How common is not charging enough
Not charging enough is an easy and a common mistake. A lot of people come to me frustrated that they have cash flow issues and often they are not making what they think and they’re not charging enough.
It’s an easy mistake to make particularly when you’re new, small and don’t have any costs. It doesn’t really hurt you to charge a bit less and it can feel like an easy way to get business.
It feels easy to be inexpensive and win work, and it feels like you’re doing a nice thing for people and feels like you’re being fair and all that kind of stuff. It’s emotionally easy.
It’s the wrong thing to do and it’s unnecessary. People are responsive to price, but they’re not as responsive as you think, and you don’t need to do that but most people do it.
However, if you’re going to grow and scale a bit you need to charge more.
I don’t mean massive but enough to move beyond going to work for every dollar, so you’ve got some scale and leverage. You want people working for you, so you can take holidays, put systems in place, have people doing the stuff and make a business run without you.
A nice business — one that serves you.
How to grow and scale
If you want to grow and scale, you’re going to incur some more costs.
I call them overheads. You’re going to need:
- Admin people
- More vehicles
- Proper insurance
- Proper safety procedures
They’re going to cost you training time and money. You’re going to:
- Need to train people properly and spend time on that (you can’t charge for them but you have to pay them).
- Have an office or a shed or both
- Use a business adviser (that’s very important)
- Keep proper financial support from an accountant or somebody who helps you understand your numbers and your margins. (I’m one of those people but I usually encourage a proper bookkeeper who can give you that proper support).
- Spend money on marketing.
The list can go on and on.
As you grow, you’re going to spend money on these things and what you used to charge when you were small and you didn’t have those costs won’t be enough. If you try to grow without charging more, you get stuck.
People get stuck. You’ll either try to grow without taking on those extra costs which means, either that you have to do all the work yourself or in the case of safety, you take on loads of risk for yourself, and for your staff that you shouldn’t. You could have a nasty fall.
If you don’t take on that extra cost, you either do the work extra or you work at night doing your admin, and bookkeeping. Or you take risks with things like insurance and safety.
It doesn’t really work for you. It’s not sustainable, certainly.
You’ll grow a bit then you’ll be pissed off because you’re working too hard and although you’ve grown, you’re working really hard so it feels like you’re not making much money.
Here’s a challenge for you.
I want you to calculate your hourly rate that you get from your business. I hope it’s not too confronting.
Here’s how to calculate it…
- Your total income from your business for the year — if you did the last financial year, you can see your profit, take the salary you paid yourself if you paid one. If it’s zero, you just take the profit that you declared at the end of the year.
- Add, put back in any of the BS that you told the taxman. You might pay your partner even though they aren’t working in your business — that’s an allowable tax deduction within reason and an efficient way to divide your income. But add that back in so you’re understanding what you actually pay yourself.
- Work out how many hours a week you actually work in your business, on the tools, on the books doing quotes, invoicing, etc. Include working at night while the TV’s on and include the time you spend on work at the weekends.
- Divide the two — Total income from your business/How many hours a week you work.
If you work a hundred hours a week, that’s an awful lot.
Do you work that for 52 weeks a year or is it 48?
You have holidays, so take out your holidays.
The total number of hours you work in a year divide that income by the number of hours and there’s your hourly rate.
It’s a simple calculation and for most people, it’s a bit confronting because you make a lot less. Don’t you think?
It’s certainly a lot less than the hourly rate.
What’s the point?
Apart from pointing out that you make less than you thought, and that working all those extra hours means you’re actually not getting paid very well for your time. The point is that it’s easy to get stuck because you need the actual income that you make for the mortgage and bills.
If your hourly rate is low, that’s because you’re not charging enough, and if you charge more, that would be a good and realistic way of breaking this high and dry position that you’ve got into.
If you charge more, there might be money to pay someone else to do some of that work that you do in the evenings.
You need to charge enough in your business so that you cover your overheads, and what you pay your tradespeople. You should be paying yourself a fair salary for the work that you do.
Add an hourly rate a little more than what you have to pay tradespeople, and you should make a profit on top of that. You should take a risk in business. You wear stress in business. You should prepare a salary for your work and you should be making profit. That’s fair and reasonable and you deserve it.
Don’t worry about being more expensive than the little guys. People care less about price than you think and I’ve said it many times. Also, some people want cheap and will hire the little guys, and some people will pay a bit more for someone who provides a bit more, like a trade who:
- Has admin people answering the phone
- Has insurance and does their safety
- Looks better and is punctual
All those things that come with being more structured organized and those things I’ll help you do if you hire me as your Adviser.
Here are two mistakes I’ve seen people make with regard to charging.
I have a client that was charging $45 an hour. We worked out that his tradespeople who he hired were probably costing him that or possibly even a little bit more.
So he was subsidising the people that he was paying to do the work by working on the tools himself, and he was taking home less than he would have been taking home had he just been on the tools himself on his own. And that was a problem caused by him not charging enough.
On the positive side, he’s now charging $65 hour, and he’s winning quotes, and he’s doing better. He’s not having a backlash or suffering from this.
And not to say that he’s an idiot because he’s not. He’s an intelligent and capable person. He fell into the trap — the trap that it’s easy for us all to fall into. And I’m trying to caution you to not fall into it today.
The second mistake is charging less for people like your apprentices because they don’t know anything, and they’re not so effective.
Don’t do that.
Your customer doesn’t need to know that you’ve charged less for your apprentice. You’re the one paying the price for your apprentice being slow and needing more supervision because you’re the one having to pay to supervise them, and doing all the training, and paying them when they’re at TAFE. Not your client.
So, charge a single hourly rate for all your workers and don’t let your customers worry about whether these guys are more experienced than those guys. Don’t do that.
Helping you charge properly and appropriately is an important part of my job. It’s my role as a business adviser.
I’m here to help you grow and scale and turn your business into that one that serves you. A business that gives you:
- Time off
- Low stress
- Freedom to take time away and holidays
All those things to make it still run without you.
If you’re undercharging, you’re going to reduce your chances of building a lovely business.
And the one thing we’ll do if you hire me as your adviser is look at whether charging more is one of the things we can do.
If you’re undercharging or if your hourly rate was disappointing, maybe you should get in touch.
Maybe we can look at that together. If you would like more info lets talk.