Pricing yourself out of the game

Ange
Really?

Andy
And I went, really? What kills me is the fact that this guy has been in business for many years, so it didn’t make sense that he wasn’t taking home an awesome profit. And what makes it worse is that he didn’t even seem to think that that was an issue. Of course it’s about delivering great work for our customers. But let’s be real here. One of the reasons you started your trade business was to make profit so you can live an awesome lifestyle, right?

Ange
Yeah. Nobody runs a business not to make a profit. So what’d you say to him?

Andy
Well, to be honest, I ripped into him a little bit. You know, I had to put him back in his place because, you know what, He was just believing his own bullshit.

Ange
Right? I bet he appreciated that.

Andy
Well, I could definitely tell over the phone he was puffing his chest out like a pigeon. He just wasn’t in a growth stage. He wasn’t using profit to grow the business. He just wasn’t making profit, and that’s what was bothering me. If he has heaps of work on your plate and you are invoicing on time, but there’s no money left at the end of the job, then it’s easy. Your pricing structure is wrong. Simple. So many tradies I speak to think they have an awesome business set up and a cracking team, but they still aren’t turning a profit no matter what they do. So I’ve got one simple question for every trade business out there, what is your current hourly rate based on?

Ange
Uh, it’s based on their previous boss or maybe their tradie mate, right?

Andy
Yeah. Maybe.

Ange
This seems to be the way every trade business owner starts their business journey, but like I’ve said in previous podcasts, just because that’s the way your mate or your old boss ran their business doesn’t mean it’s gonna work for you. The thing I wanna ask you is this, Do you think they had any idea if their hourly rate was right for their business? Or did they do the same thing and follow their previous boss too? Interesting thought, right?

Andy
Yeah. Very interesting. Yeah. Let’s face it, we’re tradies and most tradies have had very little formal business training. That’s why we play copycat with each other. We see someone who looks successful and we do what they do. One in three trade businesses are going broke. It just highlights that playing this copycat game perhaps just isn’t right.

Ange
I totally get it though. It’s easier to just do what your previous boss did. They look like they knew what they were doing.

Andy
So all you tradies out there, let me ask you this. Do you remember sitting in class at TAFE and learning about what hourly rate you need to charge to make profit? Definitely not. I only remember a six month period where we were taught anything about money or operating a successful trade business. It was called business principles. I don’t know if you out there remember that, but after a hard day of work on the tools and rocking up the TAFE to do a night class, you know, halfway through the session, I was definitely falling asleep on my desk. I was literally only showing up to get my name ticked off the roll to make sure I passed. I know all you tradies out there listening alike. That was me as well.

Ange
Great. Reminisce Andy. But hey, let’s get back to this topic of hourly rate.

Andy
Sure. I mean, I speak to some guys and they think they’re being quite smart because they’ve looked into what their competition charges and base their hourly rate and cost on the general marketplace. And although on paper that seems right, most people base their rate on when everything is going well. You know those times when there’s a unicorn flying through the sky and there’s rainbows in the air, and life is absolutely perfect. But let’s be honest, it’s not normally like that, right? Within a year, we have so many ups and downs. Boys take time off. You can’t find work. It’s raining, it’s wet, it’s windy, you name it. They’re not taking into account all the things that are going wrong in a year or so. They don’t want to be the odd one out who charges too much or the guy who charges too little. It’s still not an accurate way to calculate your hourly rate.

Ange
Yeah, exactly right, Andy. It’s not accurate simply because every business is unique. You know, you have very different overhead costs, staff wages, material costs, business expenses in general. And as your business grows, these expenses grow too. It’s not a one size fits all situation. So just pulling a number out of the air sounds so crazy.

Andy
So, so crazy. Tradies, how do you calculate your hourly rate? And let me ask a second question. Has it changed since you first started your trade business or has it changed recently? If your head just dropped or you shrugged and you said, I don’t know, or you can’t remember the last time you ever viewed it, then you are in trouble. You need to fix this right now. The truth is, you should be reviewing your hourly rate every three to six months to coincide with the businesses changing costs.

Ange
Yeah, don’t feel bad about it. Andy and I have been there and we’ve certainly done that with our business Dr. Drip. We’ve operated the business for over 20 years and still do, and we regularly have to review our hourly rate and pricing structures because the cost of things change and your hourly rate needs to change with it. So in reality, think about coffee like 10 years ago. I, I’d say we probably paid about two bucks and now it’s five. So you have to change with the times.

Andy
Yeah. The cost of beer at the pub is even worse. Everyone else can change their rates. Why can’t we?

Ange
So what are you saying? That every time the pub changes their rates, we should too?

Andy
I reckon make more money. Drink more beer. . .

