Pricing, eh? Don’t we get it three-letter-word backwards sometimes?

0
587
pricing
Why is "low price wins the job" so prevalent in the construction industry, and what can you do to escape the trap?

frustrated contractorI enjoyed reading this Contractortalk.com thread, started by a contractor who is setting out to develop a system to correlate pricing and closing ratios.

What is the percentage of estimates that you complete that lead to a signed contract?

I’m using this information to help me with my own results. I’m using a demand curve (The downward-sloping line relating to price and quantity demanded.) and a supply curve (The curve relating price and quantity supplied.) to determine my market equilibrium (The situation in which the market price has reached the level at which quantity supplied equals quantity demanded.). I’m just getting started in bidding my own jobs. MasterFormat prices in my area are too high. So, I took a small percentage off of MasterFormat prices in my area (10%) for larger jobs (The larger the job, the smaller amount of discount that I apply) and a large percentage off of MasterFormat prices in my area (50%) for smaller jobs (This applies in reverse: The smaller the job, the larger amount of discount that I apply to help determine the right price.). I’ve been increasing/decreasing these prices in 5% increments and documenting the results… I’ve been doing a lot of small jobs.  I figure that somehow a closing ratio will help me understand my numbers further.

Also curious to find out which form of advertising led to a better close ratio for you.

Also, what are your average sales per lead?

Thanks in advance for any informative answers.

I will let you read the thread for some of the insightful answers, but several people responding said they would never use software or book-type measures of costs, yet they had a sense of the right price, and where they could make money.

I can see the logic in the various assertions and observations. Clearly, we need to really know our costs of business and we need to control/manage our pricing to make sure we are profitable. If you don’t have a true grasp of your costs (which of course include your time, salary, and overhead expenses), then you’ll be in big trouble if you “bid to compete”. Undoubtedly sales skills are important, as well, and one of the critical metrics in selling is your closing ratio. Too low, and you may be pricing too low (for the market, you may be profitable, but you could be much more profitable if you price a bit higher and accept more ‘no’s). Too high, and you aren’t selling enough to stay in business (though I like the observation of one of the people on the thread who said one in 12 is fine with him — because undoubtedly his margin on these relatively infrequent sales is so high he can afford to work less and sell ‘more’.

We can also argue that, for many of us, we can reach a point of intuitive expertise that we know what is right and don’t need a whole lot of paper or formalized systems to do it well. This can be quite suitable for a very small business, but it is harder to systematize — I would fear taking a college grad or new sales rep and setting him or her loose with a “let’s do it with a pencil” attitude.

Certainly, you can use estimating guidelines such as R S Means or  software tools to provide you with a framework and give you a baseline to adapt your gut feel and intuition. You might also consult with people such as Michael Stone or others who have a good idea of common going rates and really get you to think clearly about your cost/pricing/sales systems.

Did you enjoy this article?
Share the love