Lately, it seems every discussion or training class that we have with contractors deteriorates into a pricing whine. Yes, I said whine.
Here's why: We live in a world where all of us are instantly available via our cell phones. These miraculous devices give us access to news, world affairs, immediate financial information about our companies, status of jobs, and so much more. We live in a world where we can download a good marketing idea, a load calculation program, an energy savings calculator, even the latest business book — instantaneously — from our personal computers.
And yet, with all these technological advances making great improvements in how we do business, we still question why one company sells the same job, using the same equipment for $500 less. There's only one of two answers to this question: either the company selling at the cheap price doesn't have a clue, or they know precisely what they're doing.
Unfortunately, there will always be companies with management who don't understand their business, don't understand marketing, and don't understand how marketing and pricing work hand-in-hand.
Don't worry about these companies.
Now, what about the company whose managers understand precisely what they're doing, who know the company financials, the dollar amount of overhead that must be covered every month, who track and know its sales backlog. How can that company sell the same job with the same equipment and, probably equivalent operating expenses, for $500 less?
The answer is three-fold — overhead allocation, understanding monthly break-even and variable margin pricing (a sophisticated name for understanding that pricing is part of marketing).
Overhead allocation means that the company captures the true costs of doing business and then matches the overhead or operating expenses with the types of work that cause the operating expenses to be incurred. Running service calls — demand service calls or maintenance calls — causes the company to incur more operating expense in the form of office salaries, truck expense, cell phone expense, paperwork — than an installation. Since service work causes a company to incur more operating expense, the service department should be allocated a higher percentage of the operating budget.
However, most pricing systems (specifically mark-up and gross margin) automatically allocate operating expenses based on the price of the installation or service call. Consequently, because an installation will always have a higher selling price than a service call, more operating expense is allocated to an installation. A higher percentage of operating expense is allocated to the type of work — installation — that generally requires more competitive pricing and actually causes a lower percentage of the operating expense.
A different strategy of overhead allocation alone may explain the $500 price differentiation on the same job using the same type of equipment.
Monthly Break-Even — Knowing the company's break-even is possibly the most powerful pricing tool any manager or owner can have. Every job sold after the month's overhead has been recovered means that the gross margin after the equipment, material, and labor have been paid for drops to the bottom line. This allows the company to immediately raise or lower its price on all jobs sold after the monthly break-even sales volume has been reached.
Knowing and strategically using monthly break-even alone may explain the $500 price differentiation on the same job using the same equipment.
Variable Margin Pricing – Pricing is part of a Marketing Strategy — We live in a retail world that's been negatively impacted by a recession and slow recovery. The post-recession consumer is looking for a "deal." When do retailers offer a deal? When business is slow or when they want to boost sales. Retailers don't offer deals when business is brisk — they don't need to.
So what does our industry do? We establish installation prices at the beginning of the year and only adjust them, maybe, when a supplier increases his price to us. The best retailers use pricing as a marketing strategy and offer a deal when sales need to be boosted and maintain prices when sales are booming.
Variable margin pricing alone may explain the $500 price differentiation on the same job using the same type of equipment.
The best companies in our industry understand that pricing is part of their marketing strategy, and while they may drive you crazy with their prices, they keep me sane.
Vicki LaPlant has been working with HVAC contractors for the past 30 years as a trainer and consultant. She is expert in helping people work better together for greater success. She is a Contracting Business.com editorial advisory board member and can be reached by email at email@example.com, or by phone at 903/786-6262.