Your Profit Is More Than Your Salary: Pricing A Trades Business w/ Doug D'Aubrey

If you're too cheap, everyone will buy you. But the problem with that is you'll be very, very, very busy but not make a lot of money. People don't buy on price generally. They buy on what they need and what they want. And if you can provide what they need and want, they'll pay whatever is required to get what they need and want. If you market what they're going to get from that, so you're going to have a reliable heating system that's going to make sure that you're warm throughout the winter and you've got hot water whenever you Oh, I want that. And I quite frankly would be prepared to pay whatever's necessary to make sure my house was warm and I got hot water whenever I needed it.

This is the Field Rocket Podcast. I'm your host, Tulloch Priest, and today we're joined by Doug from ETC Limited. Doug is an executive business coach and he specializes in helping business owners increase their profit. Welcome to the show, Doug.

Hi.

Today we're going to be talking about pricing and increasing your profits. Where would you actually start? Like, if you have a company, say, of 10 employees, where would you actually start looking for increasing your profit?

I think the very first thing is actually the pricing. And this is something that I come across on a regular basis. The majority of people in business small business owners in particular will pride themselves at being the cheapest or being able to close as much business as possible. And I do remember talking to a builder who I asked him what his conversion rate was on his sales. And he was like, oh, 100% conversion. I always get it. And my answer was, okay, then you're too cheap. He was like, well, what do you mean? It's like, well, if you're too cheap, everyone will buy you. But the problem with that is you'll be very, very, very busy, but not make a lot of money because you will not be making the profit. So for you to actually come in as being the cheapest, what you're doing is you're giving away the opportunity of making profit.

How many— what percentage of quotes should you actually win, or jobs should you win?

Should you win is an interesting statement. I don't know about should you win. I would say that if you are getting anything above 1/3 conversion, you're doing well. If you get up to 50% conversion, that's great. Anything more than that, then I would be considering that you'd need to review your pricing. With regards to that. And it's purely on the basis that if you are really marketing well and you're able to sell well and therefore you're increasing your conversion rate, then you should be able to increase your prices because you should be able to sell on the service you're delivering, on the outcome you're delivering rather than the price. It's really interesting because people don't buy on price generally. They buy on what they need and what they want. And if you can provide what they need and want, they'll pay whatever is required to get what they need and want.

It's kind of interesting though, like when you ask customers, why didn't you buy? The kind of the default answer is like, if you can't think of it, like if you're a customer and you've been asked why you didn't buy, the default answer is pricing, just because you can't think of anything else.

Yeah, it was too expensive. Couldn't afford it. Yeah. Let me just go with it. Let me just put this out there then. Most households, and I'll say most households because it's not every household, most households have a nice TV in the living room and maybe TVs throughout the house, different bedrooms, etc. And if the TV broke, they would find the money to spend £700, £800, £1,000 and go and get another TV regardless because it is that important to them. to have a TV operating in their house, they would find the money.

Yeah.

So if the service you're offering has the right importance for the individual, the money is not the problem. It's about what they want. So this is getting into how do you sell and what is sales and how do you close business and so on. But the reality is, if you're selling on price, you're giving away your services. You need to be selling on what you deliver. What is the outcome you're delivering? And it's not about what you're going to do. So, we're not saying we're going to do a boiler. We're going to do— one of the best marketing advertising things you'll see, British Gas, they talk about if you want a nice warm cozy house and hot water at all times of the day, call British Gas. They don't say, if you want a plumber to come out and put a boiler in and run all your radiators, we'll do that. So they're not talking about what they do. They're saying, what are you going to get from what we do? So you market the outcome.

Okay.

Yeah. Yeah.

Because if you look at small, if you look at most small business websites, it's always like, We fit boilers.

We'll come— if you need a boiler, we'll come out and put a boiler out. Yeah, which is fine because that's what they do. But actually, if you market what they're going to get from that, so you're going to have a reliable heating system that's going to make sure that you're warm throughout the winter and you've got hot water whenever you want it. Oh, I want that. And I quite frankly would be prepared to pay whatever's necessary to make sure my house was warm and I got hot water whenever I needed it. I wouldn't be arguing over price.

And it was reliable.

And it's reliable. Exactly. And oh, and if you want to put a service contract in to make sure that if it broke down, you'd be there within 24 hours, I'd buy that too, because that's important to me. So sell what's important to the customer, not what you do. And then you'll be able to sell at the right price.

So this is changing the mindset. So you're not starting from like, what do I do? You're actually thinking it from the customer's point of view. What does the actual customer want?

That's it. Yeah. So you're selling what you're selling to them, what they want. And if they want it, they're prepared to pay. And if you've got testimonials, you've got all your credibility around what you do. And as you said, you know, your testimonials, people have said what a good job you're doing, then, you know, Google 5-star rated, Trustpilot, whatever the mechanism you're doing to show how credible you are, people will check your credibility. If you're credible, then they'll go for it. Now, there are going to be some people who can't afford it because you're slightly higher priced than you were. Well, that's fine. You're not going to close 100% of your customers. But when you do close them, you're going to end up with profit instead of working so hard and ending up with no money at the end of it.

