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.

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.

>>>Set up your no-cost, no-obligation telephone consultation with Henry!<<<

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

How to Close More Deals – Part Two

In the last blog I talked about the process of having a lead qualifying sheet and with that, lead qualifying question or questions. 

The idea behind this is quite simple. To eliminate prospects that will never buy from you or are not your best type customer. This one simple process or part of your lead generation system will save you time and money.

Today, I would like to elaborate on the art of asking questions.

Last week I focused on finding that question that qualifies your prospective client as a real hot prospect.

Since every contractor has a different marketplace or best type client, this ‘qualifying’ question may vary. However, here are some more examples.

“How much do you expect to spend?” This is a great question and sets up the financial perspective the client is coming from. It also gives you an idea of the realistic financial value of the project.

Another great financial question is:

“Will you be paying for the work with your own cash or with a bank loan?” This also sets up the financial status of paying for the work, who will pay, and how long it will take to get paid. No matter where the funds are coming from it is important to find out how much they have to work with. 

Remember, projects often do run over budgets with unforeseen conditions or changes. You need to make sure they have the availability of acquiring the additional monies to cover the changes.

“Are you the final decision-maker or is someone else a part of the final decision making process?”  Too many contractors eager to get a job, expend too much time and money jumping right into a sales pitch without properly qualifying a potential client. 

It’s vitally important to determine who makes the final approval and decision on the deal or project. Otherwise, you’ll find yourself having to start all over again, or out of any opportunity to close a deal.

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Now that you have qualified the client as serious, the next questions should help you drill down on why they want to do the work. To be successful with this part of the process, listen intently and don’t be afraid to ask drill-down or follow-up questions.

The opening question for this part might go something like this.

“Why do you want to do this work?” This questions reveals a powerful emotional buying trigger, the “WHY” 

Again, you might need to drill down a little farther. Remember, people buy for emotional reasons, not a logical one. They JUSTIFY their emotional buying with logic.

Another might be:

“What exactly is the problem you are having?” 

Or …

“What do you need and what do you don’t need?” Good question since it focuses them on exactly what they need and you don’t have to make assumptions. Everyone has their pain points and during this process, you should be trying to uncover them.

Speaking of pain points, here is another question to uncover what you need to avoid.

“Have you ever worked with a contractor in the past on work like this?” This reveals whether they have had experience before or not. If they have, you would come back with this drill-down questions.

“What did you like and dislike about that experience?” WOW! Dynamite questions. Now they will tell you the things you want to do and the things you want to avoid!

Another question might follow along these lines.

“What are your expectations?”  Another powerful question since it reveals exactly what they expect and allows you to deal with it in a realistic manner. Now is the time to elaborate on how you schedule the work, handle questions, change orders, budgets, allowances, and all those things that can go wrong on a project.

“When do you want to start the work?” This question will help you understand the prospects perspective of when they expect you to be working on their project. In some areas of the country, the permit process can take days if not weeks and this allows you to educate them on that process and details the steps you have to take before any work gets started. Believe me, this question will avoid a ton of misunderstanding in the future.

“When do you expect the work to be completed?” This question gives you two important items. One, when they think the work will be done, which may not be realistic, and two a chance to work the deal back to a matter of urgency which might just help you close it sooner.

Let me explain.

Let’s say that they feel the work should be done by a date three months away. You calculate that it could be done but not unless you get the deal now. In this scenario, you play the urgency back to them. Such as ...

 “Mr. & Mrs. Jones. I know you want the work completed by this date. Unfortunately, the only way I can make that happen is if I have a done deal with you today. Let me explain. The permit process will take three weeks. Ordering the materials with delivery will take six weeks. The work will take three weeks. As you can see, that is your three months! In order to meet your final completion date, I need your approval of my proposal so I can get started today.”

Asking questions, the right questions, is an art form. It takes practice. To start, I would suggest you write down as many questions and drill-down/follow-up questions you can imagine. Then categorize them to the situation they apply.

If you do this, you will start the process of memorizing the questions and knowing when to ask them. However, practice is the best process.

Next week I’ll discuss part three, the Measure Call. Until then, happy hunting!

You Can't Go Back!

Something about getting older, maybe it is because of time and experience.

 

Have you ever realize that you wish you could have done something differently?

 

Maybe ... better?

 

Unfortunately, you can't go back.

 

You see ...

