Do you need to increase your prices? I’d be surprised if you said no!
Before we go crazy with price hikes, we need to apply some math to the situation. Doing the math will give you the knowledge AND confidence you need to follow through with a price increase.
Step 1 – Recalculate your labour rate
I have spoken many times about how to calculate your labour rate, most recently in the 2021 November-December issue of this magazine. Look it up or drop me a line and I will send you the full explanation. For a quick recap, here’s the formula. Make this calculation for all the staff and combine them to understand what your team costs you per billable hour.
We all know the cost of labour is increasing, so it’s prudent you make this calculation when you hand out pay rises.
Step 2 – Recalculate your overheads
Review all your overhead costs. Some, like electricity, will have jumped considerably over the past few months.
Step 3 – Review material, subbie and plant prices
Ring all your subbies and suppliers and ask them if they intend to increase costs (we’ve just had a financial year rollover so chances are they’ve already increased their prices). This may seem counter intuitive, but you probably price work well in advance of the build, so when the work comes in your costs have already increased and you can kiss your profits goodbye. It’s better to know in advance when prices are going to increase so you can price accordingly.
Congratulations, now that you’ve got a handle on your current cost of labour, materials, subbies and overheads, you’re no longer flying blind. Now you are in a position to make informed decisions about what to charge your clients.
The next step is to decide the margin you wish to place on your costs, which will give you your sell prices to the client.
If you put a 25% mark-up on costs it’ll yield you a 20% gross profit margin. If your overheads are, say, 10% of your turnover, you’ll end up with 10% net profit. That leaves you with $10k profit for every $100k turnover. NOTE: You need to work out your own overhead costs, but 10% is well below average!
Now that you’ve established that prices need to go up in order for you to eat more than beans on toast next year, it’s time to convince the client.
The first step is to believe you are worth the extra money. Doing your homework and working through the numbers above should give you the belief you need. Understand your niche, what you’re good at within your industry will help as well.
Clients may say that Joe Blogs is cheaper. They may be cheaper. They may be cheaper because they’ve got very few overheads, or they do a quicker/crappy job, OR they haven’t run the numbers yet to realise they’re on their way to going broke fast!
You may lose some clients in the process, but I’d rather go broke relaxing than go broke working my arse off!
Lastly, you need to inform the client.
Yes, be apologetic. Blame the economy. Explain that labour and material costs have gone through the roof and you have no choice but to pass them on. Tell them in person, they will accept it more coming from a sincere conversation. And remind them of your point of difference, the reason why they use you in the first place.
If the increases you pass on are fair, you won’t lose too many clients. The trust will be there, and they should know your value and accept the increases. You can compare your rates to the competition, but please be wary of this. It’s a good exercise in understanding your market (and useful if you think you can squeeze a little more profit out), but at the end of the day, your costs are your costs and you need to get paid fairly for the work you do.