Pricing – Important Information to Guide the Contractor!

By Stan Rydzynski

One of the most critical elements of marketing is pricing which is probably the one that is formulated with the least amount of education and knowledge.

Did you know:

• A change of one penny can increase some companies profit by thousands or millions of dollars? Or, a change of 1% of your selling price can increase profits 11%?
• The difference between “Markup” and “Margin”?
• That working from cost up to establish a price never maximizes profitability?
• What a breakeven analysis is and why it is one of the most important pieces of information to company?

Since pricing is so important, I want to first introduce you to the best text book on pricing I have read. The book is entitled, “The Strategy and Tactics of Pricing” by Dr.Thomas Nagle and Reed Holden. This book is the bible of pricing. I have met both authors and I have been at a few of their informative presentations. The book can be very academic but it completely outlines pricing.

What not to do

I would like to give you a list of some of the biggest mistakes you can make in trying to develop your pricing strategy. Hopefully by informing you on what not to do you will plan the correct strategy for your company.

• Basing prices on costs, not customers' perceptions of value. Pricing based on costs invariably lead to prices that are too high or too low. Not a winning formula for quotations.
• Attempting to achieve the same profit margin across different services. Profit is optimized when the price reflects the customer's willingness to pay.
• Contractors must find ways to differentiate their products or services to create additional value for specific market segments. This is where you identify the attributes of your services and listing them on the quotation is extremely important.
• Keeping prices at the same level for too long, ignoring changes in costs, competitive environment and customers' preferences.
• Using insufficient resources (Past results) to manage pricing practices.

Here are a few important pricing issues and concepts to consider.

Mark-up versus Margin

This is the number one issue when I engage someone when it comes to understanding and mathematically calculating gross profit margin. Most contractors, their employees, sales personnel and others believe that if you want to make a 10% profit on an item or service that cost $100, you multiply $100 X 1.10 = $110 and you will make 10% profit. This is incorrect! We have just calculated the Mark-Up of 10% from cost not the profit margin.

Profit margin is “what percentage of the price is profit”. As opposed to mark-up which is the “what percentage of cost is profit”. Using the example before, the correct method to determine the selling price for an item that cost $100 with a 10% profit is to divide the cost by the desired profit percentage (i.e. cost/{100%-profit margin percent}). Which in this case is $100/90 = $111. A simple check is to multiply the selling price ($111) by 90%. I must get my cost ($100 X .9 = $100). In the case of multiplying the cost by 1.10 to get the selling price ($110) the reverse would lead to a cost of $99. I hope this simple explanation will increase your profits in the future.

What should you do when customers only want to talk about price?

You need to prepare you response (never wing it). When someone asks about price before they understand how you do what you do, simply mention that you can provide accurate quotes once you understand what they need.  Then, immediately ask them if you could ask a few questions.  The questions you ask should strive to understand exactly what they want and what’s important to them so you can sell them on the benefits of your service.  If they persist in wanting to know what your price is before knowing any more, give them a range to work with.  Don’t defend your prices. This usually has little effect on their willingness to pay the price you ask.  Don’t volunteer to drop your price immediately.  This only adds suspicion to your entire business.  If you feel the need to match a competitor, do so only after you’ve had a chance to understand exactly what they want and what their other price was based on.
Note: this is why it is very important to list other benefits/services you will provide with your quotation. You can than match or reduce your quote by removing the other benefits/services in your re-quote without looking like you were trying to “overcharge” the customer.

Bundling

One of the most profitable and strategic ways to capture more quotes is bundling. Bundling is when you add other services or products to the quotation that will not only make it more profitable but allow you to win a job that if not coupled with other services you would loss. For example, let’s say the customer wants to upgrade to 200 amp service with a standard 42 circuit panel. The lowest bid from three contractors is $1450. You bid $1800. You can lower you bid to meet the price but the margin is very low for your business. You decide to tell the customer you can add whole house surge protection and a lighting arrestor for $650 and you can install the next day. Bundling is a valuable tool for profitability.

Finally

Effective sales and marketing strategies that focus on unique positioning, identifying the right customers and creating compelling messages are the tools that will reduce the “price questions” and make you more confident about holding the line on price concessions. The less price concessions, the more profit for you.

 
Stan Rydzynski, Executive V.P., Channel Marketing Group, has over 35 years of experience in marketing/sales/product excellence in the electrical industry. The Channel Marketing Group provides strategic planning, marketing planning and market research for contractors, manufacturers and distributors with a focus on growth initiatives to accelerate performance. If you have a marketing/strategic planning question, you can contact Stan for a FREE consult at srydzynski@channelmkt.com or 516-319-1191. In addition, Stan conducts a 2-3 hour marketing/planning contractor seminar covering basic marketing concepts as well as teaching how to write an effective contractor marketing plan. Contact your local IEC, NECA chapters and/or your local distributor to arrange for him to conduct his highly effective and informative seminars.