Continuing the quest for the ‘sweet spot’ of pricing.

Last month, we began exploring a series of maxims - business truths you can count on. Our quest: the “right price.” We begin the pricing process with a budgeted cost based upon the true cost of being in business. If you don’t know your cost of production, you can’t know whether you’re pricing for profit. Then, we touched on the floor-to-ceiling window of the right price and how most contractors settle for the floor instead of reaching to the ceiling. And the biggest reason we don’t get the best price? We just don’t ask for it.
    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.
‘Randall’s Maxim’s For Profitable Pricing’ Part Two:This month, we continue our quest for the right price. That sweet spot is the most profitable price we can charge and still have a customer satisfied with the value of the transaction.

This month’s maxims are:

    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.
There are many reasons to settle for a floor-level price when we could be reaching for the ceiling. For service professionals, one of the toughest hurdles is simply distaste for rejection. We’re the experts when it comes to diagnosing and solving problems, so we expect our customer to take our advice. Most of our craft can be boiled down to “if then” logic: If the thermostat isn’t calling for heat when it’s supposed to, then change it out. If a pipe is rotten, replace it.

But when we come to a topic like selling price, which is a bit more subjective, we tend to take the defensive.

By complaining about the price, is the customer questioning our integrity? If he or she has been watching you, stopwatch in hand, as you traipse back and forth to the truck, then yes, your integrity is being questioned. The customer believes he is paying for time and wants to get every minute’s worth.

However, it’s more likely that your customer is making a complaint about your price simply because he is doing what he has been conditioned to do. For example, if we show up with all the professionalism of a flea market huckster - wearing a T-shirt and gimme cap for a uniform, invoices and a rubber stamp from the office supply for paperwork - then why wouldn’t a customer expect to haggle over the price? Our presentation demonstrates that we’re lackadaisical toward our business practices, so our customer responds accordingly.

You don’t hear flea market shoppers bragging about how they paid “full price” at the flea market.

This is what maxim No. 5 is all about. A professional presentation with sharp uniforms and trucks, a system for proceeding through the service call and maybe even a preprinted price list of services all tell your customer that you’re serious about business, making it more likely that they’ll go along with your pricing.

But they may still complain about the price. Does that mean you should just keep the price low to prevent whining? Let’s get back to the whole purpose for our being on the job. We’re there because our customer had a problem and needed some help. We solved the problem and will stand behind our workmanship so that our customer won’t have to deal with the problem again. And now he’s upset with the price.

Who wouldn’t be? A service call is usually an unwanted, unexpected expense. Even if you can figure out how to perform professional service for free, you’re still likely to hear a complaint about the inconvenience of dealing with the problem. This is just human nature.

You might think a surefire way to deflect price complaints is to offer the lowest price of any shop in town. The complaints will still be there but as the cheapest, all you have to do is shrug and say, “Take it or leave it.” Knowing that no one else can touch your price is a pretty powerful position to be in. Powerful, that is, until someone else comes along who shaves just a bit more off the price.

And so we come to maxim No. 6: There’s only room for one lowest price and there’s a never-ending supply of upstarts who think that lowest price is their pathway to success. But there are problems at the bottom of the barrel.

To begin with, there are very few contractors who have built an operation so efficient that they can legitimately charge a low price yet fund programs that are necessary for the future of their business. Does your low-priced competition offer employee training and benefits? Do they even have the proper insurance? Or do they simply play a shell game with the Department of Labor, hoping that their employees will qualify as subcontractors who are responsible for their own Social Security taxes, workers’ compensation insurance and other costs?

The low-priced competition you have to deal with is most likely pricing below legitimate costs. Trying to play that game simply means your company, at best, will survive. Survival is not fun.

There are plenty of customers for survival-mode contractors - customers who don’t care how long it takes to get service; are willing to accept minimal warranties; and don’t mind talking to answering machines. But if your goal is to thrive, instead of merely survive, leave the survivors to take care of the bottom tier of customers. Instead, seek to serve customers who desire more value.

Prove Your Value: Customers who appreciate dependability, long-term relationships, rapid service and other amenities are more willing to pay for the extra service. They may still complain about the pricing but remember, that’s what customers do. The more valuable you become, the higher price you can command. But there is a maxim that will work against you: The higher your price, the higher your value hurdle. If you raise your pric-ing, yet offer survival-level service, you’ll be answering price complaints on a daily basis.

Admittedly, there are some markets where contractors can practice this style of operation because they have a never-ending supply of new customers. But if you care about your reputation, pump some value into your service and make it worth the price.

Pumping value into your service will most likely result in higher overhead. But overhead has a tendency to bloat in areas that don’t necessarily add to value. Keeping family members on the payroll can pump up your overhead without the benefit of adding value to your customer. The last maxim says that the more dead weight you add to your overhead, the more difficult it is to prove your value to your customer.

Here’s a simple test for every expenditure: Describe to someone else how a particular item is going to benefit your customer. The more convoluted your explanation, the less likely it will convert to value for your customer.

Investments in your employee training and morale can directly translate to customer value. Satisfied employees tend to produce satisfied customers. Well-trained employees may be more efficient, thereby reducing overhead, or they may present themselves as more competent, improving customer satisfaction. Either way, the overhead dollars spent on training can easily improve the value of your services, even though this drives the price up.

By now, you’re probably scratching your head, wondering why we still haven’t calculated the “right price.” Next month, we’ll wrap up with markup, the importance of profits and how to know when you have the right price.