An Editorial I wrote titled How to Price Sealcoating in the March/April issue of Pavement generated a pretty positive response -- so consider this a sequel.
Raising the price of services is a major contractor concern because pricing in this industry has been stagnant -- at best -- for years. And the Great Recession didn’t help as contractors made cuts to get what little work was out there.
But where do you stand now? Do you have the power to price your own services or are your prices determined by something – or someone – else? Is there an art to raising your prices? Turns out there just might be. And according to a recent article in the Chicago Tribune, one impact of the Great Recession is that businesses have forgotten how to do it.
The focus of “Recession Dulled Art of Raising Prices,” is on the retail industry but it's clear that much of what is covered applies to contracting as well. The article starts by pointing out the Walt Disney Co. just raised the price of its one-day passes by 9.6% -- the fifth increase since 2009! Yet there’s Kohl's Corp. which drove department store customers away with a price increase two years ago and is now planning an aggressive marketing campaign to bring them back.
What's going on?
The article points out that "Under pressure to maintain profit margins, firms have focused on cutting costs to the bone and hoarding cash rather than using it to hire workers or invest."
The article quotes George Tacke, co-CEO of Simon-Kucher & Partners, an international consulting firm based in Germany, who says companies can only cut so far.
"At some point they have to act on prices, and many have forgotten how to do it..."
Anyone see their firm here? He continues:
"More importantly, [they] have not educated their customers to expect it."
With the economic rebound taking its excruciatingly slow time, and with consumers still pinching pennies, there's really only one way to be successful at raising your prices: Offer something different to your customers.
Joel Bines, managing director of AlixPartners consulting firm says in the article, "Only companies that offer differentiation, whether it's the product or a service, have any pricing power."
Disney can raise its prices because it offers an entertainment experience that can't be found elsewhere. Apple already has the highest prices in the tech world but can get away with that because it is innovative and seen as cutting edge. But the article points out that the average department store -- from Kohl's to Wal-Mart to even Nordstrom's -- has little pricing power because it essentially is a "me-too" businesses.
Paving & pavement maintenance contractors certainly are very different from brick-and-mortar retail establishments, but the point is the same. How do you justify increasing your prices if you don't offer something different than the contractor across town? And don't say you offer "quality" because everyone says that. When was the last time you competed for a job where the other guy said "We don't do quality work but then we're not as expensive, either."?
So, what is it that you do that is worth more to your customer? If you don't have an answer to that question you might be in that "me-too" category, which will make it more difficult to raise your prices. That's not necessarily a bad thing -- there's plenty of room for businesses to compete at that level -- but it does put your business in a tougher spot as you try to justify some kind of increase. So if you don’t have an answer maybe you can consider what you can do to bring something different to your marketplace.
If you have an answer, put a dollar figure on it and figure out how to convey that value to your customers. Teach them (remind them) that price increases are part of doing business and many of them are willing to pay more provided they see the value in the additional cost. What they're not willing to do is pay more just because you haven't had a raise in five years.