Who Pays the Price For the Going Rate?

What is the “going rate?” The going rate is nothing more than the price set for goods and services by competitors – not sound numbers crunching. It is a rate established by calling several competitors and finding out how much they charge per hour and then setting your prices at around the same level.

I have long maintained that it is impossible to make a fair profit at the going rate for PHC services in any city in America. I have continually offered a challenge to any service company to prove to me they can make a fair profit at the quoted hourly rate. No takers so far. The offer still stands.

A selling price not primarily based on the cost of providing service is destined to provide misery for all concerned. In this week’s column, I will go over four victims of companies that charge the going rate.

Victim No. 1 – The Employees: Here is the whipping boy of going rate companies. Let’s use $55 an hour, or a going rate company, as an example.

I would say, at a minimum, that a high quality service technician who has developed valuable skills over a period of years in taxable income. Add retirement, health insurance and other benefits to equal 20{938cd9e8dae860e800efc538277d4f7684e6f6981618ba70d1c34357a53c2e1f} of income (in line with the working world at large). All this brings total compensation to $66,000 per year – a bare minimum in my opinion.

Yet, industry surveys show the average service technician makes around $30,000 in wages, with benefits typically equal to no more than 15{938cd9e8dae860e800efc538277d4f7684e6f6981618ba70d1c34357a53c2e1f} of income. As with all averages, some make more. But that means others make less. Is that how much we value our trade?

In order for a company to achieve my preferred scale for a person who protects the health and property of thousands of people over the course of a year, that company would have to charge $52.88 per hour just to pay the wages of this individual. Don’t take my word for it. Do the math yourself.

  • $66,000 = cost of employing one service tech for one year.
  • 2,080 = total hours worked by that employee over one year (54 x 40).
  • 1,248 = estimated number of billable hours that the company is able to charge customers for that person’s labor in one year (assumes employee is billing 60{938cd9e8dae860e800efc538277d4f7684e6f6981618ba70d1c34357a53c2e1f} of the hours he is working).
  • $66,000 divided by 1,248 hours = $52.88

So how does a going rate contractor pay service technicians what they are worth? The disturbing answer is the vast majority don’t. Instead of paying a wage that will provide a hard working service tech with the opportunity to live in a nice neighborhood and raise a family with a decent standard of living, they provide a grungy job that leads to two-income homes and/or side jobs. And for the astute young person, it usually means they end up leaving our industry for another profession that will provide the income required to live well. This is what the going rate provides employees.

Victim No. 2 – Suppliers: There’s another way meager profit dollars are squeaked out by going rate contractors – at the expense of suppliers and vendors. I am sure every wholesale salesman and manufacturer rep can share countless stories of dirty deals, “lost” material, slow or no pay and loyalty and service discarded for the lowest price. You see, when you charge the going rate rather than a rate that reflects your unique costs of providing service, you are always on the lookout for ways to reduce costs. In order to keep the doors open, you must shave a point or two on every job. It is a matter of survival. Ethics and “doing what is right” go out the door when you have $100 in cash and $100 in bills, and you have to figure out some way to take money home to Momma that week. It boils down to, “Let’s see who is ripe for the picking this week.”

Astute businesspeople that know to the penny how much to charge and then charge it don’t have to resort to conniving schemes designed to rip off their suppliers. They have a fair profit built in that includes paying all suppliers on-time and for the amount invoiced. It is just good long-term business.

Victim No. 3 – The Owner and His Family: I know, you’re sick and tired of my tirades about the owners in our industry being under compensated. But it’s true. Enough said about the owner.

His family also takes a beating. To make the books look good, the typical owner runs a few service calls each month and throws 100{938cd9e8dae860e800efc538277d4f7684e6f6981618ba70d1c34357a53c2e1f} of the revenue generated into the company. Never mind those 80 hours of work may result in no time for home life. Kids go off to baseball games without Dads to cheer them on. Wives sit at home alone while the going rate contractor runs some free service calls in order to keep his going rate service company afloat.

I forgot to mention that when the wife is sitting home alone; she is probably doing some free bookkeeping for the company and also taking phone calls – maybe from irate vendors.

I know from talking to thousands of contractors across the country that many, many going rate contractors feel miserable about the way they live and the people they screw. Their conscience may be the biggest victim of all.

Victim No. 4 – The Customer: To charge the going rate and survive, contractors often must figure surreptitious ways of making a buck. Let me give you a few examples:

  • Overbilling time & material customers – Ugly, ugly, ugly. A service tech works for two hours for an absentee owner and bills him for four hours. After all, you’ve got to make money somehow.
  • Jacking up material – A $2 part is sold to the consumer for $39.95 plus labor. That’s right, quote your loss leader – labor – over the phone, and once the job is done shove it high and hard with grossly marked-up material. Sounds like false advertising to me.

It drives me nuts to hear all those people call me and other flat raters rip offs because we know our costs and charge a decent profit, usually in the 10-25{938cd9e8dae860e800efc538277d4f7684e6f6981618ba70d1c34357a53c2e1f} range. But to their way of thinking it’s OK to triple or quadruple their material costs. Then they wonder why all their customers want to supply their own materials from Home Cheapo.

An Easy Choice: If you are a going rate contractor, you probably ended up that way because you figured the pain of charging more than the competition was worse than the pain associated with meager profits. You are dead wrong. Sure, you take arrows being the highest priced guy in town. You will lose customers, but not as many as you think. Double your prices and you will lose much less than half of your customer base, and you’ll be much better off for it.

In most cases, you’ll also be labeled a rip-off artist by some of your competitors. But I will take the pain that comes along with being able to provide a very good living for my employees, paying my vendors what they deserve and on-time and going to bed with a clear conscience every night. I wish our entire industry felt the same way I do. We would all be better off.

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