Every so often I talk to a restroom contractor who’s scratching his head over a new competitor elbowing his way into the market. As the scenario typically plays out, the established PRO calls on a long-time customer only to hear about the great deal the new guy is offering on restrooms.
“If you can provide service for the same price, I’ll gladly stick with your company for my portable sanitation needs,’’ is the inevitable response from the customer. The PRO quickly does some mental math, and figures he can’t possibly make a profit at the new service provider’s price.
He has to tell the customer, “Thanks, but no thanks.’’ And hope to win them back another day.
MICHAEL SCOTT PAPER CO.
The same tale was told from the perspective of the “low-balling’’ startup company with great humor on a recent episode of the popular NBC comedy, The Office.
Bumbling regional manager Michael Scott of the Dunder Mifflin Paper Co. quit his job in a huff, and then decided he could stick it to his former employer by starting a competing company.
From its headquarters in a basement broom closet, and with a brain trust of two clueless salespeople, the Michael Scott Paper Co. quickly targeted the customers he served at Dunder Mifflin. They offered unheard-of low paper prices and quickly won over a dozen clients. It was high-fives all around as they convinced one company after another to leave the established paper provider.
But then viewers saw the part of the low-ball story that you never get to see in your business: As suddenly as he started his company on an impulse for revenge, Scott realized that each and every one of the customers he’d landed was costing him money. And his crew was rising at 5 a.m. every day to make deliveries. They were overworked and broke.
Soon Scott was on the phone with his clients.
“Well, this is slightly embarrassing,’’ he tells a customer. “I’m going to have to ask you to pay me a little bit more money for that delivery we dropped off yesterday … Yes, we got your check, but we’re just going to need a much, much bigger check.’’
It was a funny TV moment, but it offered a great reminder for every small business, both the company being threatened by a new competitor and an upstart company hoping to prosper: You need to know the actual cost of the product or service you’re selling and charge a price that allows you to make a profit.
CRUNCH THE NUMBERS
It’s a simple message, and it’s one being hammered home by the Portable Sanitation Association International in these tough economic times. Especially in today’s market — where there’s an ever-present temptation to lower prices to retain or gain market share — the PSAI is reminding PROs about the importance of knowing their actual cost-per-service for running portable sanitation routes.
At the Pumper & Cleaner Environmental Expo in February and the PSAI Nuts & Bolts Conference in March, a panel discussion addressed the importance of taking all direct costs into consideration when bidding on jobs or when contemplating making special sales offers. The panel included Millicent Carroll, who handles industry/regulartory standards and marketing for the PSAI, as well as three restroom contractors: Lee Sola of S & B Porta-Bowl Restrooms Inc., Aurora, Colo.; Mike Pauling of Biffs Inc., Shakopee, Minn.; and Michael McCarthy of Mr. John of Pittsburgh in Pennsylvania.
The PSAI included some of the panel’s observations in its April/May newsletter, offering some surprising statistics regarding how pricing tactics impact a portable sanitation company’s profitability. They warned against entering a price war with a desperate competitor, and explained the perils of price cuts made without first understanding your precise cost of service.
To illustrate the point, the PSAI gave pricing examples based on a contractor who wants to maintain a 20 percent profit margin. According to the group, a contractor who offers a modest 5 percent discount will have to increase work volume by 33 percent to maintain that profit level. Cut prices by 10 percent across the board and you’ll have to boost volume by 100 percent to maintain profit. The greater the discount, the deeper the revenue hole you’ll have to crawl out of.
RAISING PRICES
Just like the big negative impact price cuts can have, modest price increases can help blunt the impact of falling revenue in a poor economy. While it may seem counter-intuitive to raise prices in a challenging business climate, the concept offers some benefits. A 3 percent price increase can provide the same 20 percent profit on 90 percent of your sales volume, according to the PSAI figures. A 5 percent increase provides the same profit on 83.5 percent of volume. A 10 percent increase provides the same profit on 71.5 percent of volume, and so on.
Determining what it takes to be profitable is simple in theory, but a little more complicated in practice. So the PSAI has written a Cost of Service Breakdown Worksheet and makes it available to both member and non-member companies. Following the worksheet, you can determine your cost of doing business — down to the penny if you’d like — and then know if what you’re charging is adequate.
The truck, the driver and the portable restroom unit expenses are laid out in detail. Truck expenses include licensing, fees, insurance and inspection, fuel and oil, repairs and maintenance of all components, lease or purchase payments, waste disposal and equipment depreciation.
Driver expenses include wages and benefits, all required employment taxes, unemployment insurance and miscellaneous items like uniforms, gloves, safety equipment and fees for employee training.
For units, you need to figure in purchase or lease, repairs and maintenance, cleaning supplies, depreciation.
For more details on the pricing statistics or to obtain copies of the cost of service worksheets, contact the trade group at www.psai.org.
THE LESSON LEARNED
So don’t be like would-be paper industry titan Michael Scott, who stared in disbelief when his accountant explained he was losing more money with every low-ball sale. And don’t lose sight of the reason you started a business in the first place … to make money.
