Asking Questions Online is Great but…be Careful of the Source

I am as guilty as the next person when it comes to spending time in online forums.  I love looking at the questions asked and often laugh out loud at the answers given and how sure some of the respondents are, because their answers are so far from what I know to be right.  I sometimes believe that we have the uneducated and uninformed speaking the loudest and leading the questioner down the wrong path.

I know that I should be answering more questions and spending more time fighting the good fight, but I really don’t believe that asking just anybody online about important business questions brings the best solutions from those most qualified.

I believe that my hesitation to answer online questions comes from my wariness over the criticism heaped on anyone who doesn’t agree with the trolls, as well as the wasted time writing an answer for someone who won’t appreciate all the education, experience, and time that went into it.

Photo by Sergey Zolkin on Unsplash

For example, someone recently asked how to set their labor rate.  Many answered that the best way to do so is to call around and see what their competitors are set at and be neither higher nor lower.  So, the advice is to set your labor rate off businesses that you do not know are profitable or successful.  Just because they have been around a long time, look busy, have their own podcast, or do regular postings, doesn’t mean that they are profitable or successful. 

The best answer to the pricing question is to understand the costs of your business, what you pay your technicians (or yourself) loaded (with all labor expenses included) and set your labor rate so that what you are paying your techs is 38% or less of what you are charging (your effective labor rate).  Which means you must understand the numbers for your business and what they are before you can determine the correct labor rate(s).

Working that backward, you look at your highest-paid technician, add in a load of 25% to 30% (for FICA, FUTA, Workers comp, PTO, Medical/Dental, etc) then divide this by 38%.  Then, I would add a productivity calculation.  If the tech is 75% productive (does 6 hours of billable labor in an 8-hour day) I would then divide the number by 75%.  This will give you the amount your effective labor rate should be to maintain a 62% gross profit on labor.

I.E. 

$36 is top tech pay and load is 30%

$36 X 1.3 = $46.80,  $46.80 /.38 = $123.16,

then for Productivity $123.16 /.75 = $164.21

$164.21 is the effective labor rate you need to be charging with a cost of $36,

a load of 30%, and productivity of 75% to maintain a 62% labor margin.

If you are 100% productive (8 hrs invoiced for 8 hrs of pay) you can charge

$123.16 effectively and maintain your labor margins.

This might be a far cry from what you are told by people in online forums who believe they know the right way to calculate labor rate but don’t.  And, if you set your price lower it could cost you thousands of labor dollars per year.

Please vet your information before you make decisions that could cost you tens of thousands of dollars per year.