Carving Out More Profit
The only numbers that really count in your business is the profit you get to keep. All the other computations help you make decisions to reach that goal. I have reduced the concept of increasing profitability to three fundamental actions that can directly affect the amount of profit you keep:
- raise prices;
- cut overhead expenses; and
- generate more business.
There’s no doubt many of you can think of several techniques in addition to the ones I mentioned, or complementary actions that will also boost your profits. However, I would like to limit my discussion of these three, the ones I believe to be the most fundamental. Besides you can’t try a dozen different techniques in your business at once. Simple, serious changes that you are committed to making produce the best results.
In fact, I consider these three actions so important I am going to review only one of them for this column and address the other two separately in upcoming columns.
Look At Your Prices Now: Although it’s probably the least popular method of increasing the bottom line in your financial statements, particularly among seasoned business owners, I am going to begin by discussing when and how to raise prices. Your suppliers have raised theirs; labor has gone up; materials are up; truck costs have risen; and, most likely, even your competitors have raised their prices. What about you?
Most owners feel they should be getting more for what they do, and wish they did. They are the ones taking the risks; they took years to build the business and their reputation. It’s time they received a return on their investment of time, money and work. So why do many business owners hesitate and worry so much about raising prices?
It seems that after you are in business for many years, you get to know your customers — and who they are and what they want. I felt this way. So when some stranger to your business or your community suggests upsetting your level of comfort with the prices you charge, it’s easy to be defensive. It’s based on emotion, fear and a little bit of complacency.
I can reduce your resistance to a price change if I share my criteria for when and how to change your pricing. A candid chat with your accountant regarding your margins, cost structure and recent changes, and the return on your business investment will help get your attention. If after reviewing the data I suggest, you still believe your prices are at the top of the market, then I commend you and urge you to be ready to address our next step (coming next month), cutting costs.
When To Hike Prices: At the risk of not being taken seriously, I would say the time to raise prices is now — without even looking at your business. I believe my assertion would be true in at least half of the service and repair businesses out there. But let me give you some more specific data to use to support my conclusion so it makes more sense to you.
The amount you charge depends on the demand for your services. If your company is known as the best, service company in the area, demand for your service work will be high. Unfortunately, the reverse is also true: If your company has many complaints about quality, poor customer service and slow response times to customer service appointments, demand will suffer.
A simple comparison to another business can help you understand pricing. For example, if an apartment building is always full of tenants and has a waiting list that would fill the units for years to come, what do you think the owners do? Right, they raise the rent. Do they raise the rent so high their vacancy rate is 50 percent? Probably not. The exact balance of vacancy and higher rent is a decision they must make after some calculations to determine their maximum profit overall.
In the service business, we have indicators that help us determine what the balance of price and demand is for our services, too. They can help us decide when and how much to raise prices. I use these indicators to make my pricing decisions.
One guideline is the volume of price complaints. We don’t get very many, but it is interesting to track that data. Since we survey our customers for their opinion of our work we have a significant amount of feedback from them regarding our service quality, timely dispatching of service technicians and, the most relevant here, their opinion of our prices. Of course, some customers are going to complain no matter what the prices are. However, I have established a threshold level that tells me it’s time to raise prices.
For our community and business, the point I have noticed that indicates our prices are too low occurs when our price complaints drop to less than 1.5 percent. If fewer than that number of the customer survey cards that we receive list prices as “too high” then we know that demand for our services is high and our prices are too low. So we raise prices.
Another key indicator for raising prices is the date of your last increase. The hesitancy to raise prices sometimes keeps us from looking at how long it has been since our last price increase. I have seen businesses that have gone for as long as five years with no increase.
Compare your last price increase from suppliers, truck maintenance expenses or labor costs with your last price increase to your customers. You may be disappointed that everyone else has raised their prices, possibly more than once, since you have raised yours. That doesn’t mean that we pass along every price increase on every small part by raising our rates or material costs every week. Though it is worth examining the date and amounts of our prior price increases.
The Easy Way: Wouldn’t it be nice if you could raise prices but the customers couldn’t tell? All those fears and dilemmas dealing with customer reactions to price increases would disappear. I have been able to do just that. It’s easy. All you need to do is to switch to flat rate pricing.
When you raise prices with time and materials pricing, you practically announce it to your customers because you state an hourly labor rate and a material price. They can easily determine what it was last time and compare — and object. Then you (your technician gets the brunt of this) must explain the why’s and how’s of price increases, and how business costs have gone up and, no, you don’t really get $95 per hour, some goes to overhead, etc. It’s an invitation for a confrontation with a customer, resulting in a negative experience, for both the customer and the technician. No wonder you don’t want to raise prices! Who wants the trouble?
Instead of the hassles of T&M pricing, especially when you need to raise prices, switch to flat rate pricing.
Every day you stick with your current prices you are missing the revenue you would receive from an increase. Use the criteria I suggested and take a close look at your prices. Increase your revenues the easy way — with flat rate pricing.