 

Time only moves in one direction ... forward. So we can't go and correct our mistakes. We can only learn from them and correct what we doing as we go forward.

 

If you understand what I mean.

 

Then you realize that the time to correct things is now, not later.

 

Remember ...

 

You can't go back.

 

I can absolutely guarantee you that this principle applies to your business as well.

 

So the question is?

 

Could you sharpen your business knowledge and skills?

 

Or ...

 

Sharpen existing ones?

 

Use a mentor to help you?

 

Take your business to a higher level?

 

All good reasons. Don't you agree?

 

From my experience as a coach and mentor working with hundreds of contractors, the answer is yes.

 

The only ones I've never been ale to help are those that stubbornly refuse to get help, and those who won't follow my directions.

 

So the next question is ...

 

Are you astute enough to realize that you could benefit from some help, or so stubborn that you refuse to get it, and later wish you had?

 

You'll never know until you reach out for it.

Speaking of reaching out.

If you would like to talk and discover how I can help you and your business, you can set up a phone conversation by clicking here!

Do you know where you make your money?

http://www.contractorcoaching.com/mentors.php

The Golden Hard Hat Mentoring Program - "Taking Care of Business!"

If you think every different type of job you do is making you money, you may be sadly disappointed.

Not every job or type of work makes you money.

In fact, some are real losers.

In a competitive market your competition’s willingness to take the job cheap, or below your costs, hurts your Sales and bottom-line.

On the other hand …

Some owners may also be leeches of your profit margin. Slow payment, expecting you to do extra work for nothing, and the never-ending punch list.

It is painful to think what work will make you money but not really know, can steer you in the wrong direction.

This is where knowing your business metrics and having the right tools will help you optimize your approach to getting work.

Making smart decisions based on valuable information is the key.

Understanding your business metrics makes your business work for you.

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However, if you don’t know your own business metrics, you become the victim of your own ignorance.

Let me explain what I mean.

When I first started out as a contractor, I thought I made money on every job.

Unfortunately, that wasn't the case. Some made money, others made less or none.

This bothered me.

I kept asking myself the question: “Why?”

At a glance, I couldn't uncover the underlying details.

I kept thinking, what is causing me the problem?

With that drill-down question, I embarked on developing a method of uncovering and revealing what was really going on. In other words, the metrics.

You see, most contractors focus on the basic Job Cost VS Estimate result.

This is fine because it will tell you if you brought it in as estimated or if you didn't.

Sadly, it doesn't reveal what is really going on under the covers. The real root problem or problems.

In my “Golden Hard Hat Mentoring Program,” I give my clients my Job Characteristic Spreadsheet that points to the plus and minus of the project, expending of company’s resources, and even … the owner.

This drills down farther than the typical job cost report.

It also flashes to you the good, bad and ugly of the job, so you can make intelligent decisions about the work or owner.

The report displays the time to complete, size and type of work, as well as the consumption rate of the company’s resources.

The report also informs us to the turnover rate, profitability, and the collection cycles of the owners.

This compliments the company’s volume derivation and distribution of management time which establishes the best economic goals for the company to pursue.

The metrics are revealed in color. Red is dangerous, Yellow is warning, and Green is good.

Figure 1 Job Characteristics Report of www.hgassociates.com

To optimize your construction company’s profitability and maximum use of capabilities and capacities, understand where and with what work and/or owner you make your highest return for your effort. This is the smartest way to jump-start your company’s success.

By understanding the metrics, you’ll be able to focus in on the work where you make money and get paid.

Again …

Knowing your business metrics is the key to success.

Do You Understand Your Business Metrics?

Are you struggling with your businesses because you don’t understand what drives it?

Every business focuses on making sales, paying the bills, and hopefully making a profit.

However, there are other financial and performance measurements that can provide early warning signals and detailed avenues to greater success.

At this point, you may be asking …

What are business metrics?

They are a unit or units of measure to gauge and detail a company’s performance and provide the company’s management with standards of improvement.

For example.

You may ‘think’ it would be a great idea to hire a new employee. Maybe, you think it might make things easier for you, or grow your business. The true answer is, how do you know? Can you prove it’s in your best interests?

It is NOT what you ‘think’ is best, it is what you can justify within your exiting capabilities and capacities of your business.

