No single factor creates as much havoc for industry companies as how to set the price. The first complication is how to arrive at the best possible price; afterward the issue becomes how to sell it against competition that always seems to have a lower quote.
Despite what you may have heard, a price has to be calculated based on the individual circumstances of your business. Most companies start in the right place — with the cost of labor and material necessary to produce the finished job; however, after this many soon lose their way. Standard formulas, such as multiplying your direct costs by 1.5 or even doubling your labor and material costs don’t work for everyone, and frequently, business owners realize after they’ve sold and installed the work that they have made little or no profit.
Pricing formulas have to be based on actual and specific costs within your particular business. You need to know (not guess) what your overhead costs actually are.
Start by separating your sales and marketing costs from your overhead. Every ad, promo, display piece, home show participation and similar is a marketing cost.
You have a sales cost even if you (personally) do all the selling. Not to allocate something for your preparation, prospect visits, sales follow up, and phone time is to deny your value in this part of the process. At the very least, allocate the percentage that you would or did pay your salesperson or what companies similar to yours pay their salespeople. Once you have these costs separated, factor them against your total sales to achieve a percentage for each.
Next, project the net profit which you desire. The formula looks like this:
(G & A) Overhead: ________%
Net Profit: ________%
Total of the Above: ________%
The total percentage above when subtracted from 100% (the selling price), represents the direct cost (labor and material) percentage which is required in each contract.
This is a basic formula. It often requires modification depending on the size and style of the project. Major jobs, smaller jobs and purely specialty contracts all require several additional steps. However, nothing changes the fact that if these four classifications above listed were to total 41%, the cost of labor and material to complete the job cannot exceed 59% of the selling price or you are eating into your profit.
Unfortunately, most contractors don’t get the price that they are entitled to, and it’s not because the finished product isn’t worth the money. The problem lies in the inability to sell the value of the finished project.
Dave Yoho is President of Dave Yoho Associates, (www.daveyoho.com) the oldest and largest consulting firm serving the home improvement, remodeling, and home services industries. He appears on an audio package called “How To Run A Profitable (Or More Profitable) Business”. For more information on Dave Yoho Associates, send an email to email@example.com.