Not charging enough is a very common mistake, especially when you’re new and small. You can use ‘being cheap’ to help you win work (people respond to price — just not as much as you think). It feels easy to be cheap.
If you’re going to grow and scale your business – something that doesn’t just revolve around you and a couple of guys or girls, but is something larger and structured, where you can have holidays and the business can still operate smoothly without you. In order for this to happen you’re going to have to grow your costs. Growing your costs means you’ll need:
- Admin people
- Proper insurance
- Proper safety procedures
- An office or a shed (or both)
- A business coach
- Proper financial support
And if you try to grow without charging more, you’ll get stuck — you’ll either try to grow without taking on the extra cost, which means you dodge it — do stuff yourself, work at night, or you take risks with things like insurance or safety. It doesn’t work.
Here’s a little challenge for you
Work out your hourly rate. If you’re caught in this trap — working for your charge-out rate and working hours outside that (not charged), and covering costs like vehicles and tools and insurance, you might find your actual hourly rate a bit disappointing.
You can do this whether you employ people or not.
Do it for the last financial year:
- What salary did your business pay you? (Could be zero)
- What’s your profit?
- Add back in any extra – Did you pay your partner, for example?
That’s your income for the year.
- How many hours a week do you work?
Be honest with yourself – include weekend work (40? 50? 60? 80?)
- Multiply by 52 (or 48, if you take 4 weeks holiday)
- Divide the profit by the hours
That’s the hourly rate you earn. It’s less than what you charge, isn’t it?
What’s the point?
My point, apart from making the point that working really hard for only ‘OK money’ is a bad thing. It’s easy to get stuck. And if your hourly rate is low, maybe you’re not charging enough. If you charge a bit more (for all your people), you’d be a lot less stuck. There might be money to pay someone else to do some of that work you do at night.
You need to charge enough so that you cover your overheads and your tradespeople (their true costs), and pays you a fair salary and makes a profit on top of that (10% or revenue is far). Profit is what you get for the risks you take and the stress you bear and for running a business.
Don’t worry about being more expensive than the little guys.
- People care less than you think
- Some people want it cheaper and some will pay more for a better service
Here are two mistakes I’ve seen people make and help them correct (and they’ve suffered no backlash).
- One guy charge only $43 p/h. We worked out that his tradespeople who he hired were probably costing him that or possibly even a little bit more. So he was subsidising the people that he was paying to do the work by working on the tools himself, and he was taking home less than he would have been taking home had he just been on the tools himself on his own. And that was a problem caused by him not charging enough. He’s doing quotes now at $65 and winning them. It’s not unusual, or stupid or a bad tradesman. It’s an easy trap to fall into.
- Another mistake is to charge less for the apprentice. It’s you that pays the price for that, not really your client – you supervise and train them. Charge the same rate for all your people.
Helping you charge properly and appropriately is an important part of my role. If you’re undercharging or if your hourly rate was disappointing, maybe your price is something to look at.
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