Whether you’re a brand new company or have been around for a while, you know that pricing your projects correctly can be one of the trickier parts of running a business. Finding the right balance of being competitive, reasonable, and making a profit will probably take some trial and error. Even once you have set up your prices for specific home improvement projects, there may be times when you need to consider adjusting those figures. Let’s delve into the details of when and why you may have to do so:
New in business
As a new business, it’s not unusual to be uncertain of your pricing strategy. It’s going to take some time and experience before you settle on the best prices for your services, and even then, you’ll find that you have to make adjustments on occasion.
You may start out with an initial offering that you quickly discover is too low, leaving you with little to nothing in the way of profits after completing projects. In the beginning, this may seem like a tradeoff to earning business and getting those first satisfied clients under your belt. After all, you want to make those sales and establish a good reputation. However, over time, prices that are too low can leave you barely breaking even, or worse, consistently in the red.
Alternatively, you may have set your project price too high, and are failing to meet your sales goals. This is why it’s so important to have done a break-even analysis as a part of your business plan to determine how much sales revenue you’ll need to bring in to cover the expenses of the business.
Understand your competition
It can be tough to gauge your competition’s pricing, and to get any information at all about their sales numbers. Still, doing some quick research on your competitors in the market from time to time is both valuable and helpful.
You don’t want to set your prices significantly lower just to beat out the competition. In fact, you may want to charge more if you know that you can provide more value and better quality for customers. You do need a general idea of what potential customers in your area are willing and able to pay for the services that you provide. Understand what your competition is doing, in terms of pricing, discounts, and promotional offers, and then figure out how you can do it better.
Markets change, and the cost of materials will likely fluctuate, and at times, increase. This will impact your bottom line, and if you just leave your prices alone, you’ll end up with a smaller profit margin when material costs are up.
One way to handle this is by including material costs in the contract. Depending on the type of job you’re doing, you may consider writing the terms in the contract so that any raw material price increase needs to be covered by the client.
For projects of a smaller scope, you may want to hold steady on the price. For a home improvement project that can be completed fairly quickly, customers will want to know what they’ll be paying from the start. If the cost of the materials that you regularly use to complete a project for your customers increases, then it should be reflected in the price that you offer. You’ll need to account for the higher cost to you when setting sales goals and making a budget.
Increased sales, but stagnant profits
You may have a situation where your sales numbers are increasing, but your profits are staying about the same. You’ll want to figure out why that is, since logically, your numbers should be going up, too. It could be that the cost of doing a project has actually gone up, while the price that you charge clients has stayed the same. Possible factors could include not just material price increases, but also labor rates.
The amount that you’re spending on customer acquisition could have also gone up. The cost of selling a specific project could rise without you even noticing, so you’ll need to dig in and find the cause. Sometimes it could be a combination of these factors.
Offering a discount can be great way to entice potential customers and win sales. Discounts and limited time offers are useful as a part of a marketing campaign and can drum up interest in your services. It’s important to have a discount price strategy in place before you go slashing the fee for a project, because you can end up lowering your profit margin to the point that you miss your overall goals.
Keep in mind that your sales team should be able to close deals without having to discount the price every time. If you’re a small business and you’re the one doing the selling, take an honest look at your tactics and style. While selling may not be your strong suit, it is a skill that can be honed over time. Consider that you may need to change your approach and try out new strategies. Businesses that have a sales team will want to look at providing better training in order to close more deals without having to resort to discounts too frequently.
Another possibility is that your price point is simply too high for a project when compared to your competition. In that case, you may need to adjust the fee lower in order to remain competitive in your market.
Most businesses, regardless of what products or services they’re offering, will see seasonal fluctuations in sales. Certain home improvement projects are naturally going to be more appealing to homeowners in certain seasons. Depending on where you’re located and what services you offer, you may see your sales slow at different points during the year. It’s essential to factor that in to your annual sales goals and projections. It can also influence your pricing strategy. You may consider discounting projects at different points in the year in an effort to boost sales.
It’s All About the Market
Remember, economics 101; price is where supply and demand cross. If the current market pricing for a service is below what it is going to cost you, you may need cut that service entirely.
Over time, you should be able to get a good handle on how much a project is going to cost you overall, in terms of time to completion, labor, and materials. Offering the best balance of value and quality will help you build a positive reputation, which in turn can bring you more customers. When considering adjustments in your pricing strategy, it simply comes down to weighing the benefits and factoring in all of the numbers.
I recommend getting in the habit of reviewing pricing quarterly to ensure that your profit margins are quarterly. By doing this you’ll avoid lost sales as a result of aggressive pricing by a competitors, and ensure that ‘cost creepage’ doesn’t prevent you from staying in the black.