Yeah, it's kind of neatly coming on to the pricing because you do need to account for things like putting money aside for a new van, you know, tools. It can't just be, you know, you actually need to actually think about what it actually runs, you know, how much you actually need and to actually run the business.

Yeah. So what we would recommend is you do what it was, you create a pricing formula for your business. So rather than just going and thinking, oh, well, I, you know, you go to a house, it's a rewire, you look at the house and go, yeah, we could do this for 5 grand. You, what does that mean? That doesn't mean anything. You actually need to do a costing. What is it going to cost? Because the wiring and the fittings and stuff, that you bought maybe 3 months ago could have gone up. There could have been a change in the economy and that's gone up. And if you're working on the pricing you've always worked on for the last 3 years, then you might get that completely wrong. So you should have a formula. You can be on an Excel spreadsheet with all the different types of things that you would need to use. You can tick off what you want and you've got the pricing in place. But then on top of the actual materials, You've got to take in the time consideration. How long is it going to take? So, if you think, oh, it's going to take me 2 weeks to do this job and there's 3 of us doing it, well, that's 6 weeks of salary. Well, then you need to make sure that it can be done in 6 weeks because otherwise, you then start to— it takes you 8 weeks to deliver it or 9 weeks to deliver it. And suddenly, what you price it at has gone down because you've got all the wages and the overheads of running for 9 weeks instead of 6 weeks. So, when you're pricing it, you've got to think about how long it's going to take, all the overheads of running the business in terms of that. And you've then got to make sure that you're making profit on top of that.

When you do the, say, let's say the job is going to take 3 weeks or whatever it is, let's go for 1 week. Would you, when you do the pricing, so you've got the materials, you've got the time, would Do you, how do you put in things like the holidays? You know, because some of your, you know, some of the people are going to be sick some days. How do you account for that? Do you just kind of roll it? Yeah. How does that actually work in practice?

Right. Okay. So, you need to understand your finances. And quite a number of people in business will just turn to their accountant to for their finances, which is all well and good. Your accountant will tell you what you did historically, but you need to be able to understand what those— what's going on with your numbers. And there are some basic things you need to understand. Your turnover is the total thing you're going to invoice. Your cost of sale is the things that you need to buy, your materials, your labor costs of doing the job. And then you have your overheads of running your business. So this is the cost of the insurance for the vans, the fuel for the vans, all your marketing, all of the various things that you have to pay for, your phones, etc., office space, storage space, if you've got a lockup or whatever it is you do. Everything that you have to pay for that's not related specifically to a client, to a job, then that's your overheads. So your overheads are going to be virtually set. There'll be some variations to that, but there will be in the main, you'll know roughly what your overheads are going to be. Your jobs have to pay for those overheads. So you cannot work a pricing without taking that into consideration. So you've got your material costs, your wages, and then you've got your overheads, which you have to take into consideration. If you know what's going on with your finances, you might know that that's about a 33% or a 40% or a 50%, whatever it's going to be. And you can then add that as a percentage. So you can add that as a percentage as you build up your pricing model. But then don't forget the profit. You have to then add the profit in.

Yeah, for the overheads and like the wages and stuff, just to make it kind of easier, like for a job-by-job basis, would you actually do it as a percentage or would you just actually work out every day, this is actually the true cost of what an engineer or tradesperson actually costs the business and we need to make at least this to cover costs. Would you do it that way or you mentioned doing it through a percentage?

Yes. Well, you'd need to do that when you're working out the wages. So, when you work out the wages, it's not just, oh, we pay £15 an hour or £25 an hour or whatever that rate is. You have to then say, well, there's a National Insurance payment and there's holiday pay. So you have to take into consideration all of the extra payments. So what you might pay the individual, being £25 an hour, is actually costing you more like £32 an hour because of the National Insurance and all the other stuff you have to pay out that the individual never sees. So you've got to take all that into consideration. So you're quite right, you work out it costs me £32 an hour to employ Fred, even though he only gets £25. And that when you do your costing, you have to work it, you cost it at £32 an hour, not £25 an hour. So yes, you have to break that down. But then over and above that, you have to cover your insurance, your van insurance, your company insurance, your tools insurance. You have to cover off your phone bills. Now, all the phone, if you've got, everyone's got mobile phones or whatever, you've got all of these extra costs you've got to take into consideration. And that's your extra percentage you're going to add on. Because there is not a set fee for that, it's going to be spread across all the jobs you do. So you can't go, it's that much per job. But what you can do is you can say it's a percentage. So you could have a 33% to just cover your overheads.

Yeah. Okay. And then you kind of briefly touched on it. You mentioned profit as well. How would you work out how much profit that you need?

