Charging lower rates in this economy won’t instantly translate into survival.

We’ve been experiencing an economic rollercoaster. Credit is tightening, unemployment is climbing, construction is declining; is it time to start thinking about survival? Will we have to cut jobs, lower prices or reduce service in order to stay in business? To figure out a strategy for the next couple of years, let’s examine a few points. Knowing how we got into this mess can help us pick a way through it. “It’s alltheirfault!” screams one batch of politicians as they point at the others. But once we get past the blame game, we find that our consumer mentality is, or near the core of, the issue. Credit cards made it very easy to respond to urgent desires without much thought of future consequences.

Real estate agents encouraged overspending with homes as an investment sales pitch. “Buy as much house as you can possibly qualify for because home values will go up and you’ll make a lot of money!” (This probably explains why, as a service pro, I would often visit huge homes with several rooms bare of furniture - after buying too many square feet, nothing was left for living in it.)

Now, to put it simply, our economy is slowing down to take a breather. Remember the last time you ran a lap around a track? If you sprinted too hard at the beginning, you had to walk it out toward the end. Running at the right pace would result in a better time without being totally exhausted. After our economy rests for a spell, it will get back on track, it always has. So the question becomes this: How do we get through this period in order to flourish on the other side?

Our economic “sprint” allowed some of us to get away with sloppy business practices. Sloppy won’t be good enough if we intend to survive or even flourish. We’ll have to sharpen our pencils, improve our efficiency and make sure every dime makes an impact. I fully expect some contractors will even be forced to lower their prices in order to stay busy. Yes, you read correctly - some contractors will have to lower their rates, which is something I have a hard time saying.

Here’s why rates may slip: Much of our economy runs on credit cards. As credit tightens, consumer purchasing power is reduced, which reduces the number of consumers with money to spend on our services. To exacerbate the problem, tradesmen and contractors idled by the construction bust will be searching for whatever work they can find, flooding the market with more supply. When more supply chases lower demand, prices must go down. It’s the basic law of economics. But charging lower rates won’t instantly translate into survival, so don’t embrace the idea until you’ve done your homework.

Homework Lesson No. 1 - Know Your Costs

Frank Blau began this column preaching “know your costs,” and that mantra continues to this day. If competition gets tough, you may be tempted to cut costs in order to survive. But you can’t cut costs unless you know what they are. This is where you have to do some hard work. It’s not easy to cut employees or other overhead items, but you may find that you have more overhead than justified.

Believe me, it’s hard to run around the track while dragging a truck tire.

Homework Lesson No. 2 - Focus On Impact

Slashing overhead improves profits to a certain extent, but it doesn’t necessarily put more money in your pocket. At some point, cutting overhead ends up costing you more in sales and efficiency than it saves. When looking at costs, decide which items directly affect sales and which don’t. The more closely related to sales an overhead item is, the more careful you should be about cutting it.

It’s very tempting to cut out sales training when times are tough, but this is when you need to ramp up training more than ever. Dollar-conscious customers need to understand the value of your services because they have to weigh your expense against all the other expenses they’re juggling. Your producers need to communicate well, recognize customer-service opportunities and ask for the sale. The better they’re trained, the more profitable they will be.

Advertising often takes a hit as if it were discretionary spending. Focus on campaigns with good track records while dropping those that are marginal, but don’t stop advertising. Advertising brings in opportunities. In some cases, you’ll have to broaden your outreach in order to bring new customers into the fold. Be aware that there are customers out there whose long-time contractor won’t survive the cut. They need to hear about you.

Homework Lesson No. 3 - Charge What You're Worth

Even without price pressures, professional trades like ours tend to be undervalued in the marketplace. The biggest reason? Contractors just don’t ask for what they’re worth. Most of the contractors I work with discover that their true and legitimate cost of operation actually exceeds their current selling price. No wonder they’re not making a profit! If you’re not earning a profit now, you’ll be hard-pressed to scratch out a living wage if prices contract.

Contractors who are charging enough to cover benefit plans, training, good equipment and competitive wages are usually found at the upper rungs of the price ladder. These progressive contractors, who have well-developed customer bases and effective marketing programs, won’t face as much price competition because they’re serving a customer who is a bit more immune to the credit squeeze and already expects to pay more than bottom-feeder prices.

Is it time to start cultivating your customer base? Should you cut prices to stay busy?

Either your customer can afford service or she can’t. Let’s say that you cut your selling price by 10 percent. Do you think that a $50 savings is enough to clinch the deal on a $500 sale? If your customer can afford $450, then it’s very likely she can afford $500 as well. It’s up to you to make the case for the value of your service, but if the money is there, 10 percent won’t matter if your customer is convinced that you’re offering a good value. If times get tough enough that price cuts are necessary, you may be faced with price cuts of 20-30 percent just to get a sale. Can you handle that sort of cut and still make a profit?

Consider these measures:

  • Instead of simply cutting prices, use coupons as a “thermometer” to test the waters. Assuming that you’ve done a good job of presenting your benefits and value, if your customer turns you down for a $500 job, offer a $50-off coupon just to find out how sensitive she is to the price. If your customer decides to let you do the job, then get it done. If not, offer one last chance by offering an additional $50 off if she is willing to accept a concession, such as a shorter warranty period or lesser-quality product. You may even find that half price isn’t enough to close the deal because the customer doesn’t have the money, not because she doesn’t see the value.

  • If you want to serve cash-strapped customers, you’ll have to find a more efficient way to do it. You could offer a major discount for allowing you to schedule service at your convenience instead of theirs. If you can take care of their job during a gap in your service schedule, then you could offer a 30 percent discount and still be profitable - simply because you’re working more efficiently. Everybody wins.

    Will times get tougher? Inevitably, just like they did at the end of the ’90s and in the early ’80s. It’s just the way things are. If you watch your business carefully, you can make it through and possibly even flourish. You may even pick up some new customers, since some contractors won’t make the cut.

    When it comes time to separate the wheat from the chaff, don’t be the chaff.

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