How To Charge More AND Do More Volume

[PressurePros 249]

This is an article I wrote for my DIY Chat Forum. I wanted to share it here as not everyone reading here has signed up for the Advanced Business Techniques For Contractors section on the board (its hidden from public view). I think its an important one as we approach the 2008 season. Happy reading!

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Knowing Your Numbers

Numbers analysis is a tricky thing. There are guys that will take up arms when you say their company nets 25%. These are usually one man shows and are indicative of not understanding what each number means. I'm going to show you how raising your prices ten percent will increase your net profit by 40% as well as ultimately increase your volume. What?? Raise prices AND get more work? Read on.

Definition of Net Profit:

First its important to clarify what net profit is. This is whats left over after ALL expenses. I think where many people get confused is that they add in the amount they take out of the business (salary) as part of the net profits. Net profit is what your company makes at the end of the year, not what you make. If your business is setup properly, you pay yourself a salary. That salary is a constant. Its your compensation for your role in the company (your job). Let's make it simple and say you pay yourself $1,000 per week, every week all year. That's $52 K per year. That's barely enough to support a two kid household with a mortgage unless you have a wife/partner that also makes money.

That money disappears from the business every week as an indirect labor expense regardless of whether you do 20 jobs or just one. Understanding the terms overhead, direct costs, indirect costs, depreciation, gross profit and the ilk, I'll leave for another conversation. For now we'll just call them "expenses". Back to the topic at hand.

Lets say you billed for $150,000 in 2007. Your "expenses" totalled $115,000. Again that includes materials, owner salary, employee payroll, insurance, , truck payments, equipment depreciation, advertising.. everything. The money left over is 35,000. This is the company's money also known as cash flow or net profit. It represents 23%.

Here Is Where One Should Take Notice

Now, in 2008 you decide to raise your prices. The first thing you have to do is factor your cost of doing business raise. This compensates for increased gas prices, rising chemical costs etc. I add 3% every year. This is a profit neutral raise. It breaks you even for last year. But lets say you are tired of doing 300 jobs per year to make your gross of $150K. You decide to raise your prices by an additional 10%. Your Housewash goes from $.10 per s/f to $.113 per s/f. Your decks go from $1.50 per s/f to $1.69 per s/f. You think your customers are going to abandon you for that little of an increase? Some may, but so what.. here's why.

Scenario One

Its unlikely you will lose much business with a 10% increase. To keep things simple to understand in scenario one, we'll say everything stays the same. You still do your 300 jobs. Instead of doing $150K in '08 you'll do $165,000.

All your other expenses are also the same (your cost of doing business price raise compensated for any rises in gas etc). Now your company net profit went from $35,000 to $50,000. There's your 40% increase.

Guess what you can do with that extra $15,000? First, give yourself a raise of $5,000 per year (try getting that in the corporate world). That means you now have an additional $10,000 sitting in your company coffers. Upgrade your equipment, enhance your image or what I like to do.. invest it in advertising. $10,000 will yield me $100,000 in work.

So let me see if I am summing this up correctly. By raising my prices ten percent I can make more money for myself as well as nearly double my volume? Yep.

Last Note: Some guys may say "if I raise my prices I will close less sales" Perhaps. But all your other expenses like payroll and materials will also drop so in the worst case scenario, you still get the raise and don't work as hard.

I know this sounds too good to be true but it is what it is. Please, ask questions or throw out your thoughts. I am far from the be all end all authority in business. I'd like to hear from you guys.

This article © Ken Fenner and PressurePros, Inc. Please do not reproduce without written consent

[Beth n Rod 1,279]

Thanks Ken! :)

Great read!

Beth

[RyanH 14]

I guess scenario 2 would be you might lose some volume, but have increased revenue from the ones you retain, so your net income remains the same, albeit with less effort and work on your behalf. Either way is a benefit to the business owner, to a point. With your extra time, you have the opportunity to explore other avenues or customers you may have ignored due to lack of availability. I suggested a similar approach to my wife's firm during this year's Christmas party. Bourbon and beer were involved, so I didn't mind offering a group of attorneys some advice :) They take in pretty much every law case that walks through the door and are all over-worked. There are always people who believe they are getting better value than that for which they are paying, so a slight increase doesn't represent anything negative to them. They can selectively ignore cases with a high PITA factor and still have the same cash flow. The concept is equally applicable to the PW industry. I vaguely remember something from economics 101 about this situation and it's why Taco Bell ($1 crappy taco, but HUGE volume) and Uncle Julios (good mexican joint in Atlanta, $8 taco, not so huge volume) both experience awesome cash flow.

[john@AEC 37]

G'day Ken

The reminder to look at the actual figures, and not just the bank balance or 'fridge content, is quite timely and important. I've just done my quarterly accounts, and while t/o is up significantly and my quote/job ratio is about 70% there were quite a few jobs that could have absorbed a 10% - 30% increase (and a few I would have lost - but "so what").

Thanks again

[panaserv 14]

That´s great advice!!!!

[Ron Musgraves 240]

So Ken, whats the real percent you think a powerwasher nets? i missed that.

[PressurePros 249]

Ron, the number is usually between 10% and 25%. It depends on how they price and how tight the operation is.

[Ron Musgraves 240]

Ron, the number is usually between 10% and 25%. It depends on how they price and how tight the operation is.

The national average is 8??? correct

[PressurePros 249]

Ron, yes. For many pressure washing companies I would probably amend my number to zero percent. My net runs at just under 20%. I think Walmart's net runs about 1%. The actual number is not important to this thread. In fact, the lower your net percentage is the higher you will gain when you raise prices. Raising your prices just 5% could double your net profit if your company is making next to nothing.

[Ron Musgraves 240]

Good Stuff Ken.