For the past 20 years, I've built a reputation for being fair with pricing and try to give as much as I can for what we charge in value and level of service. As a result, I get a call every once in a while from someone who was told by a friend that they were "taken advantage of," or "ripped off." I've been telling people it depends on the business model being used, and that's about 90% of what determines the cost. But there's more. Much more.
This may seem a bit rough to some, and surely unorthodox for a business owner to say, but I wasn't being fair or honest at all with my pricing for two decades.
I remember when I started my business with an old pick-up truck, a cellphone, my tools, and about $400. That was April of 2000, and times were a little simpler then in terms of economy and the local market. I took on new work, remodelling, service work, anything I could do with limited means. More than I should have, in some cases. 9/11/01 was the start of a very tough time for many, but we managed to push through. New work was my favorite kind of plumbing job to take, but I was floating expenses on new home jobs up to 90 days in some cases, since the General Contractors pretty much demanded such terms. I was charging the same rates the big outfits that used immigrant labor and depended on high volume were charging, and times became tougher as time went on. Debt piled up, bills became late, and it came to a head when I was late on a credit card payment that had an almost $20,000 balance on it. By 2007, I was sitting in an attorney's office hoping to get some relief and start over only to find out I was too broke to file bankruptcy.
There I was, a third-generation Master Plumber who worked all the time, charged what I thought was a "fair, honest" rate, had a business degree, and my business and life were a train wreck. I was supposed to be making a lot of money! I was supposed to be living well! I was charging what everyone else charged! Why? Why did I fail?
I was so worried about being "fair" and "honest" to everyone, I wound up being unfair and dishonest to myself. And for that, my family suffered. One of the many times we were waiting for what seemed like forever to get a check from a builder, we were late on many bills. The light bulbs in our home decided to start burning out all at once, and we were literally counting change to buy gas. By the time I finally received payment, we were so behind I had just a little of what was supposed to be my profit left for the things beyond the usual bills. So I bought light bulbs to replace every burned out bulb in our house. Even though times were tight, it didn't occur to me just how bad things were getting until the kids were running room to room, excited that every light in the house worked. "They all work, Daddy!" as they turned on every light fixture in one room, then repeated the routine in every other room. My wife had the patience and understanding of a saint and always lovingly encouraged me to keep trying. And she still does. If it wasn't for her unwavering devotion to our family in the tough times, we wouldn't have made it this far.
Long story short, Dave Ramsey saved my business and perhaps my life. I was driving to the County Public Works office with my last $80 to my name to get my water turned back on for non-payment when I came across Mr. Ramsey's radio program for the first time. At first I though he was a fruitcake, but the more I listened the more he reminded me of things my Dad and Grandfather tried to tell me. I read every book he wrote up to that point, and continue to re-educate myself on personal and business financing beyond his books to this day. The business classes I took in college prepared me for a life in management of someone else's business, but I was not prepared to run a business from top to bottom. That's a sad fact, and I'm not the only one who has come out of our college system ill prepared for the real world. It is a valuable tool, I guess you could say, but college doesn't prepare you as much as the hype claims it does. You must commit to a lifestyle where you seek to learn continuously.
Though we are doing much better than we were, we have very little saved for retirement. We have no safety net. If my business fails, I cannot draw unemployment. My truck that I purchased brand new in 2003 has a quarter million miles on it, and I can't afford to replace it. We have lived life on a wing and a prayer, one broken leg away from financial ruin, for two decades. The old way, the "honest" way, the single-person sole proprietorship (artisan) business model, is all but obsolete. It may work for a time, but it is unsustainable. The one person service business will soon go the way of the wagon maker as the economy shifts towards a more "progressive" model and the demands of an ever-changing market present newer, more costly challenges.
So fast-forwarding to today, now that I know the proper way to calculate Gross Profit Margin, Cost of Services, Fixed Costs, Variable Costs, and Break-even Analyses for a service company instead of a fictitious corporation that makes widgets, I have to say that in most cases, no, you are not being "ripped off" if a plumber is charging you what seems to be an exorbitant rate. There are some plumbing outfits that charge California, Chicago and New York rates in places like rural North Carolina, and they ARE ripping people off. So where is the happy medium? I wish there was an easy formula, but there just isn't. But that doesn't keep me from trying to achieve it.
A simple run-down of what it takes to operate a legitimate plumbing company:
Licensing
Property Taxes
Sales Taxes and the man-hours required to calculate, file and distribute them
Payroll taxes
Supplies, inventory and materials
Capital improvements like an office, warehouse, trucks, equipment
Insurance for liability, workers compensation, vehicle insurance, medical benefits, life and disability insurance for benefits, and real property
Marketing and Advertising
Office, accounting and secretarial employees or services
Salaries of Employees and bonuses
Loss of sales revenue due to warranty occurrences
Legal council and services
401K or other employee benefits like maternity leave, vacation pay, comp time
Compliance costs for OSHA, municipal zoning, labor laws, environmental regs
Waste Disposal
Personnel training
Merchant Services expenses and bank fees
Business loans AND / OR raising capital to expand and maintain growth
There's more, but you get the point. A plumbing company is like any other business on the planet. Same challenges, same risks, same needs. Only we go to you, which adds considerable operating costs.
If you call a company that you saw on an advertisement (especially on radio or television), has a staffed calling center, GPS dispatched trucks that cost over $75,000 to buy and equip, and a well paid and trained technician shows up wearing a nice uniform with booties, using the latest technology to invoice and take payments, and stand behind their work, then you will pay over $165 if not close to $200 an hour for their services. The plumber doesn't make that much, that is what it costs the business to operate and generate what is usually around an 18% to 25% profit margin. (anything less than that margin is unsustainable)
One last fun fact:
In most states across the United States, the average salary in a particular state of a licensed plumber is usually within a couple thousand dollars of the average salary of a school teacher in that same state.