So this was interesting. One of my clients, he was a CCTV and alarm fitter. And we went through his costing model and we got to the end and there was, I said, right, we need to include the profit. He went, oh no, the profit's already included. I went, well, how's that already included? He said, well, that's my wages. And he'd put his labor cost down. He saw that as his profit because that's how he had costed it as his labor time. So it's like, well, okay, but if you employed somebody, you'd be paying them that. And there's still no profit. And if that's what you're paying yourself and therefore you're taking that out of salary, where's your profit? Where's your reserve? Where are you building your extra profit to then invest in the business later, to then maybe buy machine, new machines later or whatever? So he hadn't considered, he thought his profit was just what he was going to pay himself. So he hadn't—

That's a job. That's a job with a whole lot more overhead and risk as opposed to, you know, a true business.

Yeah. Yeah, exactly. And quite often that's what happens. And when we're working with the small guys, I say small guys or small businesses, they haven't really worked out that it's a business. They've created a job for themselves and it needs to be turned into a business by looking at all these things. And that's when you have to have a proper pricing model. And that's when you have to start being serious about generating profit. Otherwise, you cannot expand your business. And you're right, otherwise you've just got a job, you've created a job for yourself. So what I would then say is at the end of your costing model, you've then got to add your profit percentage on. So whether that's 10%, whether it's 15%, whatever it is you're looking for. And if you know where you're going in terms of your business, what you're trying to do, if you've set your goals and you know where you're going to go with the business, it then helps you to understand what sort of profit you need.

Yeah, I I think that kind of ties in nicely. So you get, and also your personal goals come into that profit kind of level because you know what you want. So if you actually work everything out, you know what you actually need to get to reach your goals and to be profitable and what the actual company wants or needs. I think when you actually go to your customers, you would be a lot more certain About, no, this is the price, you know, that would actually come across. So you're a lot more confident, and that kind of ties into your, you know, winning 30, a third, or 50% of the actual, of your quotes, because you'd be, you know, more confident. And then, you know, yeah, that certainty, I think it would definitely come across.

Oh, once you know and you've done the workout, you're not going to go in And go too cheap because you know full well that if you go too cheap, what's happening is you're either not making any profit or you're having to put your hand in your pocket to facilitate the job and you've made a loss. And who wants to do that in business?

So you could have been better off just sitting in front of the TV. You would have made more money watching TV than leaving the house.

Than going and doing the job because it's actually cost you because you didn't work out the cost properly. It ends up costing you. And I've been in situations where, you know, I've been working with clients and they go, oh yeah, that job cost me a lot. Well, what do you mean that job cost you a lot? Well, yeah, we didn't quite, we didn't quote it properly or it took longer or something happened. And it's like, so how much did you lose? Oh, we lost 4 or 5 grand on that one. Right. So you had to do 2 other jobs just to make the difference up. Yeah. Yeah. That happens on a routine. That happens quite often, really. It's like, whoa. And of course, that's why I'm there, because they're not making good profit. They're not growing their business. So we go in to help them with that. The other thing I'd say is once you've done your quotes and you've set out your costing and you've identified it's going to take you 3 weeks or 3 days or whatever that timeframe is, you then have to manage the delivery to make sure it comes in within that budget you've set the price at. Because if it doesn't, you're just going to lose your profit. And this is what I was just referring to. If you go, oh yeah, that job cost me money because it overran, because there was no contingency plan put in. So when you're pricing, put in contingency to it as well. The other thing I'd say is if you've got a number of teams and you're managing various teams, You have to put your management time in because you're the one who's got to be out there managing them, or you've got a foreman out there managing them, or a supervisor out there managing them. They've got to be paid for and their wages have to be paid for. So build that into your costing model. It doesn't happen free of charge. You have to incorporate all of it. Sorry, yes, get the pricing right, but then also deliver within the pricing that you've set.

Yeah, because it's quite a journey. Like when the company, you know, as you start as a sole trader, you know, the majority of your time is spent actually doing the work, delivering, etc. But then as you start employing people, the level of complexity jumps up a little bit and your pricing definitely needs to evolve, you know, as your company is growing.

That's right. And the thing is, is when your company is growing, you can— you then have to sell the fact that you're a that you are a company, you've got the necessary accreditations or whatever it is you've got. Oh, by the way, if you do run with accreditations and you've got to go and get your— if you're going to be a Gas Safe Register, you've got to pay for all of those things. Those things are going to help you sell, but you've got to cover the cost of them too. So, you are going to be a bit more expensive than, you know, the guy down the pub that does it as a DIY job.

But the thing is, if you don't price correctly, you won't be there next year, or you might not. So you are actually doing a disservice to your customers if you don't actually price correctly.

Absolutely. And if you employ people, you have to price correctly, otherwise they're going to be out of a job. And that may— that job that you're giving them is helping them pay their mortgage or their rent or, you know, It's their livelihood that you've got, and you have a responsibility for making sure that you can continue to employ them going into the future, and you can employ them and pay them the right rate. So you've got to charge properly. Otherwise, you can't fulfill that responsibility either.

Yeah, no, that's a very good point. Well, thank you very much for your time today, Doug. That was very helpful. And yeah, we appreciate you coming onto the podcast.

You're very welcome.