Don’t Fall Into the Cost-Cutting Trap

Businesses that undercut their services are a frustration in this industry, but if you stay on top of how efficiently your operation is being run, you won’t be tempted to head down that road

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When we meet, there is nothing us tradespeople talk about more than second-rate plumbing firms who undercut the prices on their services. It is by far our most common complaint, especially when we’re speaking to people who are not part of the trades.

Too many companies can easily fall victim to this way of doing business due to a lack of business skills. Many small plumbing outfits are operated by former technicians of another firm who are learning the business side of plumbing “on the go.” There is highly profitable work waiting for companies who run a tight operation, but many are not running their businesses efficiently, which leads them down the ugly path toward cost cutting and minimal profits.

How and Why They Undercut Jobs

There are plumbing companies who do large volumes of work with sizeable profit margins. Financially these companies run a tight ship. The men and women they employ are well compensated. Their service vans are well stocked and processed. Their equipment serviced, oiled, and always ready to go. Every dollar in and out is carefully tracked to squeeze out value. Since they run such an efficient company, they are able to provide quality and affordable services for their community.

Consider another company that is run by a plumber with no prior business experience. His service vans are old money pits. He is late with payroll and his equipment is often half working or broken. In order to maintain this level of incompetence and disorganization, he must dump these excessive costs into overhead. This swashbuckling way of passing on these inefficiencies to the customer leads to the first form of cost cutting. Out of necessity, he feels the only way to overcome these shortcomings is to market himself as the cheap professional. This cost cutting, underbidding, and being an ineffective businessman leads to unprofitable “busy work” and ultimately the downward spiral into bankruptcy.

Imagine these two companies bidding on a large volume of work. The inefficient firm literally cannot handle it. They do not have the expertise, the equipment, the tools, or the volume of people. They work on small jobs and make small profit margins, but that is all they have allowed themselves to make. In order to compete with the efficient company, they undercut their price by using cheap material, lowering markup, and hiring less skilled cheap labor. Once they go down the path of “cost cutting” they are stuck making the lowest margins doing poor-quality work.

Introductory rates are the second way cost cutters will attempt to undercut. Companies routinely give a new customer low rates in the hopes of conducting more profitable business with them in the future. Doing business this way can work for plumbing firms who have their company operating efficiently, but the cut-rate firm runs into problems. The work starts rolling in without discussed pricing, and the cut-rate firm does the work without signed contracts or purchase orders. They don’t calculate how much they need to charge to make up for the loss they took on their loss leader, and get bogged down with figuring out how to get paid.

Staying Organized

We can learn a lot from the misfortunes of the cost-cutting plumbing firms. That side of our business has been a revolving door of bankruptcies for as long as plumbing companies have been around. Use the consistencies of their failures as a map of what not to do.

Keep your image professional and clean down to the tiny details — clean and marked trucks, clean professional uniforms, clean cabs, an organized warehouse, and a clean and organized office. Remember that old phrase “A place for everything, and everything in its place”? It has never been more true and important than it is for our type of business. If you do not have a designated place for something, it will never be where you want it to be.

Focus on making your office process a slow, simple, and methodical daily exercise. Just because the calls coming in can be chaotic doesn’t mean you should handle it in a chaotic fashion. You need to make an effort to be a processing machine that chews methodically through any and every call that comes in the same exact way. Same goes with your technicians. How you want the service call process to be must be ingrained in them.

Clean up your image by cleaning your shop and your office. Get your technicians nice, professional uniforms and vans. Make things visually appear simple, clean and under control. Have a process that controls incoming funds. Inefficiencies in these areas cannot be thrown into overhead. Be a professional on the job and in the office and don’t freak out when you get undercut. Just wait a few years — the cost cutters will put themselves out of business. 

About the Author

Anthony Pacilla is a registered master plumber for McVehil Plumbing in Washington, Pennsylvania. He has 22 years' experience in the plumbing and HVAC trades, and has a bachelor’s in business and economics from Thiel College. 



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