If you read my report The 10 Biggest Mistakes Contractors Make, you should remember that Mistake No. 9 was pricing your work too cheap.
Today, I'm going to show you how to systematically determine the price your prospect is willing to pay based on the service you are offering, the characteristics of the project, and the type of client you are pitching to.
Most contractors are CONVINCED they know what their market is willing to pay. Yet, when I get the opportunity to analyze their data collection systems, I discover there is a glaring hole in their information. There is no possible way they could really know the best price to offer a prospect.
I see the same problem when looking into contractors'job costing systems. Most simply do not collect enough data to know how their costs vary by project type and size (Mistake No. 6).
Raising Prices is the Fastest Way to Juice Your Bottom Line
The two main reasons contractors offer low prices are:
- They are afraid they will lose the job.
- They don't have hard data to guide their pricing decisions.
Fixing the second problem usually eliminates the first.
Hard data on past performance combined with ongoing monitoring gives you the confidence to offer higher prices. So let's get your data collection started.
Your goal is to track your market's willingness to pay for your services. The more detail you track, the more refined and exacting your price guidelines will be. The more detail you track, the more money you will make.
Start by copying each proposal and writing down the estimated cost, physical job size, type of services being offered, type of client, client status and lead source.
For client type, note whether you are pitching to a residential, commercial, building owner/operator, property manager, retail space, office building, general contractor, subcontractor, industrial, institutional, or other. For client status, note whether you are pitching to a new customer, existing customer, or referral. Note the lead source.
For project size, find an indicator that makes sense for your trade. Areas (e.g. square feet) or volumes (e.g. cubic yards) are the most common.
Set up a spreadsheet to capture your data (I have one if you need it). Create a column for each data item.
Put in columns for the proposal number and name of the project or client. Include a column for proposal status (won, loss, open, budget). Include a column for proposal date.
Enter each proposal on a single line in the spreadsheet.
Often the best way to get the data into the spreadsheet is to hand the stack of proposals to someone and have them enter the data all at once. Weekly data entry is pretty typical.
After you have captured a large set of data you can analyze it and see where your prices need to be. If you crank out a lot of proposals, you may collect enough data in three or four months. If you only create a few hundred proposals a year, it could take more than a year to collect enough data for your conclusions to be valid.
Now for the fun part - analyzing your pricing success.
When looking for the price guidance, sort and filter your data by work type, client type, job size. Look for visual indication that you've found a legitimate and logical trend.
Focus on win rates. Do you win 1 out of 5, 1 out of 2, or 1 out of 3? You want to know what mark-up produced the right amount of success.
You are looking for success between 25% and 40% depending on job size. The smaller the job, the higher the success rate. The larger the job, the lower the success rate.
Competition intensifies with larger jobs. Everybody wants them.
Assume that the higher the price of the job, the less mark-up you're going to get. Almost all buyers become more price sensitive as the total price goes up. Look for validation of that in your data.
Price Sensitivity Varies Greatly With the Type of Client You Are Pitching To.
Residential customers tend to be the most price sensitive and industrial the least. Always remember the Other People's Money syndrome. When your prospects are spending someone else's money, they are almost always less price sensitive than the owner of the money.
Use Your Data to Guide Your Price Offers
By throwing your data into spreadsheets, graphs and tables, you should be able to create price guidelines for your company. The guidelines will apply as "All things being equal, for this type of job, this size of job, and this type of client, this is the price we ought to be able to win a third of the time."
I wish I could give you an exact three step procedure for reaching your conclusions but the truth is that you are often going to have to play with the data before the message becomes loud and clear.
Once you have established the standard price to offer, carefully consider the prospect standing across from you.
If you happen to be selling to someone who appears to be less concerned with money than other people in his position, then use a higher mark-up.
How do you know that he or she might be willing to go higher than normal? Use your sales questions. Those questions will give the prospect a chance to show that their concerns may be over things that have little to do with price.
If you are visiting with someone who appears to be extremely price conscious, then offer a lower price than the guidelines recommend, assuming you want the work at that price.
Bear in mind that if your data shows a normal client would pay more for the work your prospect may be a bad client (Mistake No. 2).
You want to be winning around 25% of the larger jobs you go after and you certainly don't want to be winning more than 40% of the smaller ones.
If you are winning more than 40% of the offers you extend, in any category, you are either the most masterful qualifier of prospects, or you are grossly under-priced. In my experience with contractors, it's the latter...and that they are leaving a lot of money on the table!
If you have collected this type of data yet struggle to understand what it's telling you, give me a call. I'd be happy to help you figure it out.
Ron Roberts, The Contractor's Business Coach, teaches contractors how to turn their business into a profit spewing machine. To receive Ron's FREE Contractor Best Practices Newsletter visit www.FilthyRichContractor.com.