In my Golden Hard Hat Mentoring Program, I show owners of construction businesses how to measure, track, analyze and justify their business metrics. In hiring people, we use the program’s distribution of time to develop the metrics for each position within the company. Based on the strategic business plan we have developed together, and the existing performance of the company, we can clearly justify when it is required by performance for new hires, thereby eliminating a top heavy business.

Another example that I see so often, is the ‘thinking’ of which work is most profitable for the business. Unfortunately, for most owners, this is nothing more than a thought based on emotions. Remember, we want to measure, track, analyze and justify. To do that, we use the program’s Job Characteristic Report to show us, based on our specific parameters, type of work, or owner that provides us with the highest return for our efforts, thereby eliminating that work or owner who hurts our bottom-line performance.

Even one more element is understanding your pipeline and backlog metric. As we all know backlog is the amount of work you have in the work process at various degrees of completion. Your pipeline is the amount of work you expect to funnel into your backlog through your marketing, lead capture and capture rate of the leads into signed contracts. Based on your turnover metric, we can calculate your maximum and minimum backlog you should have at any given time.

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The use of business metrics, including the measuring, tracking, analyzing, and justifying help keep the business on its target, and within the capabilities and capacities of the business. As in all things, it is critical to the success of the business to know the right parameters – and then to know how to use them. Measuring with the wrong metrics can do more damage than good.

Here are five easy tips:

1.      Understand and know your businesses capabilities and capacities. I hate to say this but I see too many contractors get themselves into trouble because they do not understand their capability and capacity. You only have so much time, money, employees, equipment, knowledge and experience. Use it wisely.

2.      Understand measure, track, analyze and justify. Every element of your business should be exposed to this concept. Accountability is fundamental to effective management and decision making.

3.      Determine the correct metrics. You need to determine the correct metrics, and then make sure you fully understand them and have the proper tools and information for measurement. Choose your metrics that best fit what matters to your strategic business goal, from which individual objectives are created.

4.      Avoid the pitfall of ambiguity. Your metrics must be extremely clear. A broad goal like ‘increase sales” can leave everyone with different ideas, thereby producing failure. Your metrics should be so clear that an outside person could come in and check whether the objective has been met. Clarity produces certainty.

5.      Invest in the knowledge, help and tools that deliver. To make this work for you, you need a working knowledge and real-time feedback. In the Golden Hard Hat Mentoring Program we provide owners of contracting businesses, the knowledge, resources and spreadsheets that feed the vital information to the owner via dashboards that allow them to quickly view and analyze its performance.

     Here is an example of a dashboard that show the financial and employee metrics to do its

     yearly volume:

From this snapshot, we can see the following metrics from a fictitious company we will name, Your Construction Company.

The company plans to do $1,000,000 in volume at a markup rate of 1.45, and produce a bottom-line of $85,000 after paying its owner a reasonable salary. The company will need a capital reserve of $152,500 in either a line of credit or cash, or a combination of the both to properly fund its goal.

It collects on its receivables every two months, and it takes the company approximately 150 days to complete its average project.

The maximum backlog amount it can’t exceed is $200,000 and its minimum backlog amount in cannot go under in order to maintain its goal is $145,161.

As long as the company controls its expenditures and reaches its goals in all areas, its break-even volume is $725,806.

Based on its capture rate, the company will have to bid approximately $14,285,714 of new work in order to produce its desired volume of one million. This metric indicates that either estimating or the companies target market may have to be reviewed.

According to its time management requirements, it has the correct number of estimators, and project managers. It has an excess in salespersons which indicate that with proper modifications in its sales people it could increase sales.

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    Talk to Henry

To schedule a no-obligation conversation with Henry Goudreau, "America's #1 Business-Building resource for Contractors," click here!

Let us help you build a BETTER, more PROFITABLE, more ORGANIZED construction business.

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Keep in mind that you will need to reevaluate and adjust your metrics as your business priorities change. Fortunately, this program shows you how to accomplish that. Such knowledge is extremely helpful in making every effort to achieve what you set out in your strategic plan, even if your targets were off.

Unfortunately, too many owners of construction business don’t always recognize what makes their businesses work thereby stunting growth, profitability, and the freedom they desire in their lifestyle. When you invest time and thought into setting, monitoring, sharing, and refining your metrics, you’ll be amazed at how much more in tune you are to the state of your business, and how much more easily you can make the critical decisions that can catapult your business’ success.

Remember, your business metrics is what drives your business to success!

#successincontracting