The Going (Broke) Rate: Why Let Competitors Run Your Plumbing Business?

Learn how to properly price your service work, and don’t forget the second technician
The Going (Broke) Rate: Why Let Competitors Run Your Plumbing Business?
Steve Huff

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Most plumbers I talk to have no idea how to properly price their service and work. What they usually do is mystery call other plumbers in their area, find out what they charge by the hour (the going rate) and set their prices accordingly. If you are like those who think undercutting the going rate by 5 or 10 dollars an hour less will bring you more business, you’ll eventually realize that’s just the going broke rate.

If you are basing your pricing on someone else’s hourly rate, ask yourself this: How did they come up with that number? Is it based on his actual costs of doing business or was the number just pulled out of a hat?

Even if your competitor is smart enough to actually calculate a rate that turns a profit, is that number right for you?

Think about this. Let’s say the going rate in your area is set by a guy who works out of his house. He’s a one-man operation and works under the radar with no license or insurance, while you rent office space outside your home, pay someone to answer the phone and are properly licensed and insured. But you still only charge his going rate. My question to you is: Who’s making more money?

Labor rate

The rule-of-thumb is that your labor rate should be five times the hourly wage of your highest paid tech. For instance, your highest paid field employee makes $25 an hour. Multiply that by 5 and your labor rate will be $125 an hour. That labor rate stays the same for all your revenue-producing employees even if they are paid a lower hourly wage.

To break that down, once you subtract that employee’s hourly wage, what’s left ($100) goes to pay for everything else. And I mean everything: trucks, insurance, rent, lights, water, office wages, office supplies, taxes, owner’s compensation, benefits … everything.

Charge for the helper

The one thing it does not pay for, and a lot of people miss this, is a helper’s wages. If you send a technician and a helper out on a job and bill the client the going rate of $125 per hours, you’re covering the technician’s wages and all the other overhead costs. You’re not, however, brining in any additional revenue to cover the helper’s wages and associated overhead. We have never come up with a definitive multiplier for a helper’s wages, but at minimum you should charge double his wages to cover the cost of his hourly pay and the associated overhead.

To make a profit, do the math

The other thing most plumbers don’t do is charge enough for their profit. If they are brave enough to charge 25 percent (which is a low number in my opinion), they usually do it wrong. The correct way is not to multiply your cost by 0.25 and add that back, but to divide it by 0.75. I know this seems backwards, but I have had more than one numbers guru tell me this is the proper way to figure profit margin.

For example, you would think charging $125 on a $100 service would give you a 25 percent profit. It doesn’t. Adding $25 to a $100 service is called markup, it’s not the same as profit margin. For a 25 percent profit margin, divide $100 by 0.75 ($100/1 -.25) and you come up with $133.33, a 33 percent markup. That’s a difference of $8.33, and as the saying goes, every $8.33 counts!

If you want to make money and be successful you must mark up your materials correctly and base your labor rate on your own costs of being in business and not someone else’s. Otherwise you are no longer in control of running your business – the other guy is.

About the author: Steve Huff is president of Steve Huff Plumbing in Kingsport, Tennessee. Founded in 1975, Huff was a good plumber but a poor businessman. In 1999 he faced bankruptcy. Seeking outside help, he learned how to run a business, not own one. Today, Steve Huff Plumbing is the largest service and repair business in the area. Contact him by emailing Plumber at edw@colepublishing.com.



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