“How far behind the curve am I?”

If you own a business, you’ve asked yourself this question. Here’s the answer:

You’re not behind the curve.

You’re on a journey. Curves are a part of the road. You’ll get where you need to be.

I’m not about to dump a list of tasks on you that “you should have already done.” That wouldn’t be fair or helpful. Instead, let’s start from where you are right now.

Maybe your 2022 was exceptional. You couldn’t wave your arms without generating profitable business. But 2023 was a refreshingly normal year for demand, and you should be expecting another normal year in 2024.

The downside of normal is the return of price shoppers — the people trying to micromanage a budget who think they know more than you. They may not be the exact people you dealt with before 2020, but they present the same problem. And if you don’t understand how pricing actually works, you’ll be hard-pressed to deal with them.

So, will you be perceived as a high-value seller? Or will you cave to price-shopper demands? To achieve the former, you’ll need a few mindset shifts to help you view pricing in a new light.

Mindset Shifts on the Road to Scalability

Mindset shifts navigate the curves on the road to scalability. To better understand pricing, here’s a map you can follow:

Sell every job in such a way that it will be profitable.

• Even if you’re busy, which is the goal, you should be able to outsource 100% of any job.
• Any job you sell should make a 30% margin or more.
• Price profitably, win the project, then execute wisely.

Adding permanent expense (overhead) to reduce the cost of future jobs is bad math.

• Overhead and job cost aren’t related. It’s bad math.
• If you’re about to hire because a big job is coming, log off of Indeed and call me.
• The profit for every job is already built in. Making one project more profitable doesn’t necessarily help your business to be profitable.

Your prices are based on your costs; your margin justifies being in business.

• Ours is an industry of made-up prices, but your prices should be based on your actual costs. The added margin makes it worth your while to absorb the risks that come with selling your goods or services.
• Customers who ask you to lower your prices aren’t concerned with what your costs are. They have no insight into how your pricing functions.
• It’s up to you to protect your bottom line.

If you use scalable models in the selling process but don’t use them in the delivery process, you’ll eat through your profit.

• If you want growth, profit, and low stress, pricing alone won’t work. You also have to use a scalable delivery method, which keeps your overhead down while ensuring your delivery product’s quality.
• This means you need to outsource more. In order to outsource effectively, you need to be good at planning jobs.
• You need a deep bench of suppliers. Also, being highly attentive to details allows suppliers to effectively support you.
• Now, whenever you don’t need to outsource, you’re that much more profitable. Stop giving your profit to price shoppers. Protect your business and focus on better customers. That’s a scalable delivery process.

Some Truths to Learn…

… even if they’re hard pills to swallow:

• Gross profit pays for overhead. Keeping your overhead down is what creates net profit. Look at the months in which revenue doesn’t break even. You’ll notice lots of gross profit but negative net profit. Gross profit doesn’t create net profit; it offsets overhead.
  
• Owning equipment does not create net profit. Owning equipment is a business investment. It’s not part of your job costing system. Some owners like to own more equipment and hope to have enough business to justify it. Others like to own less equipment and are comfortable sub-renting to reduce the risk of seasonality and variability. Owning equipment is an investment decision, not an operating choice.
  
• Excess capacity is expensive. For years, owners wanted a deep bench of technicians and to own lots of gear to reduce the cost of goods. They wanted excess capacity. That way, when the busy season came, they could take one more job and not worry about how to cover it. They overlooked that the cost of all that capacity is the same in a busy month as it is in a slow month.
  
  You’re better off turning down revenue than having excess capacity. If you’re scalable and your operational processes are sorted out, you’ll have a lot of capacity. You’ll be able to outsource just about anything at almost any time.

Bottom line: If you never turn down revenue but can’t reliably generate 20–25% net profit annually, you have too much overhead. Fixed costs of goods sold with less than 100% utilization are excess capacity.

Conclusion

You’re not behind the curve. You’re on a journey. Keep the following points in mind and you’ll get where you need to be:

• Fix your pricing and protect gross profit at the sale.
• Rely less on gross profit to cover overhead and more on appropriate overhead.
• Excess capacity may be convenient, but it’s not a smart investment.

Want to apply these practices directly to your business? Let’s chat.