3 Financial Myths That Compromise a Contractor's Long Term Success
Here is my list of the top three myths I see that compromise a contractor's ability to achieve long term financial success. These areas definitely affect a contractor ability to profitably grow a business, as well as the contractor’s personal financial health, including retirement funding.
I must be competitive with my pricing
In my opinion when any business seeks to be competitive it typically becomes a commodity. By that I mean the buying public looks at that business and or it’s offering as being the same as their other choices. When consumers see a product or service as a commodity they ultimately make their choice between available options based on price. By trying to remain competitive contractors playing in this sandbox become bidders in a reverse auction where the loser is the one who wins.
To prove my point, ask any contractor who sells their services through a bidding process if they will have the money they need to comfortably retire at 65 without working again. There will be some exceptions, but I bet the majority will tell you their plan is to work until they die. What would their significant other say about that plan?
Also, keep in mind that nine out of every ten contractors will eventually fail. By being competitive contractors are most likely joining the ranks of contractors who will eventually fail. Rather than compete, why not differentiate your business? Check out an article I wrote on this subject for Remodeling Magazine
I can't raise my prices; I'm already the most expensive contractor in my market.
I hear this one all the time from contractors. Most of the time it comes from contractors who have no idea of their true cost of doing business and guess at what markup to use. This is referred to as the WAG method, or the "Wild Ass Guess" method. Based on the fact that they are guessing at what price they should charge I would also suggest they are guessing about being the highest price in their market. Did they do or hire someone else to do market research to back up their claims? I doubt it.
When I ask how they know they are the most expensive most contractors tell me their prospects are the source of their assumptions. For those using their prospects' feedback to determine their price point in the marketplace remember, buyers are liars. The 11th commandment states that you can lie to a sales person and still go to heaven!
One of my contractor coaching clients told me he was the most expensive in his market and would not be able to sell anything if he raised his prices. After I helped him do his first business budget and determine the markup he needed to use to cover his true overhead costs and make a profit, he went out that night and closed a deal at his new higher pricing. Check out this article I wrote for remodeling magazine about the benefits of having confidence in you numbers.
I can only charge what the market will bear
Now, if a contractor has done market research, for his or her local market, this may be true. Savvy contractors, those who know what price they need to charge, will sell at higher prices up to the point that a majority of protects stop buying. I would consider this to be true market research. However, these business not only know how to determine the true costs of doing business, they also typically have professional marketing programs to help them get in front of specific prospects and they employ professionally trained salespeople who know how to sell.
Contractors using the WAG method to price their work also typically do not have a strategic marketing plan. Without targeting a specific market of customer types, how can a business owner know what price point the market will bear? Without professional sales skills, how would a contractor know if the reason for not selling at higher prices is due to the market or to his/her selling skills?
Also, what market are they referring to; the one they are proactively pursuing or the one that randomly ends up knocking on their door? Are they using professionally trained sales people or are they using order takers? One way to differentiate between sales people and order takers is that sales people present their solutions in person. Order takers typically hit send. If you use the hit send method I don’t think that counts as a valid way to test what the market will bear.
Looking to target specific customers and work types?