Ange
It doesn’t matter if you’ve pulled your hourly rate out of the air or you’ve copied what others set theirs at, or based it, maybe even on market value, even if you think yours is pretty accurate based on your costs. Every single one of us can benefit from double checking that our hourly rate is right.

Andy
You’re so right Ange and honestly, what annoys me the most is the bottom feeders who are killing us by underquoting and undercutting the market. They’re the guys who go to quotes after you that say he can do it for half of what you charged. And you’re left sitting there thinking, how can I compete with that cost? I can’t get the job done that cheap. There is no way and you know what? The tradie probably can’t either, but he just doesn’t know it. And that right there is what really pisses me off because it’s guys like that who are killing the trade industry and making it harder for the rest of us who do great work and charge what we are worth to maintain a successful, profitable business.

Ange
Yeah, you’re so right Andy. We’ve gotta change the industry because otherwise we’ll all be priced out of the game and nobody will wanna be a tradie anymore cuz they’ll be saying there’s just no money in being a tradesman, we don’t want customers to decide on price alone because these cheap Billy bum cracks who do shoddy work and charge peanuts for it are giving us such a bad name. The customer will choose these cheap guys first. They’ll receive terrible service. And I think we are all the same, and it’s just not true.

Andy
I have so many business owners coming to me saying they just can’t compete anymore. Realistically, that’s a good thing because if you know you can’t compete, you can go broke sitting down on the beach. You don’t need to be doing work for work’s sake just to keep yourself busy. We don’t want you to reduce your prices to win the work either, that’s gonna kill you really quick. I remember when I first started my business, when I didn’t really know much about business and I didn’t really know much about quoting either. I was working for this builder and I put in a price for this builder of $8,000 and he came to me and he said, listen, Andy, you’ve just come in a little bit too high. I need you to shave $2,000 off. Now I was green. I was really green and I was desperate to get this builder’s work, and I was like, oh, okay. So I thought for about two seconds and I went, okay, then I’ll do it for six grand. But you know what? I definitely lost money. It was an eight grand job, all day long.

Ange
Yeah. We see tradies doing this all the time. It means they’re doing a job simply to break even or worse, making no money at all, but they don’t actually even know it.

Andy
That’s another reason why it’s super important to know your actual hourly rate. This way you know when you are okay to say yes to a customer or no. You know what? It’s actually okay to say no to a customer. Know your hourly rate and price correctly. You know, as an industry, we need to come together and stick to our pricing structures based on what we need to charge to operate a successful and profitable business, not what Billy bum crack charges. You know what? We all need to stick to our guns.

Ange
Yeah, absolutely. What’s important is working out precisely the hourly rate that you need to charge to make a profit and run a successful business and stick to the price. So for starters, customers who want you to charge peanuts but deliver top quality work are not your customers. You can usually pick them out pretty easily because before the job even starts, they’re trying to get you to discount or waive the call out fee and at the end of the job, they wanna break down your costs or they’re arguing the invoice.

Andy
Yes. Happens many times, doesn’t it? You’re exactly right. But there are plenty of ways around this about how to prevent getting caught up with these type of customers. On the flip, those customers who understand your worth and know your rates are fair and are prepared to pay what you charge because of your top quality work. These customers are your A-Grade customers. These are the people who understand what you charge based on your skills and ability to deliver an incredible service, so don’t bend over backwards for low-grade customers, hold out for your A-Grade customers.

Ange
Yeah. Overall, the only way to make a profit and make great money is to know what your time is worth and calculate your true hourly rate based on your business, not just what others are charging. Don’t stick your head in the sand and don’t complain that it’s all too hard. Just do the maths. Take the time and work it out. It’s really important to have this conversation with your accountant too, but the reality is sometimes they just don’t understand our industry and it means they can give you the wrong advice about what you need to charge per hour to make profit.

Andy
I can hear some of you saying, Hey, back up. My account is awesome. And if they are, that is great. But let’s get clear about what metrics you are looking at every month so you understand your business better.

Ange
Yeah, that’s right. That’s why it’s even more important to speak with the likes of us here at Lifestyle Tradie who’ve worked with thousands of trade business owners and have a really easy template to use your numbers from your P&L to work out the right hourly rate for you in your trade business.

Andy
That’s right. It’s not about us telling you what you need to charge. It’s about you realizing all of your overheads and what you need to charge to be a profitable business. And guys, if this is giving you a headache and you’re feeling super lost and feel like it’s all just too hard, let us give you a hand working out your hourly rate. Book a strategy session with me and let’s chat about your business and how we can get your pricing right to ensure you are making more money on every single job.

Ange
That’s right, the links in the show notes, or go to lifestyletradie.com.au and get in contact with us today. We’re here to help guys. You just have to ask, okay. That’s it for us today. Until next time.

Andy
Looking forward to chatting soon. See you!