Raising prices

[ayerforce]

Has anyone else ever decided...."I can't operate at my current labor rate and material markup anymore" and actually done something significant about it? My question for you folks is.....what happens? What happens when I raise my pricing across the board 15-20%? Will 10,20,50,75% of my customers choose another contractor? Can I anticipate needing 31% less employees, less headaches, greater profits and a happier spouse? All of our work is referral based and we don't advertise except for lettering on our trucks. Oh yeah....why 15-20%? Because I finally got a chance to sit down, figure out our operating costs and realized we've been operating at basically net zero profit for the last 3 years! Live and learn!

[mdshunk]

Some of your customers will leave, but the extra you make on the one's you keep will more than make up for it. The overall quality of your client will proportionally increase.

[westelectric]

Oh yeah....why 15-20%? Because I finally got a chance to sit down, figure out our operating costs and realized we've been operating at basically net zero profit for the last 3 years! Live and learn!
Live and learn. How did you figure out your op. costs.

[ayerforce]

Thanks Marc. That was my gut feeling.

[quogueelectric]

Live and learn. How did you figure out your op. costs.
The ledger of his checkbook I presume.

[ayerforce]

Westelectric - I created a system of unit pricing to bid remodel jobs when I worked for another contractor, left, started my own company, and assumed that I could operate the same way. Unfortunately, the MAJORITY of my new work ended up being "easy to bid" unit priced jobs, and I was so busy working in the field that I didn't review my financials properly. Now I use gross profit - net profit = overhead. Divide estimated billable hours into that, add base labor cost and realize...gee we made $42.00 per hour on all those jobs!

[emahler]

Westelectric - I created a system of unit pricing to bid remodel jobs when I worked for another contractor, left, started my own company, and assumed that I could operate the same way. Unfortunately, the MAJORITY of my new work ended up being "easy to bid" unit priced jobs, and I was so busy working in the field that I didn't review my financials properly. Now I use gross profit - net profit = overhead. Divide estimated billable hours into that, add base labor cost and realize...gee we made $42.00 per hour on all those jobs!

can you go into a little more detail? you're equation doesn't add up...

[ayerforce]

Okay. We use Quickbooks accounting software and it's really simple to create profit and loss reports. At the bottom of the report, you see your net profit. Near the top, you see your gross profit. All the crud in between is your operating expenses - fuel, office staff, health insurance (I pay 100% of my employee's health insurance costs), office supplies, etc. etc....The stuff in between is what I need to find a way to pay for, so I take the yearly total operating expense, divide the billable hours into that and add it to my NET cost per employee. When you pay an employee $28.00 per hour, and end up getting paid $42.00 per hour on a given project, your overhead is not covered, and there is not even an opportunity for a profit margin. Markup on material helps, but I was taught to cover all operating expenses with labor.

[480sparky]

Each time I've raised my price, I get more work. Funny how that happens.

[ptonsparky]

I have found in the past that you loose some customers and types of work as you increase rates. This is not all bad. I like my 45-50 hour weeks a lot better than the 70 hour weeks I use to have.

[Sparky555]

Each time I've raised my price, I get more work. Funny how that happens.

Each time I raise my rates I make more money. Maybe it's because rate per hour and gross sales are proportional. The only clients I've lost are the ones that I needed to lose. It was never a significant percentage of my business. Raising prices always led to increased gross sales & increased net profit.

Dave

[Minuteman]

Each time I raise my rates I make more money. Maybe it's because rate per hour and gross sales are proportional. The only clients I've lost are the ones that I needed to lose. It was never a significant percentage of my business. Raising prices always led to increased gross sales & increased net profit.

Dave
I would agree. Loyal customers (if there is such a thing) will continue to call you after a reasonable price increase. Those who balk are on the edge anyway. And those who never call again where price shopping anyway.

[petersonra]

The company I work for has raised prices several times in my tenure. It has always resulted in the loss of a substantial amount of business.

Somehow we always found other work though.

I do think you need to be careful about raising prices in markets that are very competitive but that you have a lock to keep if you don't rock the boat. If you have solid long term relationships with a few customers, it makes sense to give them a better deal.

There is also the 80-20 rule to remember. 80% of your sales work is to keep 20% of your business. It is usually a good practice to prune out that 20% now and then and put that 80% of your sales time to work trying to find better customers.

[All Amped Up]

I paid 4.74 for a Pass & Seymour 3 gang gfi/S1/S1 (plastic) switch cover the other day. I only needed 1, but bought 6 for the truck. like 30 bucks . Oh yeah that was at the local supply house, Not HOME DEPOT. I guess I'll have to start calling around for the best pricing on device covers. Did I miss a meeting ?

[satcom]

Each time I raise my rates I make more money. Maybe it's because rate per hour and gross sales are proportional. The only clients I've lost are the ones that I needed to lose. It was never a significant percentage of my business. Raising prices always led to increased gross sales & increased net profit.

Dave

It has been that way for many years, "The only clients I've lost are the ones that I needed to lose. It was never a significant percentage of my business." Raising our prices have also led to increased gross sales, & net profits.

[LarryFine]

I paid 4.74 for a Pass & Seymour 3 gang gfi/S1/S1 (plastic) switch cover the other day. I only needed 1, but bought 6 for the truck. like 30 bucks . Oh yeah that was at the local supply house, Not HOME DEPOT. I guess I'll have to start calling around for the best pricing on device covers. Did I miss a meeting ?Ouch!

Yes, I agree that, with orange and blue stores all over the place, I'd rather not spend more in gas to spend more on materials.

[powerslave]

We raised our rates 20% over the last couple of months. But we also expanded our marketing budget. It has raised the number of calls.

Some of your customers will leave, but the extra you make on the one's you keep will more than make up for it. The overall quality of your client will proportionally increase.

I agree 100%.

[peter d]

Because I finally got a chance to sit down, figure out our operating costs and realized we've been operating at basically net zero profit for the last 3 years! Live and learn!

Better to learn 3 years into it than 10, when you've worked all those years and have nothing to show for it, or worse yet, go under.

[emahler]

Okay. We use Quickbooks accounting software and it's really simple to create profit and loss reports. At the bottom of the report, you see your net profit. Near the top, you see your gross profit. All the crud in between is your operating expenses - fuel, office staff, health insurance (I pay 100% of my employee's health insurance costs), office supplies, etc. etc....The stuff in between is what I need to find a way to pay for, so I take the yearly total operating expense, divide the billable hours into that and add it to my NET cost per employee. When you pay an employee $28.00 per hour, and end up getting paid $42.00 per hour on a given project, your overhead is not covered, and there is not even an opportunity for a profit margin. Markup on material helps, but I was taught to cover all operating expenses with labor.

that's what I thought you meant, but you are still running behind the 8 ball...you are letting your business dictate how you live and operate...

All that "crud in between" is the important stuff...what you really want to do is work backwards...figure out what you need to pay for all that stuff...figure out how much net you want...then figure out how much you have to earn to pay for it and leave the desired gross...

[ayerforce]

Thanks to all for the replies to my post. It's funny how you start a business so that you can be an electrician, but instead you become a businessman and start the whole learning process all over!