The Customer Pays For Everything
October 1, 2012
Have you been listening to the news lately? The government is going to increase taxes on those greedy oil companies. What do you think oil companies are going to do if their taxes are increased? It's a good bet they're going to increase the price of their product so the increased taxes are actually paid for by the consumer.
Any company owner, with any degree of understanding about business, realizes all costs of doing business have to be included in the price of the products or services they sell. What about the car industry? Ever-increasing governmental efficiency standards means automakers need to invest in lots of research and development to meet those standards into the future. That costs money. Who is going to pay for it? The customer will in the form of higher car prices. Think about your local government. When it builds new buildings, new roads, makes capital expenditures or adds people to the payroll, where does the money come from? Right again. Unless something is cut somewhere else along the line to free up the cash to pay for all this, citizens will have to pay for it via taxes.
My first job out of college was with a cigarette manufacturing company. I have never smoked but that was my first job. In 1971 the price of a pack of name brand cigarettes was about 35 cents. Over the years the government has taxed the manufacturers again and again and even forced them to produce ads explaining why smoking is bad for your health. Today the cost of that same pack of name-brand cigarettes is in the $4.50-$5 a pack range. Just like you, the cigarette company has to generate a profit if it is going to stay in business. The higher costs, in this case taxes, goes into the product and the price of the product increases to cover it.
The bottom line is pretty simple. Every single dollar a company spends needs to be passed onto the customer. When the price of gasoline goes up, your insurance premiums increase, you decide to add a cell phone or to take on another loan payment, associated costs MUST then be added to your cost of doing business. If you are going to maintain your profitability, every dime you spend has to be passed onto the customer in the form of a higher hourly rate or bid price.
If your insurance premium goes up $2,000 a year you have two choices. You can add it to your cost of doing business, therefore your pricing will increase, or you can absorb the cost therefore lowing your potential profitability for the year by $2,000.
I just completed a one-day program called "Service Manager's University." During our discussion of flat rate pricing I asked the class to tell me what costs they expected to increase over the next year, per service technician. We listed things like a wage increases, training, increased parts costs, and increased maintenance on aging vehicles not to mention the projected increase in the cost of gasoline.
The class' final number was about $20,000 additional per service tech over the coming twelve months. I then asked the class how many were prepared to absorb the additional $20,000, thus lowering their profitability. It got kind of quiet. I then asked how long it had been since their companies had reprinted their flat rate books. For many contractors it had been years since they had re-printed their manuals. If they had three service techs, and their costs had gone up $20,000 per year per tech, and the books had not been updated in three year...well you do the math!
At the end of class each contractor was asked to share two or three things they were going to do when they got back to the office. Nearly a third of the class said their No. 1 priority was to update their flat rate pricing books.
Let's face it; the costs of doing business are going up each year. If you pass the increased costs onto your customer you will maintain profitability. If you absorb the cost profit will fall. The choice is yours.
If you need a little help determining what you need to charge per hour to cover your real costs of doing business then you just might want to consider attending one of Grandy & Associates three-day Basic Business Boot Camp classes. Give us a call today for more details.