Pricing For Survival
Computerized pricing software can make your business more money, allow you to treat your customers more fairly and give you more free time to do what you love.
Don’t believe me? Let’s take the example of a fictitious shop, Joe’s Plumbing and Heating. Joe’s what I call a “treadmill” contractor. Here’s why:
Joe’s accountant tells him his overhead runs about 20 percent. Joe wants to make a modest profit of 10 percent on top of his overhead. So Joe sells a faucet that costs $100 and marks it up 30 percent figuring this will get him his 10 percent. In other words, the sell price will be $100 x 1.3 = $130.
The problem is that Joe’s overhead is 20 percent of what he sells that faucet for. In other words, that’s $130 x 0.20 = $26. To figure out what Joe really makes on this faucet, you subtract the overhead from the selling price - a whopping 4 bucks!
The problem is compounded by the fact that Joe doesn’t use pricing software, so he can’t easily track the cost of the faucet. Next month, the price of the faucet goes up to $105. Joe doesn’t notice the change, so he starts losing $1 every time he sells that faucet. The truth is, he’ll probably be using the same price next year because he’s so busy running in one place.
I’d like to share some of the reasons contractors tell me why they don’t need pricing software. If you’ve been in the pricing software business as long as I have, you’ve heard ’em all. Eventually, I get a lot of postcards returned with “No such person, address unknown.” Read on and see if you recognize any of these treadmill types like our buddy Joe:
Wagers use a form of pricing better known as the “wild ass guess,” and they come up with such nice round numbers when they quote a job. The only people they are fooling are themselves. If their customers are sure they’re getting a hell of a deal, they’ll accept the price. Otherwise, they’ll question the price and try to beat it down.
Wagers will probably settle on a lower price because they haven’t got a clue whether they’ll make money on the deal. They only see the number of jobs they’ve got signed up as a measure of their success! Wouldn’t you rather work on one job at a fair profit than 10 jobs where you lost money?
Laggers create a pricing model and figure it’s done until next year. When you buy a razor, the blade stays sharp for life, right? We all know that if you shave with an old blade, it’s going to hurt, so we replace the blade when it gets dull.
It’s the same with prices if you want to keep your business on the cutting edge. Let’s say materials prices have increased 5 percent to 7 percent across the board. That means if you buy $100,000 worth of materials per year and you charge the same amount for an item next year, you’ll be taking $5,000 to $7,000 out of your own pocket and handing it to your customers.
How many jobs did you bid last year that you’re working on this year? What about that great flat-rate book you printed up last year? Still using old prices because it’s just too much trouble to change them? Pricing software updates the prices automatically to maintain your profit margin. Compare the money you risk losing against the cost of the software and price updates, and I think you'll see which is a better strategy.
Gaggers try to create prices using recommended business standards (profit percentage method) and they choke when they try to present them to their customers.
These guys allow their customers to set their prices! When was the last time you went to the grocery store and the grocer lowered his price for hamburger because he thought you were being charged too much?
Allowing customers to dictate how much you can charge is a sure way to put your business on the treadmill and keep it there. Gaggers must accept that they must sell customers on the value of their products and services.
Your business requires a certain minimum profit in order to keep the doors open and it is your responsibility to build that profit into what you sell. Pricing software allows you to set a reasonable selling price that incorporates the true cost of doing business. My advice: Don’t allow these customers to drag you down; ignore them and move on.
How It HelpsPricing software starts with a giant price book that is maintained in your computer. This price book has thousands of items in it. The prices of these items are all maintained automatically by subscription. These prices can then be used in estimates, invoices and flat-rate books to develop the price you charge your customer.
This is exactly the same thing you do whether you use a paper price book or ask your supply house to quote the prices. Pricing software just makes it faster and more convenient to develop selling prices that you won’t end up losing money on. Without it, you’ll risk putting your business on the treadmill - convinced you’re making progress but really just staying even.
How can pricing software help? By enforcing a fair and consistent method of pricing that doesn’t shortchange your business. Let’s see what happens when we put it into practice for Treadmill Joe:
First, we’ll put Joe on the right track by creating sell prices that keep him in the black by using the profit percentage method. Frankly, you don’t need pricing software to do this; it’s just a lot easier to do with it!
So let’s take Joe’s goal of making 10 percent over and above his overhead. Using the profit percentage method, Joe divides the cost of the item ($100) by 0.7 (this is the reciprocal of the profit percentage) and he ends up with a sell price of $142.86. Joe is thinking, “That’s a straight markup of 43 percent! I have to mark up that much to make 10 percent?”
Well, numbers don’t lie, my friend, unless you sell mortgage-backed securities. The truth is that many tradespeople still use straight markups, thinking they’ll make $30 on that faucet, but end up with just $4. That keeps them on the treadmill, running as fast as they can and never getting ahead.
Next month, the price of the faucet goes up to $105. Rather than simply absorbing the price increase, Joe’s pricing software uses the new price of the faucet. Since the prices are maintained by subscription, it automatically calculates a new selling price ($150) based on the 30 percent profit percentage Joe set up in his software. As you can see, pricing software keeps Joe’s business profitable and maintains a consistent pricing strategy that also treats his customer fairly.
Pricing software really can keep your business in the black, allow you to treat your customers more fairly, and give you more free time to do what you love. Or you can get on the treadmill with the Wagers, Laggers and Gaggers.