This is Part 2 of a 4-part series on pricing from Mike Gorman. It costs more to deliver quality work. If it costs more, you should charge more.
Determine a Fair Price
Instead of lower prices, try to establish fair prices. Fair prices are based on the true cost of doing business. Start by taking a look at how much it costs to operate your business, and be realistic. The remodeling side of home performance contracting is truly one of the most inefficient businesses for a host of reasons; almost every job is unique, jobs are scattered around the geographic area we service, employees are expected keep track of their own time, and many more reasons. Understand that to estimate costs accurately, you must know what portion of every dollar generated by sales is needed to pay the cost of operating your business, and what portion and how much is left over for the sticks, bricks, and labor to build the job.
You should also allow for some profit, over and above your daily salary. The cost of operating your business is known as overhead. To determine your overhead, look back over the last twelve months and identify how each dollar was spent during that time. This exercise is not as overwhelming as you might think. Get out your Big Chief tablet and your #2 pencil and organize two columns, one headed Overhead and the other Job Cost. Every check you wrote last year goes in one column or the other.
Now divide the total in the overhead column by your total sales income for the period that you analyzed. The result is the percentage of your total income necessary to support your overhead for that period.
For example: $30,000 in overhead divided by $100,000 in sales gives an overhead percentage of 30% (30,000/100,000 = .30 or 30%).