Pricing for Profit
or. . . How to stop guessing and start prospering
By Tim Clover
Computerized pricing software can make your business more money, allow you to treat your customers more fairly, and give you more free time to do what you love. Don't believe me?
Pricing software starts with a giant price book that is maintained in your computer. This price book has thousands of items in it. The prices of these items are all maintained automatically by subscription. These prices can then be used in estimates, invoices, and flat rate books to develop the price that you charge your customer. This is exactly the same thing that you do whether you use a paper price book or ask your supply house to quote the prices. Pricing software just makes it faster and more convenient to develop selling prices that you won't end up losing money on. Without it, you'll risk putting your business on the treadmill -
Joe's accountant tells him his overhead runs about 20%. Joe wants to make a modest profit of 10% on top of his overhead. Joe sells a faucet that costs $100 and marks it up 30% figuring this will get him his 10%. The sell price will be $100.00 x 1.3 = $130.00. The problem here is that Joe's overhead is 20% of what he sells that faucet for :$130 x .20 = $26.00. To figure out what Joe really makes on this faucet you subtract the overhead from the selling price, a whopping 4 bucks! The problem is compounded by the fact that Joe doesn't use pricing software, so he can't easily track the cost of the faucet. Next month, the price of the faucet goes up to $105. Joe doesn't notice the change so he starts losing $1 every time he sells that faucet. The truth is, he'll probably be using the same price next year because he's so busy running in one place!
How can pricing software help? By enforcing a fair and consistent method of pricing that doesn't shortchange your business. Let's see what happens when we put it into practice.
First, we'll put Joe on the right track by creating sell prices that keep him in the black by using the profit percentage method. Frankly, you don't need pricing software to do this; it's just a lot easier to do with it! So let's take Joe's goal of making 10% over and above his overhead. Using the profit percentage method, Joe divides the cost of the item ($100) by .7 (this is the reciprocal of the profit percentage) and he ends up with a sell price of $142.86. Joe is thinking, "That's a straight markup of 43%! I have to mark up that much to make 10%?" Well numbers don't lie, my friend, unless you do budgets for the Federal Government. The truth is that many tradespeople still use straight markups. Think they'll be making $30 on that faucet, but end up making $4. That keeps them on the treadmill, running as fast as they can and never getting anywhere.
Next month, the price of the faucet goes up to $105. Rather than simply absorbing the price increase, Joe's pricing software uses the new price of the faucet. Since the prices are maintained by subscription, it automatically calculates a new selling price ($150) based on the 30% profit percentage Joe set up in his software. As you can see, pricing software keeps Joe's business profitable and maintains a consistent pricing strategy that also treats his customer fairly.
If you've been in the pricing software business as long as I have, you've heard 'em all. I hear a lot of excuses, eventually I get a lot of postcards returned with 'No such person, address unknown' . I'd like to share some of the reasons contractors tell me that they don't need pricing software. Read on and see if you recognize any of these "Treadmill Types".
Waggers use the WAG method of pricing, the Wild Ass Guess, and they come up with such nice round numbers when they quote a job. The only people they are fooling are themselves. If their customers are sure they're getting a hell of a deal, they'll accept the price. Otherwise, they'll question the price and try to beat it down. Waggers will probably settle on a lower price because they haven't got a clue whether they'll make money on the deal. They only see the number of jobs they've got signed up as a measure of their success! Wouldn't you rather work on 1 job at a fair profit than 10 jobs where you lost money?
Laggers create a pricing model and figure it's done until next year. When you buy a razor, the blade stays sharp for life, right? We all know that if you shave with an old blade, it's going to hurt, so we replace the blade when it gets dull. It's the same with prices if you want to keep your business on the cutting edge. Let's say materials prices have increased 5% to 7% across the board. That means that if you buy $100,000.00 worth of materials per year and you charge the same amount for an item next year, you'll be taking 5-
Gaggers try to create prices using recommended business standards (profit percentage method) and they choke when they try to present them to their customers. These guys allow their customers to set their prices! When was the last time you went to the grocery store and the grocer lowered his price for hamburger because you thought you were being charged too much? "This is just ground meat, it shouldn't cost that much. I could grind my own for less." Yeah, right! Allowing customers to dictate how much you can charge is a sure way to put your business on the treadmill and keep it there. Gaggers must accept that they must sell customers on the value of their products and services. That's a given! Your business requires a certain minimum profit in order to keep the doors open and it is your responsibility to build that profit into what you sell. Pricing software allows you to set a reasonable selling price that incorporates the true cost of doing business! My advice: Don't allow these customers to drag you down, ignore them and move on!
The use of the profit percentage method really goes back to folks like Frank Blau who have gone to a lot of trouble trying to educate our industry about the pitfalls of using straight markups. They were telling us to "get off the treadmill and charge what you're worth" years ago! If we're smart, we'll listen and learn.
How many times have you seen this little drama play out? A mechanic that you trained decides to start his own business. He uses prices just a hair under what you've been charging and goes after your customers. He has a tough first year getting enough business, but his second year he's so busy he has to turn work away (seeing as he's still using the previous year's prices you'd have to be an idiot to try to compete with him). Third year comes along and rumors start to fly around the supply house that this guy hasn't paid his bills and is on a cash only basis, and pretty soon thereafter he's out of business. Now you know why.
Pricing software really can keep your business in the black, allow you to treat your customers more fairly, and give you more free time to do what you love. Challenge yourself: start using pricing software in your business now -