It should not be considered news to report that our current economic contraction is far from over. What is important to remember is that even in times of financial “adjustment,” there are opportunities to build businesses and earn profits.
Tough economic times tend to weed out poor business managers, so if you’re not good at managing your business, don’t be surprised if you and your business end up as a statistic. Imagine our economy as a receding ocean. As the economy contracts, the water levels drop. The inept and unfortunate business people on the shallow edges are likely to end up like beached whales or crashed upon the rocks.
On the other hand, savvy business operators will continue to have opportunities to stay afloat, even in a smaller ocean. Staying afloat requires cash. Not the borrowed kind - we’re talking the kind of money that makes bank accounts swell, the kind that gets discounts on supply bills, the stuff that you use to invest in yourself.
This month we’re going to explore a fundamental method for acquiring much-needed cash: flat rate pricing. Two quick caveats: Firstly, chances are you already use flat rate pricing. If so, we’re going to spell out some ways to use it that you may not have considered before. Secondly, if you’re still in the “Flat Rate Won’t Work In My Town” camp, then you may as well stop reading and start looking into ways to survive on the beach.
Building A BudgetFlat rate pricing forces us to consider budgets. If you don’t think you can deal with a budget, then you might start exploring sand castle architecture because you’re going to need something to keep you occupied while stranded on the beach. Don’t worry, though; your budget doesn’t have to be accurate down to replacement lead for your mechanical pencil. You simply need a realistic estimate of how much you expect to spend on running the business and what you’re going to use for your production standard as a way to distribute that cost into your productive labor.
This is no time for wishful thinking. If there’s a cost, it needs to be counted. Don’t count costs up to a point where you think your cost is high enough and stop there. Include all your costs in the budget. This is the step that stymies most of the contractors you see stranded on the mud flats.
Once you have calculated your costs (most of which is overhead expenses), you’ll know what your selling price must be in order to earn a profit. Just to make sure you understand: If you think that doing a job at cost means that you are charging for wages plus material costs, then you will find yourself surrounded by a flock of hungry seagulls shouting, “Mine! Mine! Mine!”
When you know that your selling price includes a profit, you don’t have to worry too much about which services your customers buy. Anything they buy will be profitable for your company. Profits keep you afloat. Profits are good.
Getting More CashIt doesn’t require a degree in economics to understand the fact that when your customers select more, or better levels of service from your company, then your average sale per trip will be higher. A higher average sale per trip improves overall efficiency and boosts your profits.
Flat rate pricing makes it easier for customers to compare repair prices with replacement and upgrade prices. Some of your customers will appreciate, and take advantage of, your upgraded offerings. When they do, your sales, efficiency and profits rise. Besides helping your business stay afloat, you are giving your customers a more pleasant experience because they get to make choices as they benefit from your better levels of service.
When you establish realistic selling prices for your services, you also set the stage for sales incentives. Here’s a quick primer: Whether you’re building mechanical systems for high-rise towers or repairing drippy faucets, your business depends upon sales in order to stay afloat. Not enough sales means you’re pounding sand. To keep your business on course in hard times, it may make sense to cut your profit margins a bit in order to boost sales.
Note that I did not say, “Cut your price.” I did say, “Cut your margin.” The reason I said it that way is to imply that you know your costs to begin with. If you’re asking $100 for a widget and it costs you $95 to deliver it, then what happens when you put a 10 percent discount on the widget? You’re drilling holes in a leaky boat, that’s what. With a properly calculated selling price, you will know how much of a price incentive you can offer and still remain profitable.
If your selling prices are properly calculated, why in the world would you want to put anything on sale in the first place? The price is the price, right? Well, not exactly. You see, your profitability is closely tied to your production. If you spread your annual overhead over 1,000 production units per truck, then your profits start adding up once you meet that production goal.
In hard economic times, you may struggle to meet that production goal, so you might consider putting some items on “sale” in order to pump up production. The items you put on sale should be those that include enough profit and production (labor) to help you toward your goals. Basically, this is how savvy retailers do it, whether they’re selling yachts or water wings.
It’s difficult to put services on sale if you are a time-and-materials operator. If you offer a discount on labor, how does your customer know whether he or she received a good deal? What can he or she compare it with? How does the customer know whether you’re working as efficiently as you would have been at the “regular” price?
And if you’re just putting the materials on sale, will there be enough price difference to encourage a sale? Or let’s say your business model is pseudo flat rate, where you size up a job then pull a price out of the sky. Can you tell me that a looming truck payment doesn’t affect the price you quote? Does your customer see it the same way? Give your customers a menu of legitimate options with real prices and, when necessary, include tangible incentives to help them make purchasing decisions.
Price increases are another way you can use flat rate pricing to right your ship. If you are selling a thermostat, installed, for $150, who is to say that you can’t sell that same t-stat for $160 or $175? For the time being, we are still in a mostly free market, so your customer is the only person telling you how much you can charge.
Whatever the widget you are selling, if you aren’t encountering price resistance on it, try raising the price, even if just a little. A $10 price increase probably won’t bother your customer, but sell 10 of those widgets and you’ll pick up an extra $100 with no more labor, no more marketing expense and no more exposure to risk. A hundred here, a hundred there can go a long ways toward keeping your boat afloat, especially when it’s cash we’re talking about.
These are just a few ways to help you stay afloat, and even prosper, through a long-term downturn. But whether in good times or bad, if you are running a business without profit, you are trying to float on a raft made of fish net.
I hope you have a snorkel.
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