One of the first questions towers ask is: How much should I charge?
You’re in business to make money and you don’t do that by working for nothing. The first thing you’ve got to be sure of is that your lights stay on and the trucks stay running- Anyone with a pulse can do that.
But you want to make a profit.
One method of setting your rates is to start by determining these four things:
- Exactly what it costs to be in business
- Exactly what it costs to run a call
- What amount of profit you’re looking for
- And what the market will bear.
Now when I say (determine what it costs to be in business) many only tally up what it costs for insurance, fuel, utilities, and other monthly expenses but they leave out a lot of important stuff. You wouldn’t want to exclude truck repairs from your expense column- but it’s commonly left out due to its sporadic and unpredictable nature. Also- damages, licenses, legal expenses, taxes, and accounting expenses are often forgotten- because they’re not felt monthly. In order to get an accurate cost of doing business you need to take into account every dime you spend.
The best way to track your overhead is to have a dedicated and separate account for business and use some sort of accounting software that you update daily. It may sound like another job entirely- but it’s an important factor in getting your rates right- and making a profit.
One of the biggest mistakes I see towers make is not including their truck mortgage as an expense.
I get it, I understand that when you pay your note down it slowly moves your truck, more fully, into the asset column. And yes your accountant depreciates it at the end of the year, decreasing your taxable income. But for the purposes of determining what your rates should be you should definitely consider your truck note an expense.
A couple of things to consider: If you’re just starting out you won’t have a lot of customers which means your cost per call will be too high to be competitive. So you’ll need to start with an imaginary number, a guess of the number of calls you expect to run on a regular basis–This will help get you close to your cost per call. And even if your plan isn’t to hire employees in the future…error on the side of caution, and figure in an hourly employee expense with payroll taxes added- so you don’t short yourself.
Start by adding all the costs associated with being in business (overhead) for the year– Below is an example of expenses for the towing industry:
- Supplies & Parts
- Office Supplies
- Tires/batteries/ lights etc.
- Garage Keepers Insurance
- On-Hook Insurance
- Bank Service Charges
- Credit Card Fees
- Legal & Accounting
- Radio Services
- Truck Note
- Uniform Cleaning
Total these costs- this is your overhead, what it costs to be in business.
Then take the number of calls you run on an annual basis and divide your overhead by that number:
(Example: If overhead= $150,000 divide that number by the annual number of calls 10,000=$15) This is your average overhead cost per call
Next determine how much it costs to run those calls. These are the operating expenses, expenses that are directly effected when servicing your customers.
These are Labor and Fuel.
So as to continue with our example let’s assume that the annual fuel expense is $70,000 and annual labor cost, including dispatching and payroll taxes is $200,000. We’ll add those together and get $270,000.
(Example:$270,000 divided by the annual number of calls 10,000= $27) This is what it costs, on average, to run a call
With these 2 numbers in hand you can begin to get an idea of what the minimum average charge per service should be. $15+$27=$42.
So, in our example, the break-even point is $42. The next step is deciding how much profit we need per call. If you’re running 10,000 calls per year- and spending $420,000 to do it- You’ll want to get a reasonable return. But don’t sell yourself short- the unexpected will happen and you’ll have expenses you didn’t count on. You want to be sure you can meet those needs when they arise.
(Example: 10,000 calls per year at $28 per call= $280,000) This is the amount of profit you expect to make annually
We now have all three numbers: $15 is the average overhead cost per call, $27 is the average operational cost per call, and $28 is the average profit per call. $15+$27+$28=$70
So, taking into consideration the above costs and the expected rate of return (the amount of desired profit) the average price per service should be $70.
But, if after doing all this, you then realize that the market will not bear what you’re asking. If you learn that customers fail to respond favorably to your rates because your competitors have priced you out of the market. You’ll then need to make some tough decisions. Decisions that may include down-sizing, refusing service to low-ball customers, changing your employee compensation strategy, using a different type of truck- or many other money saving moves that will allow you to be more competitive.
The best position to be in is to be able to do all this well before you become encumbered with unnecessary expenses and overloaded with too much truck debt.