On today's episode, we talk PERCEIVED VALUE vs INVOICE PRICE! We had a listener email us recently, and they asked for advice on how to handle a client who was giving them a fit about a price that they feel was extremely fair...if not, a little lower than standard for the HVAC industry. This service business owner would like to know what we would do if we were put in a similar situation with our heating and air conditioning small business.
Julie and Tersh talk between the two of them about ways to add value so that these types of calls are less likely to happen! Please share your thoughts and feedback with us!
Also, connect with us on social media @tershblissett & @julieablissett Tersh@icebound.us if you'd prefer to email!
Click here for an explanation of how to figure out your billable hour for those who may be questioning themselves on the price they are giving their clients.
Of course, to get a true picture of your business expenses, you'll want to calculate your overhead rate or direct service overhead. This is true whether you're a manufacturing firm or whether you are applying overhead in a service company. To do so, divide your overhead (indirect) costs, such as rent and utilities, by direct costs, such as labor. If your overhead costs are $100,000 and direct costs are $50,000, your overhead rate is 0.50, or 50 percent. If the typical overhead rate for companies in your industry is 75 percent, and your rate is 50 percent, you have a competitive advantage with your lower overhead.
But when calculating your overhead rate, keep these important factors in mind:
- Materials cost. These are the costs of goods you use in providing the service. A mechanic's shop, for example, would need to factor in the costs of supplies, like engine oil, air filters, tools (though mechanics at a shop usually provide their own tools), spark plugs, brake pads, etc.
- Labor cost. This is the cost of direct labor you hire to provide a service. As discussed, this would including the hourly wages or salary of the mechanics at the auto business, for example.
- Overhead costs. These are the indirect costs to your business in providing services to customers and is different than the overall overhead rate. This would include the costs of any employees/support staff not working directly on the autos, such as billing clerks or administrative assistants and even human resources personnel if the firm is large enough. Other overhead costs include your monthly rent, taxes, insurance, depreciation, advertising, office supplies, utilities, mileage, and so on.
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