Tuesday, April 11, 2017

Understanding Pricing Models

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.


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.


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.


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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