Do you
understand what you need to charge for your construction services?
Whenever a
prospective client tells me they’re doing a lot of work but not making the
money they should, I know they have a basic pricing problem. In other words,
they’re either not charging enough, or their costs are too high.
One big
problem is the use of pie-in-the-sky markup rates or guesstimating the job
cost. Either one will lead to some form of financial headaches. This is where
the low-ball arena will take you.
There is a
way to properly calculate your markup, but few even make the attempt to run through
the numbers. However, there are some other factors that must come into play
when determining your pricing model.
VALUE
One big
element is what you bring to the table. Do you have a selling process that
uncovers exactly what the prospective client is looking for, is it something
they can’t get from your competition, and can you deliver?
No one can
put a monetary amount to value, even your prospective client. But they do know
they want it.
COST
What are
your costs associated with the service or product you are delivering? How much
is the “cost of goods” or as I call it “cost of sales.”
One of the
problems with using margins to develop your selling costs is that it must cover
your overhead and produce the profit you desire. If something changes below your
gross profit, such as your overhead, this will impact your use of your gross
margin making is an ineffective pricing method. That is why I use the markup
method. It forces you to monitor your overhead and net profit amounts.
In the low
bid arena, where you must have complete control over your costs, the MUR
(markup rate) is especially helpful if it is coupled with good cost control and
budgeting models.
PRICING OBJECTIVES
What are you
trying to accomplish with your pricing?
This depends
on what you are trying to accomplish with your overall business strategy. If
you are pricing low to maximize sales, you are bootstrapping your cash flow and
it’s a no-win game.
Are you
trying to maximize long-term profits by increasing market share through an
economy of scale? If that is the case, revenues might be more important than
profits and that can be a no-win game.
Higher revenues
at a slim profit, or even a loss, reveal what I call the Wal-Mart Syndrome
which is a risk based on market capitalization.
The
bottom-line is where you need to focus after you have considered all related
costs, including your reasonable salary. Here are some basic considerations:
·
Your pricing model must be high
enough to cover reasonable variations in sales volume.
·
Your selling price must be enough to
provide you a reasonable wage.
·
Your pricing must produce a
reasonable net profit.
·
Your price should NEVER be below your
direct and indirect costs.
A pricing
model is a tricky thing to develop. It takes a lot of variables that must be
considered and tested. You are entitled to cover your costs and make a profit.
That profit is what you determine, not your client.
Your pricing
model must provide the value that the client is seeking because it is worth
what someone is willing to pay for it.
However, if
you don’t know your business metrics, it will be tough getting anything of
value formulated. I suggest you start there. If you are looking for help, I
have some business coaching slots available. Click on the link below and let’s
talk about how I can help you.
Henry Goudreau has been a
business coach, mentor, author, speaker and seminar leader to the construction
industry for the last 24 years. His proven business model for contractors have
helped his clients achieve and exceed their goals like it did for his own
construction business. His education is in civil engineering and business. You
can visit his website www.contractorcoaching.com or www.hgassociates.com or
email him at: henry@hgassociatates.com
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