Tips for finding that ‘sweet spot’ for your company.

As a purveyor of upfront pricing books, I am regularly involved in helping PHC contractors find the right selling price for their services. Typically, my client begins with a question like, “Do you know the going rate for my market?” To which I respond with something like, “We calculate your pricing according to the needs of your company.”

The “going rate” has very little to do with your business goals - unless it’s your goal to live a hand-to-mouth existence, never getting far enough ahead that you can someday turn loose of the reins and enjoy the fruits of your labor.

If you’ve read this column very much at all, you know that proper pricing begins with a grasp of your costs - all your costs. But knowing your cost of providing service is just the beginning. Finding the sweet spot of proper pricing also involves factors that are difficult to plot with a spreadsheet, so we’re going to spend a few columns in search of more profitable pricing for your company.

We’re going to begin with some maxims that I’ve unearthed over the years, and each month we’ll add a few so that by the end of this little series you’ll have a quick reference for getting the right price.

Randall's Maxims For Profitable Pricing: Part One

    1. If you don’t know your costs, you can’t know your profit.

    2. If you’re going to be in business, budget like a business.

    3. The value of a product or service is a window, not a peephole.

    4. The No. 1 reason customers don’t pay more for services is that contractors just don’t ask for it.

With these maxims in mind, let’s begin a search for the sweet spot of pricing. As axiom No. 1 implies, you must know that your budgeted costs are less than your selling price. The only way you can know what your budgeted costs are is to add them up. The more detailed your list of costs, the more accurate your cost picture will be. But the math is the easy part. Confronting the truth about your costs is where the real battle takes place.

When coaching my clients, I sense sweaty palms as they watch their true costs tally up to more than their current selling price. This is especially true when their budgets don’t already include line items like training, marketing, recruiting and retirement. Simply put: If you expect to spend money on something, it must be included in your budgeted cost or you will be devouring profits to pay for it.

By the way, have you noticed my use of the term “budgeted costs” rather than just “costs.” On countless occasions my clients will tell me things like, “We’re just starting out, working from home so I don’t have to pay any office rent.” Please tell me how “office rent” contributes to the value of a service? Is a 165,000 Btu furnace worth $500 more because you actually have a desk for your receptionist? Is a new toilet worth $200 more just because you don’t have employees milling around in your kitchen every morning?

If you’re going to be in business, budget like a business and make no apologies for it. The sooner you confront the truth of these business expenses, the sooner you can enjoy profits in your business. This is the heart of maxim No. 2.

If you know your budgeted costs, all you have to do is calculate your profit margin and zip bam bang, you have a selling price, right? Not quite. The value of a product or service is established when a willing buyer and a willing seller agree upon a price. Spreadsheets and pricing calculators are good at telling us where the pricing floor should be in this negotiation, but why should that stop us from searching for the ceiling? As our third maxim states, we’re not just aiming for a peephole. A fair price and an honest value can fall anywhere within that floor-to-ceiling window.

Ceiling? Most contractors don’t even get their pricing all the way up to where the floor should be, much less the ceiling. Finding the ceiling, the highest price they can command, is not even on their wish lists because they’re frantically trying to survive, rather than thrive. Which brings us to our fourth maxim: The No. 1 reason customers don’t pay more for services is that contractors simply don’t ask for it.

Ask And Ye Shall Receive: Service trades are notoriously under-valued, not so much by consumers but by the professionals who ply the trade. The free market is quite adept at determining how much it is willing to pay for a product or service but most contractors, probably even you, don’t give the market an opportunity to demonstrate what it will pay. Is rejection so painful that we should cower beneath the floor rather than ask for what we’re worth? I don’t think so.

eBay can teach us a little about market pricing. On a daily basis, eBay helps millions of willing buyers and willing sellers agree on the value of goods or services. The seller posts an item for sale and establishes the lowest price at which he’ll let the item go. If a lone bidder matches that price, the value of the item has been determined at that very moment. But what the seller doesn’t know is how much that lone bidder was willing to pay.

Here’s how it works: Let’s say a Chop-O-Matic fried egg peeler is offered. The seller wants at least $10 for the item so that’s the minimum acceptable bid. You’ve been searching far and wide for a fried egg peeler (they are extremely difficult to find), so when you discover it, you excitedly enter your maximum bid of $30. eBay’s system automatically posts your bid at the lowest possible price to still be the high bidder.

If no one else posts a bid, you get the fried egg peeler for $10. If someone else posts a bid of $15, your bid automatically becomes $16. You hope it won’t go all the way to $30 but you’ll still be satisfied with the purchase if it takes the full amount.

What this means is that the agreed-upon value of the fried egg peeler can be anywhere between $10, the lowest price the seller wants to get, and $30, the highest price you would want to pay. Is $11 a fair price? Yes. Is $29 a fair price? Yes. How do we know? Because both the buyer and seller agreed to the price. This is what we mean by the floor-to-ceiling window.

If the price offered was only $9 (below the floor), the seller wouldn’t sell. If the price was $31 or more (above the ceiling), then the buyer won’t buy. This is fair, even if all parties involved are disappointed because they didn’t get to make a transaction.

But let’s say the seller was also a typical PHC contractor during the day. This means he or she probably paid about $12.95 for the fried egg peeler in the first place. When they offered it for a minimum of $10, the market agreed that it was a decent value but the seller’s accountant is kicking him/her under the table because they’re losing money on a “fair” price. Is this you? Next month, we’ll reach for the ceiling and add a few more maxims to the list.