Ah, the age-old dilemma that has become part of every type of business. It never goes away and becomes part of every sales meeting, whether it is on the agenda or not. The topic I’m referring to is “pricing.”
What got my attention about pricing recently was an article that looked at various pricing scenarios, as well as how to set the right price based on cost, customer types, competition and tiered pricing. Although the article was not directly geared toward contract work, the concepts discussed fit every business that needs to negotiate pricing, and I can’t think of many that don’t.
Digging a little deeper into price negotiations, a business owner must consider how much aggressive pricing is hurting the bottom line. Or is it? Do you really know what impact your pricing strategy is having on profits and cash flow?
Aggressive Pricing Doesn’t Have to Mean Lower Margins
Aggressive pricing is normally used to increase market penetration or attract more business from current customers and increase the top line. It may prove financially unsound if you have substantial fixed costs to hurdle.
You know how it goes — you must cover fixed costs and then variable costs to generate a profit. Normally, a successful pricing program will accelerate growth and fixed cost coverage and generate higher profits. You have probably experienced this scenario many times, with Amazon being a prime example of how this strategy works.
On the other hand, competitive or aggressive pricing is thought to reduce margins, but it may not reduce them at all. Maybe the pricing strategy currently being used produces above-average margins because the other component of the transaction is being properly managed and planned for — with the other part of the transaction being cost.
In this scenario, cost is decreasing because of technology and other methods of efficiency. If you reduce revenue by reducing pricing, but costs have been reduced more than the price reduction, you wind up with more margin dollars, especially if overall sales dollars increase from the current level.
Applying new technology and efficiency is a must for every business. For certain companies, it may be a simple and cost-effective change. For more technical and large projects, it could be considerably more expensive, requiring expert implementation of new systems and procedures. The former provides a short payback cycle, the latter a longer payback period requiring constant supervision to meet goals.
Pricing Variables in Action
I was writing this when a perfect example of the variables and how they work together to produce above-average profit appeared right in front of me. I was in the market for new gutters and leaf guards for a house in Wisconsin and went through the process of interviewing various vendors to discuss products and pricing. Before these meetings, I spent some time researching current pricing for the materials and labor for this type of project. After talking to four different companies, I selected one that met the online pricing and had a nice product line.
The “winner” sent out an experienced estimator who provided pricing in about 15 minutes. We were instructed to contact dispatch to set a date and time for the work. I signed the bid on August 9th and the work was completed on August 20th. I can tell you this would not have been the case with the other vendors.
I couldn’t help myself and had to find out how my chosen vendor could make a dollar with the pricing they gave me, especially when compared to the other vendors. Let me tell you how.
Prompt Service
At 8 a.m., the dispatch from Pinnow Sheet Metal, Inc., Oshkosh, WI, called and said the crew would arrive at 9 a.m. At exactly 9 a.m., a white school bus with an extension (this was a big bus) pulled up, five people came piling out and they were on the roof within 60 seconds confirming the gutter measurement and tearing down the old system.
Speed and Efficiency
The person on the roof measured and called down to a supervisor who conveyed the measurement to a person in the bus, who then pushed a button to produce a seamless gutter for the exact size needed along with downspouts to compete the job.
Here is the best part. They were back on the bus and leaving 40 minutes later! I kid you not. Both the house and garage had new gutters and guards on them. A chat with the supervisor explained that they have their system down. Each crew member knows what they need to do, they work with the same crews and they have been providing this service for many years. The work was excellent, with my house looking a lot better.
Reasonable Pricing via Cost Control
So, I believe they make a nice margin on the work they do using pricing they consider reasonable. No doubt their pricing gets them more work without sacrificing profit. To top it off, the supervisor did not stop to converse with us to go over the invoice, etc. He hopped on the bus and corporate sent the invoice for payment, saving another 15 minutes of unbillable labor that would have otherwise sat waiting on the bus.
Profitable Formula
This is a perfect example of a simple fix with immediate feedback:
- Have a system and continuously update it.
- Find ways to get more efficient.
- Be on time.
- Have your crew under control.
- Have the equipment you need up and running.
In short, the bus contained both the crew and all the equipment and materials needed to produce the gutter and downspout and complete the work schedule for that day. I kept looking around and asked my wife “Where did they go?” I also said, “Boy, that was a nice ROI for 40 minutes of work.”
I guess the bottom line here is if you really understand and have your costs under control, you can play with pricing alternatives and not hurt your margins.
Garry Bartecki is the managing member of GB Financial Services LLP and a consultant to the Associated Equipment Distributors. He can be reached at (708) 347-9109 or [email protected].
