jump. So keep that in mind and make sure the price increase you settle on is reasonable — and justifiable.
Time the increase appropriately.
Timing really is everything, and you want to set new prices in a way that keeps people coming back. You can do this by increasing pricing during peak times and letting current customers to get upgrades at old prices. Giving people time to adjust also makes it easier to stay busy during the transition period.
Note how it affects your contracting business.
Pay attention to exactly what happens when you increase your pricing. Are you able to work a little less? Are you able to give your techs a little more? Are your customers still happy? Pricing increases have many benefits, but there can be downsides, too, if it’s not done right, so it’s important to note how it affects your business.
What’s Your Contracting Business’s Next Move?
At Grandy & Associates, we know that building a profitable and successful contracting business can be overwhelming, even with HVAC business help. When it comes to increasing your pricing and finding other ways to successfully run your contracting business, we know how to help. To learn more, give us a call today at 877-202-8891 or sign up for our next profit planning workshop!