No Magic Labor Rate
Contractor 20/20 offers a Brief Simplified View of Labor Rates that will Benefit Your Business
In the past 3 years, I have studied the financials of over 200 companies in 25 states and Canada. I have also conducted consumer awareness and market share studies for the same. This is a complicated issue; I will try to keep my analysis in plain language and grossly simplified. Remember, there is no magic labor rate that everyone can live by.
1. Labor rates are locally driven. To pay a technician $50 an hour is not uncommon in some cities, however a technician with the same skill level may get $15 an hour in other cities.
2. Market share is driven by multiples of labor rates and a company’s top of mind awareness level.
3. The market share levels are predictable. Given the population within 20 miles, the average age of the home, a company’s labor rates, labor costs, and qualitative and simple formulas, I will accurately predict market share and potential, 9 out of 10 times.
4. Hourly efficiency is driven by traffic patterns and your technician’s ability to sell additional tasks. In effect, the more tasks done and the less time spent in traffic, the higher the hourly efficiency. *Higher Hourly Efficiency = Lower Labor Costs* Let’s say you’re taking a FLAT rate company and your DIRECT labor goal is 25% of gross. It’s not just a matter of taking your technicians pay, including benefits, and multiplying by 4.
Example: $20 x 4 = $80 – You have to figure it out by actually working an hour less and assuming 50% efficiency.
Example: $20 x 2 x 4 = $160/hr – Now, figure in call backs.
Example: $20 x 2 x 2 = $160 + 10% call backs = $176/hr
But here’s the kicker: If you can raise your hourly efficiency and how your call backs you can charge customers less and still keep your labor at 25%.
Example: $20 x efficiency x 4 = $120 + 5% call backs = $126/hr
The benefits to you of charging less are more customer retention, more referrals, and a better word of mouth which equals lower customer acquisition costs and lower overhead.
5. Only once, out of more than 50 studies, have I seen a T/M company with less than a 35% direct labor cost. Don’t get me wrong, T/M companies often have higher call to appointment ratios and appointment to sales ratios, but it is very rare to see a T/M company clear more than 8% profit. It’s very common to see flat rate companies, that are properly managed, in the 12% to 18% profit range.
6. Overhead is a killer. Companies that maximize profits keep their overhead below 40%. That is next to impossible to do, unless you tie your sales goals and tech staffing to multiples of your overhead. You must also tie your advertising/promotion budgets to cover the gap between your actual sales and your necessary sales goal, as demanded by your historical new customer acquisition costs.
1. Flat rate pricing does not forgive the sins of bad management.
2. Low hourly efficiency will push up real costs.
3. Higher prices will eventually equal lower market share.
4. Wasted dollars on bad advertising will increase overhead.
5. Badly trained technicians with low average tickets equals higher real labor costs.
6. Excessive call backs eat profit and destroy customer retention.
7. A badly trained CSR that waste leads, kills your advertising results.
It’s not just about a magic ad. As an advertising pro I can tell you, most times getting the phone to ring is the easy part. What is most important is EVERYTHING YOU DO AFTER THE PHONE RINGS, It’s not just about some magic labor rate. IT’S ABOUT WHETHER YOU RETAIN CUSTOMERS AND HOW YOU EXPLOIT THE LEADS YOU GET.
NOBODY BATS A THOUSAND. I know first-hand that not everything you do works every time, for everybody. But I can also tell you how frustrating it is to be blamed for bad outcomes from people who only completed half of a program or supply half of the information or the time needed. Recently, I have been recommending a certain sales trainer. From three clients, I have heard the same story. HALF OF THE MEN HE TRAINED MORE THAN DOUBLED THEIR SALES. The moral of this story, the training was a success for the ones that applied themselves and had the right personalities to succeed. For the rest, it was a waste of time. There you have it.
-No magic labor rates
-No magic advertising
-No substitute for great management
-No substitute for hard work
-No perfect consultant or organization
SUCCESS IS THE RESULT OF HARD WORK AND PRAYER.
Gandhi said, “Before enlightenment I carried water and stacked wood; after enlightenment I carried water and stacked wood.” And as my favorite business planner John Pope said, “We all learn from mistakes, but they don’t have to be our own mistakes.”