Does Your Pricing Come up Short?

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Three contractors in four weeks, each with some serious pricing problems that where hurting their businesses!

Last week, I pointed out that getting more sales doesn’t necessarily fix everything. There is some scary reflection of reality in the statement “We lose money on every job, but we make it up on volume.”

On rappel - Kanab Zero - Grand Canyon

200′ rappel with a 150′ rope?

Next month I want to tackle the cost side of things–in terms of reducing costs to boost both profitability for you and value for your customers. Even then, though, you’ll need to understand the interplay between your costs and your pricing.

Back now to those three contractors. There were overlapping issues common to many contractors, but the initial triage highlighted different immediate challenges.

The first contractor was way off on some of the job installation costs. Almost every project was taking longer that they estimated. They also weren’t fully capturing the true labor hour cost recognizing things like taxes and paid time off which need to be reflected in the hourly rates. And some of the material costs baked into their estimates hadn’t been updated in a few years! They still have a lot of work to do, be we were able to quickly fix some of the cost assumptions on their most common installation measures and make pricing adjustments as high as 50%.

The second contractor had onsite actual installation times dialed in extremely well. The problem? A lot of missing time both on the job, e.g., clean up and set up, transportation to and from the job, time cleaning and stocking trucks, etc., that wasn’t figured in. When we crunched the numbers, this turned out being as much as 25-30% of the labor hours not be accounting for in either the job costs nor the pricing. That’s a big deal!

Connection between Cost, Markup, Price, and MarginContractor #3 was making a simple math error I see frequently in “markup”. In a simplified case, let’s say you’re aiming for a 40% margin on a $1,000 sale. Many contractors markup up the $1,000 by 40% or $400 bringing the price to $1,400. But wait. They have $400 left on a $1,400 project. $400/$1,400 = 28.6% margin. What happened? They didn’t apply the percentage to the right amount! To see a 40% margin, you don’t multiple the cost by 40% and add the two figures together. Instead you have to recognize that to see a 40% margin it means your costs have to be 60% of the price. So the right formula here is, Price = $1,000/(1-40%) = $1,667.

These contractors were selling themselves short by pricing too low. Two of them even said they weren’t routinely running into price as a stumbling block objection from their customers (maybe in part because they were so low!). All of them are adjusting their pricing. I expect in some cases they may have to improve their sales ability to command these higher prices. That will take work, too. But at least they’ll go into this with increased confidence that when they do sell a project, they’ll actually be able to make a bit of profit!

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About the Author:

Mike Rogers is the President of OmStout Consulting. A nationally recognized expert in residential energy-efficiency, he works with contractors and programs to scale sustainable market approaches to improving homes. More on Google+

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