Pricing decisions can be really difficult. And that’s true whether you’re one bloke in a van with a box of tools or you’re running a gigantic corporation with hundreds of people. The problems are all basically the same.
Firstly, there is no guaranteed formula for determining the right price for the things you sell in any given situation. This is because it’s never possible to know all of the relevant information that should go into deciding the correct price of something. In particular, you can’t look inside the mind of your customer. You can’t see the value proposition for whatever you’re selling in exactly the same way as they do.
So, how do you go about solving this problem? Well, I’m not going to give you a crystal-clear answer on how to do it, because I just told you that there is no guaranteed formula. However, I can give you some tips on how not to do it, and I can also share some ideas about the things you should be doing to maximise your chances of getting the best price possible.
The first thing to understand is the reason that you are pricing your work in the first place. This might seem obvious, but unfortunately not everybody gets it all the time. So, just to be clear, the reason you price work is not to win the work. The reason you price your work is to win the profit the work generates. So remember, it’s gross profit, not sales that pays for all your overheads and rewards you as the business owner.
Which leads to my second point. It’s vital that you understand the connection between your pricing levels, your gross profit margins and the volume of work that you’re doing.
Let me give you an example of what I mean. If I was to ask you how much work you could afford to lose If you put up your prices by 5%. What would your answer be? So remember, if you put up your prices your gross profit margin goes up on each sale, but of course you’ll be making fewer sales, because your prices went up. Do you know, I mean actually know for sure how many sales you can afford to lose for any given price increase while still making the same amount of gross profit.
Why’s this important? It’s important because you need to understand the impact on profit of your pricing decisions.
Alright, let’s talk about some of the factors that should go into your pricing decisions. Obviously, you should keep an eye on what the competition is doing. This doesn’t mean that you let your competitors set your prices but rather it’s about situational awareness. You should be looking for products and services and markets where margins are strong and competition is not what it could be. That’s where you need to be focusing your marketing effort.
But what do you do when you’re constantly being undercut by the competition? The answer is to figure out why it’s happening then figure out how to respond. Make sure you do things in that order, don’t just respond without knowing what’s going on.
Some of the things that you should investigate is whether your competition is just more efficient at doing the work. Or maybe they’re using cheaper goods or they’re cutting corners. You might need to do some detective work to figure this out. But, let’s say that you conclude that you’re operating as efficiently as you can, but you can’t match the competition’s prices and make an acceptable gross profit. What do you do then? You’ve got two choices. Either you can exit that particular market and focus your efforts elsewhere, or you can realise that the problem is fundamentally a sales problem. Remember, price is only one element in a customer’s buying decision. If it wasn’t, everybody would be doing all the shopping at the Two-Dollar shop or Aldi. And they don’t.
So, if you’re really struggling against competitive pricing there are two things you need to do.
First, realise that the work that you do and the products you sell are high-quality and deserve a premium price. The first sale you make always has to be to yourself.
Second, learn how to communicate that value to your customers. Yes, I mean learn how to sell. There are plenty of resources out there to help you with this. This isn’t something that comes naturally to most sparkies – in fact it doesn’t come naturally to most people. But selling is a critical part of business success and you owe it to yourself and your business to learn how to do it properly. You don’t need to be a sales wizard, you just need to learn the basics and be a little bit better than what you are doing at the moment.
So, to wrap up, my message to you today is that pricing is hard and that there aren’t any magical systems that will always result in the perfect price. But if you’re focused on your margins, and you understand your market and you’ve got a strong sales process, you’re much better positioned to make the right pricing decisions.
Another good decision you could make is to enlist the help of someone who knows how these things work. At Certus Group we have a three-phase program specifically tailored for growing electrical and HVAC businesses. Feel free to give us a call to discuss how we can help you grow your business, and check out our website at HVACaccountants.com.au.