Too many contractors set their service pricing by accident. For this reason one contractor out of five closes every year when the economy’s strong, let alone when it’s weak. Service pricing should be set at a level where you can pay your bills, pay yourself, pay your employees, provide training, invest in the growth of your company, and leave a little left over. In other words, service prices should be set to earn a targeted net profit.
Sounds obvious, right? The question then, is why don’t more service companies charge what they should? The three leading reasons contractors fail to set profitable prices are ignorance, self-esteem, and the fear factor.
It should be obvious that prices ought to be set with an eye towards achieving profitability. This presumes a contractor knows his costs. Too many don’t. They don’t even know if they made money during a given month. A good month is one with money at the end of the month, rather than the reverse.
Contractors who don’t know their costs base service pricing on what competitors charge. This might make sense in some industries, where deep pocket companies price for the purpose of gaining market share. In the world of service contracting it’s a big mistake. It’s like becoming lost and following a blind man who is equally lost. Setting your service price based on the price of others is often the blind leading the ignorant. And yes, if you set your prices in this manner, you are ignorant. Sorry. You are.
Many contractors are afraid to charge the prices they need to charge. They don’t think their service is worth it. That may be true … today.
These contractors don’t deliver enough service to command higher prices. Their people aren’t up-to-speed with the latest training. They drive beat up trucks that leak oil in front of the customer’s house. They look sloppy and slovenly. They can’t respond to emergency service calls rapidly. They hurry from job to job, not taking the time to perform as thorough a diagnostic as they should (though they might disagree). They lack all the tools they might need. They’re more likely than their more thorough contractors to fix symptoms and not true problems, leading to callbacks, which they accept begrudgingly because every callback is seen as money out of the pocket.
In short, they offer a cheap service that corresponds to their cheap price. And, at the prices they charge, they can’t afford to offer more. It becomes a Catch 22.
The solution is to break out of the low price bondage. Set prices at the level needed to provide great service and get busy raising the service levels to match.
Of course, this is all for naught if you can’t get past your own mental blocks. You can’t run a contracting business and think like a technician. You must also see things from the homeowner’s perspective; not yours.
Homeowners call you for service because they either can’t make a repair on their own or they’re too busy with other, more productive activities. In either case, the value of your service is worth more to them than it is to you.
What is the value of a cool house when it’s 100F outside? What is the value of cleaner air, an end to thermostat wars, more reasonable utilities, and a reduced environmental impact? You are worth far more than you think.
Contractors often fear customer reactions to higher prices. They fear that it will cost them business. It might. But the fear is misplaced. This is especially true if you use flat rate pricing.
Most contractors who raise their prices to the levels they need to successfully operate a first class, profitable service company see little customer loss. The added revenue from the price increase will more than make up for any customer loss. Not only will revenue increase, but gross profit will increase.
Know your costs, build your value, and have the courage to price accordingly. There’s no virtue in bankruptcy. Price for profitability.
EDITOR’S NOTE: This was excerpted from The Power of Positive Pricing, (235 pages, Service Nation Press) by Matt Michel. You can order your copy for $28.95 at Shop.ServiceRoundtable.com.
Matt Michel is the CEO of the Service Roundtable, which can be found at www.ServiceRoundtable.com. He is also a member of the Contracting Business.com editorial advisors board. Contact him by email at maito:[email protected] or toll free at 877/262-3341, or on his mobile at 214/995-8889. You can friend him on Facebook, connect on Linked In, follow him on Twitter (@ComancheMktg), and read his blog at www.ComancheMarketing.com.