This may seem a bit rough to some, and surely unorthodox for a business owner to say, but I wasn't being fair or honest at all with my pricing for two decades.
I remember when I started my business with an old pick-up truck, a cellphone, my tools, and about $400. That was April of 2000, and times were a little simpler then in terms of economy and the local market. I took on new work, remodelling, service work, anything I could do with limited means. More than I should have, in some cases. 9/11/01 was the start of a very tough time for many, but we managed to push through. New work was my favorite kind of plumbing job to take, but I was floating expenses on new home jobs up to 90 days in some cases, since the General Contractors pretty much demanded such terms. I was charging the same rates the big outfits that used immigrant labor and depended on high volume were charging, and times became tougher as time went on. Debt piled up, bills became late, and it came to a head when I was late on a credit card payment that had an almost $20,000 balance on it. By 2007, I was sitting in an attorney's office hoping to get some relief and start over only to find out I was too broke to file bankruptcy.
There I was, a third-generation Master Plumber who worked all the time, charged what I thought was a "fair, honest" rate, had a business degree, and my business and life were a train wreck. I was supposed to be making a lot of money! I was supposed to be living well! I was charging what everyone else charged! Why? Why did I fail?
I was so worried about being "fair" and "honest" to everyone, I wound up being unfair and dishonest to myself. And for that, my family suffered. One of the many times we were waiting for what seemed like forever to get a check from a builder, we were late on many bills. The light bulbs in our home decided to start burning out all at once, and we were literally counting change to buy gas. By the time I finally received payment, we were so behind I had just a little of what was supposed to be my profit left for the things beyond the usual bills. So I bought light bulbs to replace every burned out bulb in our house. Even though times were tight, it didn't occur to me just how bad things were getting until the kids were running room to room, excited that every light in the house worked. "They all work, Daddy!" as they turned on every light fixture in one room, then repeated the routine in every other room. My wife had the patience and understanding of a saint and always lovingly encouraged me to keep trying. And she still does. If it wasn't for her unwavering devotion to our family in the tough times, we wouldn't have made it this far.
Long story short, Dave Ramsey saved my business and perhaps my life. I was driving to the County Public Works office with my last $80 to my name to get my water turned back on for non-payment when I came across Mr. Ramsey's radio program for the first time. At first I though he was a fruitcake, but the more I listened the more he reminded me of things my Dad and Grandfather tried to tell me. I read every book he wrote up to that point, and continue to re-educate myself on personal and business financing beyond his books to this day. The business classes I took in college prepared me for a life in management of someone else's business, but I was not prepared to run a business from top to bottom. That's a sad fact, and I'm not the only one who has come out of our college system ill prepared for the real world. It is a valuable tool, I guess you could say, but college doesn't prepare you as much as the hype claims it does. You must commit to a lifestyle where you seek to learn continuously.
Though we are doing much better than we were, we have very little saved for retirement. We have no safety net. If my business fails, I cannot draw unemployment. My truck that I purchased brand new in 2003 has a quarter million miles on it, and I can't afford to replace it. We have lived life on a wing and a prayer, one broken leg away from financial ruin, for two decades. The old way, the "honest" way, the single-person sole proprietorship (artisan) business model, is all but obsolete. It may work for a time, but it is unsustainable. The one person service business will soon go the way of the wagon maker as the economy shifts towards a more "progressive" model and the demands of an ever-changing market present newer, more costly challenges.
So fast-forwarding to today, now that I know the proper way to calculate Gross Profit Margin, Cost of Services, Fixed Costs, Variable Costs, and Break-even Analyses for a service company instead of a fictitious corporation that makes widgets, I have to say that in most cases, no, you are not being "ripped off" if a plumber is charging you what seems to be an exorbitant rate. There are some plumbing outfits that charge California, Chicago and New York rates in places like rural North Carolina, and they ARE ripping people off. So where is the happy medium? I wish there was an easy formula, but there just isn't. But that doesn't keep me from trying to achieve it.
A simple run-down of what it takes to operate a legitimate plumbing company:
Licensing
Property Taxes
Sales Taxes and the man-hours required to calculate, file and distribute them
Payroll taxes
Supplies, inventory and materials
Capital improvements like an office, warehouse, trucks, equipment
Insurance for liability, workers compensation, vehicle insurance, medical benefits, life and disability insurance for benefits, and real property
Marketing and Advertising
Office, accounting and secretarial employees or services
Salaries of Employees and bonuses
Loss of sales revenue due to warranty occurrences
Legal council and services
401K or other employee benefits like maternity leave, vacation pay, comp time
Compliance costs for OSHA, municipal zoning, labor laws, environmental regs
Waste Disposal
Personnel training
Merchant Services expenses and bank fees
Business loans AND / OR raising capital to expand and maintain growth
There's more, but you get the point. A plumbing company is like any other business on the planet. Same challenges, same risks, same needs. Only we go to you, which adds considerable operating costs.
If you call a company that you saw on an advertisement (especially on radio or television), has a staffed calling center, GPS dispatched trucks that cost over $75,000 to buy and equip, and a well paid and trained technician shows up wearing a nice uniform with booties, using the latest technology to invoice and take payments, and stand behind their work, then you will pay over $165 if not close to $200 an hour for their services. The plumber doesn't make that much, that is what it costs the business to operate and generate what is usually around an 18% to 25% profit margin. (anything less than that margin is unsustainable)
One last fun fact:
In most states across the United States, the average salary in a particular state of a licensed plumber is usually within a couple thousand dollars of the average salary of a school teacher in that same state.
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