The Case For Lowering Prices
It’s an understatement to say our nation’s economy is going through some serious turmoil right now. While the politicians on both sides of the aisle are pointing fingers and slinging accusations, we have to figure out how to navigate through the mess. Notice the word “through.” That word is intended to imply that we’re going to get to the other side of this rough spot, even if we have to do it in spite of the politicians.
The PHC industry has largely been built upon the political blunder of equating the Great American Dream with homeownership. Well-meaning politicians felt the government (aka taxpayers) should make it easier for working-class folks to achieve that dream by making homes easier to buy. The government started guaranteeing (subsidizing) home loans and soon enough, people were buying up homes as fast as we could build them.
However, owning a home is not the Great American Dream. Homeownership may be a symptom and a result of achieving The Dream, but it is not the dream itself. As we blindly chased the dream, we forgot to do a reality check, which would have told us there’s no free lunch.
As taxpayer subsidies flooded into the housing market, home prices began to climb. Eventually, this made The Dream more difficult to achieve. The laws of supply and demand are unavoidable truths, just as sure as gravity. Many business people rode the inflation into success. The fortunate ones finished out their cycle before the bottom fell out. If you came to the game a bit later, you’ve probably been whacked by the fallout. This means you’ll have to adjust your process, but it doesn’t mean the end of the world as we know it.
Plumbers know that water seeks its own level. Economists, even though they constantly try to thwart it, know that prices will also find their proper level. When portions of our economy became overheated due to government benevolence, the prices of nearly everything else climbed as well. As the overheated real estate market comes back down to earth, it brings deflation, similar to letting some air out of an over-inflated tire or balloon.
This deflation is going to affect the prices of just about everything that went up with real estate inflation. It will also eliminate some of the excess money from the economy, which explains many of our job losses. This oversimplified scenario helps us understand why some contractors will be forced to reduce their prices.
Yes, I said it. Some contractors will have to reduce their prices if they are going to maintain sales. Lowering prices, however, is not easy and might not be the solution for your particular situation.
Why? Because your prices may be too low already. If you follow the typical pricing model of charging the “going rate,” then you probably don’t need to drop your prices because you’re not charging enough to begin with. This can be a huge problem for you if our economy has a prolonged struggle. While things were rocking along pretty good, you were frittering away your profits. You needed those profits so that you could pay down debts, build up assets and be ready for the economic adjustment.
Since you didn’t implement proper pricing strategies when times were good, you’re going to have a tough go of it in leaner times. Pay attention to some of the fundamentals later in this column because you still have an opportunity to make a difference.
Property Management OpportunitiesIf a significant portion of your business comes from property managers, you may be asked to sharpen your pencil when it comes to pricing. The good news, if you can call it that, is your sharper pencil may result in higher sales volume. Previously I referred to how our government used tax dollars to encourage the real estate boom cycle. Hundreds of thousands of homes have been foreclosed. By the time you read this, that number could be over a million.
Add in the fact that several cities are bulldozing vacant homes and you get the impression we’re in for a long, hard slog. Those foreclosed and/or bulldozed homes had families in them and those families are still out there, somewhere. With a foreclosure on their record, it’s highly likely they will become tenants in single and multifamily properties. More rental property means more landlord business - if you have a sharp-enough pencil.
Working-Class ClientsThe saying, “Time is money” is a truism, even in a tight economy. When your working-class customer had plenty of overtime, he spent money on services in order to buy time for other things. Tighter budgets mean more homeowners will attempt to tackle the less technical chores and they’ll be more selective about the add-ons and upgrades they accept. Many will appreciate a chance to save money by waiting a day or two for service.
Unless you can make a significant cut to your pricing, lowering your rates probably won’t help you stay busy. On the other hand, you might maintain sales volume if you can offer significant discounts for add-ons and offer more efficient scheduling options.
Do not neglect loyalty with this group. The economic downturn means there will be more shade-tree contractors in survival mode. They will cut into your customer base if you don’t stay in touch with your customers.
The Hard WorkWe all face economic challenges. Those who meet the challenges will survive, perhaps even flourish. Those who don’t will become another statistic. Success is never guaranteed but here are a few tips to help you adapt to these challenging times.
The first item on the list is to know your costs (you knew this was coming, right?). This fundamental rule will never change as long as business is about profits. Knowing your cost of doing business is fundamental to profitability; you can’t know your profits if you don’t know your costs. In lean times, when customers are asking for the most bang for their buck, knowing your costs becomes even more important. If you guess at a price, how much of a discount can you guess at and still be profitable?
The process of learning your costs will inevitably reveal the next step in your tough economy strategy: Trim the fat. When times are good, there is a tendency for overhead to bloat. The more excess baggage you’re carrying, the more difficult it is to flourish in tough times. It’s up to you to determine the difference between lean and fat.
That decision is a bit easier if you consider costs in terms of customer value. If your net profit goal is 30 percent, then a $100 expense is going to cost your customers $143. Ask yourself if the expense will be valuable to your customer. Does it save them time? Does it make the service visit more enjoyable? How will this expense item improve your relationship with your customer?
You're Never Fully Dressed Without A SmileYou may remember Little Orphan Annie. She lived through plenty of tough times but always managed to keep a smile. During the tough times, don’t forget to smile.
Your customer relationship becomes critical when you’re battling against more competitors for fewer dollars. If every marketing dollar costs your customer $1.43, then you need to make sure those dollars count. This is where excellent customer service plays an important role. The more repeat and referral business you can build, the more efficient your marketing, which translates into more competitive pricing while still maintaining a healthy profit margin.
In a tight economy, you have to pay attention to the same things successful business people watch all the time: know your costs, work efficiently and stay on top of your marketing. The only difference is a tight economy is less forgiving when you fail to measure up.
Stay on your game and remember, we’re going through this to the other side. Tomorrow is only a day away.