How to avoid pricing mistakes.
Pricing is a big issue right now for us and for many others. We just finished an in depth mid year review and have found that the overhead costs that have been sneaking up on us over the last year or so have really affected our bottom line. So like so many others we are going to have to adjust our pricing upwards to keep things moving. No we are not in trouble or anything, we are in no danger of having to close like so many others, including some of our own customers this last year, but we realized that in some cases we were giving away the farm and not leaving anything for the company. Every business needs to at least keep up with the cost of living and doing business, and so far this year we have been going in the other direction. Very soon you will be seeing an across the board price increase. While we are cutting and trimming costs in areas that we can you should be pricing your products and services avoiding these mistakes to be sure you keep your business healthy too.
All that pricing is, is a risk. The risk of setting a price you and your customers can both live with and continue to do business. But most risk can be managed with good information.
1. Low ball pricing and undercutting your competition. For some businesses this is a strategy, but not a very good one for long. Pricing yourself and your services too low all the time may bring in great sales numbers but not the bottom line profit to stay in business. You do not have to get all of the price conscious customers that are out there. Know what your service costs you to offer them and price accordingly.
2. Using the same margin for everything. No one says you must make the same % of profit for everything you do. You may need to decrease the margin on less time consuming work, and increase the margin on the infrequent or costlier jobs. You can afford a smaller margin on the higher sales volume of the quicker jobs. Say a complete strip, stain and reseal job for a 3000 square foot deck at the back of the house vs. the quick concrete driveway cleaning at the front.
3. Knowing the difference between markup and margin. Markup is based on your costs and Margin is based on the price. If you price a service with a 20% mark up on the cost of the products you use for the job and then offer your customer even a 10% discount on the total service you may end up with not making the margin you need to run the business.
4. Not taking all costs into account. Every job price must cover all your costs. Not just the cost of the soap, water and gas to get you there but also some of the cost to purchase equipment, operate and maintain it, along with all your bookkeeping and other costs it takes to get and process the job. Every business needs to know its basic hourly overhead for a whole month even if you do not do a single bit of work for that month.
5. You need to know what the competition is charging for the same work. That does not mean you follow the price they charge but you need to find out what value they give vs. what you offer and price accordingly. If you use a better machine, better soap and give superior service include those costs in your price and be able to defend those prices by showing and explaining to the customer why you cost more.
6. Discounting instead of giving added value. Every 10% discount you give means you have to do 50% more work to make the same profit if you had not given the discount. You can discount yourself out of business. So make your discounts mean something when you give them, use them sparingly and try and give your customer added value instead. Give the customer an added service for free as an incentive instead of a discount. Clean the gutters with every roof cleaning, clean windows with a house wash etc. Most of the time you would be right there doing the first job anyway so the base cost is very low, the material cost could also be next to nothing so why not put a price value on the extra service and give that to the customer instead of a cash discount.
I hope this helps you price your work to your customers to keep you running a healthy business and that you understand when we have to reprice our products to keep our business healthy too.
