How much are our services worth?

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Pricing and service value are complex areas of business decision-making and inquiry but should be near the top of our thinking when we are considering marketing strategies and principles.  Clearly, if we can find enough clients to pay a high enough price to cover our business costs we can continue in business.  Equally, however, we can price our services so low that we lose money and then we are in big trouble.  Without enough volume we are also out of business.

Effective marketing allows you to create a brand value sufficient that you can increase  your prices. If your input marketing costs are $100 and these costs allow you to increase your price by $500, then obviously you will consider marketing to be a truly wise investment.  However, where do you spend that $100 and is the $500 gain really possible?  Perhaps you can simply raise your prices now and make more money without any marketing?

You might think I am on some sort of drug (other than coffee) to suggest the latter idea but it is actually one of my first test questions when I connect with a business considering how to go about a marketing strategy.  I probe into the volume of repeat and referral business and if it is high enough that there is any sign of a backlog, I suggest the business owners  may be underpricing their service and a price increase is in order BEFORE they even start any marketing campaign.

Yes, great service providers  under price themselves.  Our family has been using someone for basic lawn maintenance and gardening services.  We discovered her by referral.  She is excellent, and completes her work on time and schedule.  She is also really inexpensive.  Neighbours, on learning about her, also have contracted with her for similar services, so her order book is filling rapidly.  She has succeeded in building a brand but she is pricing her services far too low (from a business perspective, that is, because we are quite happy that her price is where it is and are not encouraging her to raise it.)

Conversely, we all know about luxury brands — cars, watches, diamonds, shoes, clothing, vacation resorts, and the like where prices are through the roof high, yet the businesses never lack clients.  They have higher costs than their competitors, but the relative value, in an intrinsic sense, is hardly greater.  Consider the difference for example between first class and economy fares on international flights to Asia. You might pay around $1,000 for a comfortable if cramped seat in the back but the fare is closer to $20,000 for your private suite in the front.  Does it cost the airline anywhere near 20 times the cost to serve the first class than the economy class client?  I doubt it.

Many construction businesses find themselves trapped in conventional thinking about pricing, associating pricing power with an auction mentality — a reverse auction, where the lowest price wins.  Although public bidding and tender opportunities aren’t quite the equivalent of a reverse auction, in that the bids are sealed and so there is no negotiation below the listed price in a competitive process, we all know about that phenomena known as “bid shopping” and there are few areas in our industry where hypocrisy and inconsistency in public statements and private behavior is more apparent.  Fortunately, efforts by some purchasers to go all the way with a public reverse auction model have failed to gain traction.  Nevertheless, the game is to come in with the lowest price possible and hope we win.  This is hardly a route for great profitability, especially when bidding is truly open and virtually anyone can participate (and is especially problematic for smaller, public jobs where the bid list can be in the dozens.)

There are better ways and effective marketing coupled with profitable pricing provides the answers.  If you build your brand/reputation AND develop strategies to find and attract new clients to you, you will be able to raise your prices and profits.  If you think beyond the conventional competitive process to the underlying value you are delivering, and the potential clients you wish to serve, you will be able to sell your services  at higher prices than your competitors.   You will earn much better profits in good or hard times.

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