By Tom Grandy
Proper labor pricing, or I should say profitable labor pricing, is still a major issue within the trades industry. There have been positive changes within the industry over the past 30 or 40 years. New software has been developed, mobile technology has become common and techs are better trained than ever before. However, one thing has not changed. The overall life cycle of the industry has remained basically the same.
Most are aware that over fifty percent of all small businesses fail within the first five years. Although statistics are not kept specifically for the trades industry, I strongly suspect the failure rate within the trades industry is significantly higher. Why? Because the process of starting new companies within the industry has not changed within my lifetime.
We are all aware of the process. A highly trained and skilled technician is working for someone else. One day a little light bulb goes off. “Ghee, they are paying me $XX.XX/hour and the company is charging the customer this large amount of money. If I went into business for myself, I could charge a lot less and be rich within months”
Thus, the process begins. The highly trained technician leaves the company on Friday and by Monday a new company is born under the leadership of a highly trained technician that is technically very proficient; while at the same time is woefully lacking in the area of business skills. The new companies’ hourly rates are easily set after having called every other company in town to find out what they charge. The wise new owner then sets rates somewhat below everyone else (which tends to ruin the market for all other contractors) with the assumed knowledge that he can charge a lot less and still be rich. After all, my old company was paying me $24.50/hour while charging the customer $175/hour. There are a lot of profit dollars between $24.50 and $175, or so the thinking goes.
Ironically, things go well the first couple of years since the new company has little overhead compared to everyone else in town. The startup company grows, the costs of doing business rise however hourly rates tend to change very little, if at all. Profit seems to be shrinking but no worries, sales are increasing so all will be well. Five years later the doors close on yet another relatively new company.
It really is a shame because the new owner usually does an outstanding job technically. However, without the knowledge of how to initially set profitable hourly rates and more importantly, how and when to increase those rates, another business becomes a statistic.
It’s not like training is not available, but far too few companies take advantage of it. Pride raises its ugly head. The new owner’s thinking is just like those who have gone before them. “We will borrow a little more money to help us get over the hump and soon, very soon, everything will be all right.” Significantly raising the company’s hourly rate is simply not an option because the new owner is totally convinced the customer simply won’t pay that much, or will they? The reality is as true today as it was 40 years ago. If the company simply does quality work, do what they said they would do and show up on time, the hourly rate they charge would not even be on the top ten list of concerns for most customers.
I continue to be amazed at the number of trades companies that I have worked with that have hourly rates in excess of $250/hour. Sure, they are on flat rate pricing so the customer never sees their actual hourly rate but all those companies have two things in common. First, they continue to have consistent growth, and secondly, they are very profitable.
Do yourself and the industry a favor. Set proper hourly rates so your company and indirectly the industry, can all make a reasonable profit. Don’t be shy. If you need help, ask for it. You will be glad you did.
