I remember a few years back, before I started in social media and blogging, I was very active in some AV industry chats and forums. One of those forums used to ask questions of established industry veterans about industry practices and standards. As you may imagine, there were sometimes few responses, as it seems that some in our industry see helping others as potentially threatening to their own business. However, there were a handful of integrators always willing to share their experiences to help newer companies avoid some of the pitfalls they encountered along the way.
One question that inevitably came up, was as an AV integrator, what should I charge? Of course the follow up to that was “do you mean for equipment or for labor?” Many times they wanted to know both. I know at many of the firms I have worked at, there were standard labor rates depending on the type of work. Basic cabling may be $60-$75 per hour, whereas interconnecting components may bring $100-$125 and hour, and programming between $150 and $200. Then in high end niche AV work, I saw day rates of $2,000 per day for programmers and PMs at times. So the question is, are these rates in line with what firms should be charging for work? The answer is that it depends. In fact, I think a main issue with many smaller integrators is that sometimes they don’t know if they are making money on a job at all. Everything is bid to show a profit, but at the end of the year, the business made hardly any money. How is that?
Forget the phrase “Fixed Costs Go To Zero.”
If you took microeconomics at any point in time, you may remember the phrase “Fixed Costs Go To Zero.” If you are a smaller integrator, forget you ever heard that. The theory is true, if your business has a fixed cost to operate, as you sell more and more services, the those costs are averaged across the number of jobs you do — meaning if you did a high volume of work, those fixed costs are virtually $0 per job. However, at low volume, fixed costs are REAL and not $0 at all.
Fixed costs make a difference.
Lets say you have a small integration business. As the owner you do all the sales and you PM all of your own jobs, and for that you pay yourself $75,000 per year, a modest salary for a business owner. You have an admin who makes a small wage of $12 an hour as well. You have a small office/warehouse that costs you about $830 month, one truck for installation work, and then normal insurance, licenses, utilities, etc.
As a small company, you do jobs that average around $6,500 and can be completed with two techs in about a day. That’s $5,000 in hardware, $1,200 in labor (16 hours of install at $75 an hour), and $300 for a couple hours of PM to get the crew started in the AM, and do the client handover at the end of the day.
You average 12 of these jobs a month and you do a little under $1,000,000 in revenue per year. By all accounts, you should be doing pretty well. I mean you’re taking about 22 percent margin on the hardware, and charging $75 an hour for techs that cost you about $32.50 ($25 and hour plus benefits/fringe). That should be netting you 32 percent blended margin on these projects and generating over $300,000 for the business right? Not quite, as your fixed costs come back into play. About $160,000 per year, or half of that “profit” you estimated when bidding the job. That brings your margins down to about 15 percent, and we haven’t let the tax man take his piece yet. How much do you think is left?
Now, take into account that many times this same owner matches online hardware pricing and takes 10 points on hardware, or doesn’t charge the client for his 2 hours of PM time at $150 an hour like he should. You do both of those things and your bid will still say you’re making 18 percent “profit” but in reality, with your fixed costs in play, your business just lost $18,000 for the year! (At least you don’t owe any taxes though, huh?)
So what is an integrator to do?
Sell products at higher margins. This is the least viable, and the old school of thought, but in the era of Amazon, good luck with trying to make a ton more on hardware.
Reduce costs. You could move out of the office and work from your home and truck, or ditch the administrative assistant (poor soul), and try to handle all phone calls, ordering, AR and AP on your own. This is a knee jerk reaction many integrators fall into, but it makes maintaining the business hard and growing it near impossible. Viable but may not work the way you hope.
Move upstream. Doubling the job size to $10,000 in hardware would nearly triple your profit dollars and bring your margins up about 5 points as well. This may mean new sales strategies or manufacturer relationships as well. It’s not an easy task but a viable option.
Charge more by justifying the premium with a reputation for quality and service that justifies the cost. This is a very viable option for negotiated work as opposed to RFP/RFQ bid responses, as in those situations quality of service can be low on the totem pole, if it is considered at all. For a small integrator doing referral and repeat business, this is a viable option.
Do more of the same small jobs. If you add a sales person and a truck, you add a little to your fixed costs in salary, lease payments and insurances, but doing 24 jobs instead of 12 every month would triple your profit dollars and add 8.5 points to your margins. (Remember you only pay techs when they are on site, so they are not a fixed cost). This takes some work and is viable, given you are willing to invest in the initial additional fixed costs to get there.
Sell monthly support services. Security companies charge clients $35 plus every month for monitoring services that cost them $5-10 per month. It doesn’t matter whether you make that $25 through security monitoring, AV system maintenance, remote system monitoring, etc. If you apply that $25 per month to your 144 clients for a whole year, that’s a quick $3,600 per month in recurring monthly revenue. That adds $43k to your year end profit, but also offsets those monthly fixed costs on a month where things may be slow so you can still keep the lights on and make payroll (both important things). This is what most smart and profitable integrators are doing today in the face of lower product margins.
Be more efficient. Use better wire crimping tools, better TV and projector mounts, more reliable HDMI cables, etc that keep your technicians moving forward and not coming back to troubleshoot work. Every hour they spend mitigating problems due to using sub standard, “value engineered” products costs you profit dollars that you can’t recoup in the end. It is fairly easy though to bid the better products up front and maintain product margins at the sales phase.
Stop giving things away!!!! Matching Best Buy or Amazon and giving away your time to PM jobs at no charge is just bad business. Stop doing it. It is fine every once in a while, if you have a reason to believe it will pay dividends, but most times the guy beating you up on price and demanding you be there at 8 p.m. at night at no charge is never going to hire you again. He doesn’t value your services because he expects them for free and he will expect the same if you do make the mistake of working with him again. This can stop some immediate bleeding and give you more peace of mind as you start to fire clients before they hire you in the future. Sell what’s in your head… sounds familiar… hmmm. (Click here to see why.)
At the end of the day, integrators need to look at what it costs every day to keep the doors open, and select a business strategy that addresses the fixed costs up front. They should be looking at the profit in every potential job and be asking, “Does that cover all of my costs for the amount of days that this job will take to complete and still allow the business to make money?”