RAISE YOUR PRICES: IT’S THE LAW
Nov 1, 2001 12:00 PM,
SOME LAWS ARE IRREFUTABLE. TAKE THE LAW of gravity, for example. As we get older, we watch our bodies succumb to it and we understand that we may not like it, but we can’t stop it. Our best bet is to use the law to our advantage and spend more time relaxing.
Another powerful law is the law of supply and demand. This law states that when the demand for a product or service exceeds supply, its value increases, enabling the provider to charge more. Suppliers of energy products understand this law all the way to the bank. Just ask anyone who buys gasoline or lives in California. The trick here is not finding a way to break the law — for such a thing is extremely difficult, if not impossible — but to find a way to make it work for you.
In the security alarm industry, the power of this law is vastly underestimated, especially when it applies to hourly service rates. In my many face-to-face meetings with security companies, I’ve found that more than 80% undercharge for service work, with most billing from $45 to $65 an hour. As a consultant, I tell them to raise their hourly rates. They utter two responses: “If we raise our rates, we’ll lose business,” and, “We’re only paying our service technicians $18 an hour, so we’re making a killing at our current rates already.”
CHALLENGING THE EXCUSES
While it’s easy to keep your current price structure intact, these two most common excuses — fear of competition and the belief that profits are already maximized — are nothing more than self-imposed restrictions that keep a business from its best practice.
My Competition Will Eat Me Alive. In our market (in 1995), our competitors were charging $55 an hour, while we charged $95 an hour for service. Our clients hardly ever questioned our price. Their concern was getting the problem fixed quickly.
The bottom line: You can’t worry about your competitors. If you provide superior service, and your clients are content, your hourly price should be significantly higher than your nearest competitor’s. If your service is good, you will get business. If it’s poor, then your customers will seek out your competition. But, again, customer loyalty is determined by quality of service much more than by price.
I’m Already Making a Killing. “With what we pay our technicians, we’re already making plenty on our hourly rates,” say many managers. But let’s do the math. Although technicians are in very short supply (and costing more every day), let’s assume the average hourly rate is $18. The standard benefits package, averaging around 30%, adds $5.40 to the cost of a labor unit, bringing it to $23.40 per hour. By adding inefficiencies (training, shop time, downtime) of 20%, and callbacks at 10%, we should add another $5.40 to the hourly cost, for a subtotal of $28.80.
And let’s not forget about service vehicles. The hourly cost for vehicles, including acquisition, equipment, maintenance, and insurance, usually varies between $5 and $10 an hour. At an average of $7.50 an hour, this brings our total hourly cost for service to $36.30.
Finally, there’s the O-word: overhead. For most security contractors, this ranges from 25% to 40%. Assuming an average overhead of 33%, this adds $11.98 to the hourly cost, bringing us to $48.28 — almost $50! So, is charging $60 an hour while only generating $11.72 in profit really a good return on a resource in short supply? Definitely not! When you charge $60 an hour for service, you’re not making a killing. On the contrary, you may be getting killed in the process.
WHAT IF YOU UP YOUR RATES?
Most companies are afraid to raise their hourly rates; however, I’ll tell you what happens when you decide to raise them. When you increase your rates $10 to $15 an hour, 90% of your clients will say nothing; they’ll simply pay the bill. The other 10% may want to negotiate.
If the client is big enough, it’s wise to compromise. If the client is really important to your business and complains, then you do the smart thing — you blame the accounting department for making a mistake, and you let the client win. But these cases are the exception, not the rule.
By fully understanding the law of supply and demand, you have the opportunity to substantially increase your gross margins. With technical labor resources in very short supply, you have no choice but to obey the law. As for me, I’m still working on my secret formula for defying gravity.
Alan Kruglak is the former owner of GIC, one of the most profitable systems integration firms in the country, sold to Sensormatic Electronics Corporation in 1995. You can reach him at [email protected].