In the two previous issues, we have explored a few maxims that affect contractor pricing. (To read the February 2007 and March 2007 issues, visit the PMmag.com archives. Free registration is required.) As you begin to understand how these maxims affect your business, you will discover that “the going rate” is just a myth. Don’t let the myth of the going rate keep you from earning the profits you deserve. Here’s a quick recap:
1. If you don’t know your costs, you can’t know your
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.
5. Consumers will complain about the price, no matter how low it is, if they feel they have no choice.
6. There can only be one cheapest contractor in town.
7. The higher your price, the higher your value hurdle.
8. Customers don’t care about your overhead.
9. In business, the goal is not just to survive, but
10. Profits are a sign of a healthy business.
11. What your peers think about your price just doesn’t matter.
12. You have a right to go into business. You also have a right to jump out of an airplane.
To be sure, there is a point at which your customers will rebel, but vast numbers of PHC contractors don’t even come close to that price point. On the other hand, there are a few contractors who decide what they want to accomplish with their businesses, then figure out how much to charge for their services. They’re not settling for a lifestyle of scrounging for nuts and berries in the wilderness because they want to thrive and flourish - providing excellent careers for their employees as well as themselves.
Pricing isn’t the only key to flourishing, but you’re guaranteed not to thrive if you don’t charge a profitable price.
Profits Mean Health: When business people set their sights on building a thriving, prosperous enterprise, one measurement stands head-and-shoulders above all and that’s profits. Paying the bills and having a little left over is a sign of a profitable business, but it’s not exactly a hallmark of a thriving business. There are many elements involved in producing a profit, proper pricing being just one of them.
But don’t be surprised if your actual profit falls short of your desired profit margin. It’s just too easy to have an unexpected expense or inefficiency in your operation, and these surprises will devour your margins in a hurry. Keep these surprises in mind when pricing your services. Work on efficiency in order to reduce costs but remember that increasing sales can improve your profits.
The simplest way to improve sales is to increase your profit goals. The higher your profit goals, and the closer you come to meeting them, the higher your profits. The more profitable your company, the more it thrives.
Listen To Your Customers: As your prices climb higher, you may find your peers in the business will start classifying you according to their pricing standards. At first, you might be “a little higher than the going rate.” At some point, you may find your company being the highest priced shop in town. If you’re dynamically managing your pricing, there comes a point where the local trade gaggle will label you as a shyster and price gouger.
Before you pay too much attention to your local clutch of naysayers, ask yourself one important question: How much money do these malcontents spend with my company? Your peers may have an opinion about your pricing, but it’s your customers who have the last word, if you know how to listen to them.
Remember maxim No. 5: Consumers will complain about the price, no matter how low it is. It is quite possible that you’ll hear more price complaints as your prices climb (if you don’t hear an occasional price complaint, then you’re priced far to low).
But it’s not what your customers say that alerts you to the price ceiling. Your customers tell you about the value they’re receiving by whether or not they buy from you. Pay attention to the close rate of your crew to understand this language.
Communication is a two-way activity, so in order to know if you’re hearing the right message, you must first make sure your crew is doing its part in the communication process. Your crew provides a face for your company, so if they’re not convinced that you offer a good value, then it’s likely your customers will get the same impression. Make sure your crew understands the value of your company and how to present that value.
Then, watch your close rates and adjust pricing accordingly. If your close rate is steady, and within your budgeted projections, then try a higher price on for size. If the close rate continues to hold steady, bump it up some more. Your goal: Find the sweet spot of pricing, which is the highest price you can charge while customers continue to see the value of your company.
Is dynamic pricing greedy? It most certainly is, if you’re a greedy person with greedy motives. The same could be said for stripping away service and value just to save a few bucks. But if you’re a businessperson trying to build the most value in your company and a brighter future for yourself and your employees, then your quest for the sweet spot of pricing for higher profitability will never end. Pricing is an important tool to use in that quest, so use it.
No One Forces You To Price For Profit: It’s your right to be in business. You also have a right to jump out of an airplane. No one forces you to use a parachute; it’s your choice. Regardless of the sky jumper’s motivation, preparation and training, the law of gravity will have its say in the outcome. Proper execution determines whether you get to jump again.
In business, there are no civil laws forcing you to earn a profit, so you can price your services any way you choose. Regardless of motivation, preparation and training, the laws of economics will have their say in the outcome. Proper execution, including pricing for profit, determines how long you get to stay in business and how prosperous you’ll be.
It’s your choice.