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Thursday, June 07, 2007

The Cost of Services

Talking about someone else's pay is not in my comfort zone. However, when I see independent contractors (IC) and independent retailers (IR) hurting and hear the subject of their cost-of-service I think both need to review their prices. Otherwise, both will continue to cut themselves out of much bigger markets. There are no state or government agencies or laws which can force a change. It must come from the individuals involved. Although my references are to apparel the principal of these observations with recommendations on cost of services have broader application across other areas where Service Providers and Service Recipients conduct business.

The Independent Contractor Service Provider Model

Independent contractors, as Service Providers, tend to structure their service rate on an hourly pay schedule. Often, this rate is based on the top hourly pay he/she received after many years in the industry. A little extra something is added to round it off at about $20. As an example, a 2.5 hour apparel job is priced for the IR at $50. It is a lack of understanding of the resale business on the part of the IC to think the IR can move merchandise on the IR's floor priced far beyond a competitive price and earn a profit. The IR would need to resale the item at a minimum of $51 to regain their $50 plus $1 profit. This is not realistic. ICs overlook the IR's overhead costs (rent, electricity) as part of the reason for the IR's markup. Yes, IC's pay rent too, but more on that later.

Typically, IC fabric purchase prices, for example, are neither bulk nor wholesale. The IC service rate problem is that it comes from an employee experience versus the at-home entreprenuerial environment. They are not the same, for example, the apparel employee who earns $10/hr versus the entrepreneur who charges $10 for a single apparel item. The employee is obligated and commited to an 8 to 5 workday with all the behaviorial expectations including a set break time, lunch, productivity and more. The at-home entrepreneur has nobody to tell him/her how many times he/she steps away from that apparel project to run to the refrigerator, play with their child, visit a friend, talk on the phone, watch TV or run to McDonalds'. The IC knows when the IR expects delivery.

If the IC can do it in 2 hours, but chooses to stretch it out to 8 hours that is the IC's business and nobody else's, this is, to borrow from the popular Mastercard commercial, "priceless".

The Independent Retailer Service Recipient Model

Despite the fact of the independent retailers small size they are treated by merchandisers like major buyers in their apparel purchase. This treatment creates a financial burden large amounts of cash are tied up in inventory. Also, a physical burden is created because of the space these bulk purchases take up in their small boutiques. I believe this treatment and financial burden affects the IR treatment and compensation of ICs for their services. The IR's payment as Service Recipient is based on, or biased, by the bulk low prices they pay merchandisers. That is, the low bulk price they pay the merchandiser is reflected in what they pay for the IC's cost of service.

The IR service rate problem is that IRs often come from the employer experience and tend to regard the IC as an employee. The reality is ICs are on par with IRs from an entreprenuerial perspective, that is, ICs are business people just like IRs. The types of places of business
location, one earns their livelihood in a boutique, another earns their's in their home makes no difference on business status. Terms of compensation for cost of service should be discussed and agreed upon by two people, not one. The relationship between IC and IR is strengthened by mutual respect. Quality of timely delivery of goods and just compensation for services rendered is the best evidence of that mutual respect, because as noted earlier, ICs pay rent, too.

A Competitive Scenario Model

It does not matter how big the competition there is always a way to compete profitably. Is it possible for ICs and IRs to compete against the giant retailers' $10 price tag for a single apparel item? Yes, IF they work together.

That low $10 price cannot hide the retailer's enormous overhead costs including, business insurance, employee benefits, electricity, water, rent and more. Still, that's the magic number ICs and IRs must and can beat because they do not have all these costs. Once the IC gets past the initial setup time involving patterns its up to him/her how fast and many times they replicate a single apparel item to beat the retailers $10 price.
However, if the IC decides to sell to the IR at the $10 price, how can the IC expect the IR to stay competitive and profitable?

Independent Retailers, for your part, if you receive the IC's apparel goods at half the $10 price tag do you resale to match the competition or markup in excess of the $10.

If you markup in excess of the $10 price would you do so as well in how you compensate your IC, that is, your Service Provider?

The biggest retailers and suppliers know they have got to work together on price and delivery if they are to survive, thrive, stay competitive
and be profitable.

This is just as true of the smallest Independent Contractor and Independent Retailer when they network together are to survive, thrive, stay competitive and be profitable.

Do you network?

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