Chances are if you are a medium to larger size business, you have defined what type of organization you strive to be and what that means relative to pricing your products in the market. For example, you may strive to be a leading-edge provider of the best products and solutions, and your pricing is targeted to yield a specific return, regardless of the competition. On the other hand, you may have decided that all products are essentially commodities, and you strive to be the low price leader to the point of your target margin. If however you are like many thousands of small businesses, you have never formally defined what type of organization you want to be, nor have you determined any type of pricing strategy for your business. You simply bid each job as it comes, using some type of pricing mechanism that you believe will yield a profit. This column is aimed at this last group, because there are a few proven things you can do to improve the profitability of your business relative to pricing, and it doesn’t take a Harvard MBA to implement them.
1. Define Your Overall Business Strategy.
This doesn’t have to be complicated, but it sets the tone for everything else you do. For example, you may have gone into business for yourself because you thought you could do it better than how you have seen it done, and you thought in the long run you could make more money. You would like to someday sell your business, and have it be attractive enough that someone would want to buy it. Other than that, you just want to be competitive and make a good profit. So, define what is a “good profit.” Is that 1%, 5%, 10%? You have to answer this question. Consider that someday when you sell your business, someone will want to know what kind of profits it generates, whereby they might be willing to pay 5-7 times earnings for that business. If your business is only generating 1% or 2% net profit, you may end up having to sell it strictly for the assets. It’s a good idea to talk with others in your industry before committing your answer to paper, do not shortcut this step.
2. Understand Prevailing Prices in Your Market
Who are your main competitors? What do their prices look like relative to yours? It is important to understand the market in which you operate relative to your overall business strategy. If you are like the business described above and you are in a medium-sized or larger market, figure out which competitors are most similar to yours in terms of your business strategy and understand where they price their jobs. Perhaps you plan to offer a good-better-best product strategy, so make sure you are comparing apples for apples when you look at prevailing pricing in the market.
3. Determine Your Target Market
Do you want to do jobs anywhere, or is there a specific area you want to concentrate your efforts in? Chances are, you intrinsically know the answer to this, so define it in terms of specific ZIP Codes, and areas within those ZIP Codes. You can base this on the age of the housing stock along with a variety of other demographics easily available. (I.e. age of homeowners, household income etc.) Focusing your efforts on the customers most likely to fit your overall business strategy enhances your ability to be successful. This is also an essential step toward developing a targeted marketing campaign.
4. Develop A Pricing Strategy That Fits with Your Overall Objectives
Perhaps you have decided that you essentially want to have an “everyday price” strategy as defined by margin goals by class of product. You are willing to negotiate within reason, but you want to spend the limited amount of labor hours you have on jobs that yield your target margins. Given that, you might plan to run occasional promotions, essentially one time deals to entice customers at certain times of the year or to throw off your competitors. If you have a good-better-best product offering, you could price it in such a way that higher-end products or solutions deliver commensurately higher margins. On the other hand, you could “sandwich” your pricing in such a way as to drive the consumer toward the solution in the middle category. The point is, there are a number of ways to accomplish the same objective.
5. Do Job Costing
It is imperative to know how much you made on each job relative to your objective, and why. This allows you to make the necessary corrections in order to make sure you are achieving your ultimate objective. There are many places you can go to get help putting in systems to accomplish all this, and they don’t have to be complicated. They just require a commitment on your part to make it happen!
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