Pricing and Profit: Don’t Act Stupid
authors Shawn McCadden | November 19, 2018
Not many writers in our industry publications will risk calling out readers for their stupidity. But then again, you have probably come to realize that I’m different. So here it goes. If you guess at the pricing of your jobs, you are acting stupid. If you guess at which markup you should use, or perhaps simply copy someone else’s markup, that’s stupid too. If you estimate with hours and then job cost with hours, unless you have only one employee, that’s stupid too. Notice, however, that I didn’t say you were stupid. I said the things you might be doing are stupid. In fact, I know you are not stupid. What’s also stupid is that it’s all really just sixth-grade math, and you’re not applying it.
Why Do Remodelers Do Such Stupid Things?
I think it’s partly because while in school, most of us were never taught how to apply the math we learned in real-life situations. Maybe in class you were even one of those who said, “Why do I need to learn this? I’ll probably never use it in my life.” But remember, I suggested that was only part of the reason. I think as a business owner, you owe it to your business and those you love to find out how business financials work. Yet, the majority of remodeling business owners still don’t find out. I truly believe that a good number of you are afraid to find out. Afraid you might never get any jobs because you’ll have to deal with the reality of raising your prices. Maybe even afraid people will think of you as too expensive. Well in my opinion, if you fail to know how the financials work, you are already a failure as a business owner. Because what sane business owner would set pricing before knowing whether that pricing would lead to profit or failure?
A Key Consideration Most Are Unaware Of
One thing I find very troubling is that even if remodelers can figure out which markup or margin they should be using, they still don’t understand the importance of volume in their assumptions. Let me explain: Let’s say you do the math and find out that if you do $1 million of work at a 40 percent margin (1.67 markup) you will cover your $300,000 overhead and $100,000 profit requirements ($400,000 is 40 percent of $1 million). If you assume you just need to hit a 40 percent margin on your jobs, you may be headed for disaster. If your business doesn’t produce $1 million, but rather only $900,000, your volume is short $100,000 against your goal. If you expected a 40 percent margin on that work you didn’t produce, as a result your profit will have dropped from $100,000 to $60,000. Keeping the example going, produce only $700,000 against a $1 million goal and there will be no profit. You’ll need to find $20,000 just to cover your overhead. Where will you get the $20,000?
What You Can Do to Help
It’s sad to think at least 85 percent of our industry has no idea how to properly price their jobs. The most recent data I have seen also indicates as many as 50 percent of remodelers go out of business within five years—up to 90 percent by 10 years. This reality should be so embarrassing that we should all want to either help those businesses who are guessing, or ask them to step aside before ruining their own or other people’s lives by going bankrupt.
I know, asking them to step aside will be tough—maybe even futile. So if you get this stuff, can you commit to helping just one other business owner wrap their head around what they need to know and do to be confident about their pricing? If the 15 percent who get it each helped one other business owner before the first of the year, maybe as many as 30 percent of our industry could start the new year knowing how to earn a profit.
Why I Wrote This Column
I wrote this and last month’s column, where I offered a few challenges for the remodeling industry media, for two important reasons. The first is because I hope it will inspire other leaders and potential future leaders in our industry to stand up with me and start holding our industry accountable to these sad realities. The reality just might be that if we don’t do these things ourselves to improve our industry, well-meaning politicians with even less knowledge about our industry may try to step in and solve the problems with laws and regulations that could make things even worse.
My second purpose is because I love this industry and am thankful for what it has afforded me. To give back, many years ago I made it one of my missions in life to help more contractors at least understand how the whole financial game works. Whether they will use what they learned from me was and is up to them. I know my efforts have helped many remodelers, and that makes me feel good. One guy even told me I saved his marriage. That’s right: He said after attending one of my classes that he figured things out and started to make real money in his business. As a result, his wife started loving him again. | QR