The remark happens at least once every time we have an annual planning meeting. “Maybe we should cut our prices to improve our sales . . . ”
There’s nothing wrong with someone in the organization making that sort of quick suggestion — after all, one of the rules of our planning meetings is that anyone can suggest anything, without fear of recrimination. However, I admit, when I hear this one, I quickly get my back up and say: “Why would we even think of doing something that stupid?”
Then I proceed to the rational explanation.”How much additional volume in sales would we need to achieve to offset the lost margin on each sale we make?” Say, we reduce our prices by 10 per cent. Assuming costs remain the same, that represents a 100 per cent profit/margin loss. Well, not quite so much, because there are some variable costs — such as sales commissions — that would also decline. But if we had a $1,000 sale, we would be throwing certainly more than $50 in profit — and we probably would need to sell at least $250 to $500 more to offset that lost revenue. “How easy will that be to do,” I ask the sales representative, who is presumably struggling to fill quota even at the current prices.
Sure, existing clients might be happy to take the discount, but we would have to hustle up plenty of new business — and no, we if we try to hold prices high for current clients and reduce prices for new ones, we walk into a minefield of messy business relationship problems.
My answer usually is: “How about considering a price increase?” Indeed, even slight price increases also have a disproportionate level on profits and sales-needed-for-breakeven.
If these points are valid in the publishing business, you would think they would be equally valid in the architectural, engineering and construction industry — but far too many practitioners are wedded to the concept: “Low bid wins the job” and they race to the bottom in an absurd competitive frenzy.
Take this recent posting from Michael Stone as an example:
I can’t tell you how many times in the past few weeks I’ve had contractors tell me they are cutting their prices to get work. I even took a call from a contractor in the Midwest who told me we should bring our two-day Making The Numbers Work In Construction class to his town “because all the NARI members are busy cutting their prices.”
Why? If the price you calculated is what you need to cover your job costs, pay your overhead expenses and make a reasonable profit, why would you choose to pay those expenses yourself just so you can build this project?
When contractors cut their price, it’s almost always because they are hurting for work. They need to get a down payment so they can pay bills. More often than not, they aren’t getting enough leads, which makes every lead more valuable. When you’re desperate for leads, you’ll do whatever you need to make the sale, and sometimes that includes taking money out of your own pocket to build the project just to keep your employees working.
Don’t forget that if you start negotiating price with a client, they discover that what you say is negotiable. You can end up negotiating many more details by the time you’re done with the project. Make this your mantra: “You tell me what you want, where you want it, and how you want it, and I’ll tell you the price.”
If you have a steady stream of leads coming in the door, you won’t be in this situation. You get those leads by advertising. Start with a website that is optimized to generate leads, but don’t stop there. You should also be using at least three or four other advertising methods, such as vehicle wraps, job signs, billboards, newsletters, business cards, social media, thank you cards, TV or radio, home shows, or newspapers (some people still read them). If it looks like you’ll be heading into a slow time, ramp up the advertising with TV, radio or newspaper ads, keeping in mind that it will take a while for leads generated to actually turn into jobs. (You can read about the job cycle in our book, Markup and Profit Revisited. We also talk about it in this blog post.)
The construction market is improving. But there are fewer contractors to do the work, that includes both general and specialty contractors. Buildings are seven years older than they were in 2008 and that means they are at least in need of repairs, and many are overdue for remodeling. By all reports, there is more demand today for new housing than there was in 2008. So, more demand for remodeling and new homes, and fewer contractors to get the job done. Why would anyone cut their prices in that kind of market?
Consider this. Do you use an air compressor to get your work done? Have you noticed there are fewer companies repairing compressors today than there were seven years ago? Have you also noticed that the compressor repair shops haven’t cut their prices?
Do you have welding equipment that needs repair? Repair shops for welding equipment keep raising their prices, not cutting them.
How about your vehicle mechanic? Have they cut their prices? Your doctor? Your dentist? The grocery stores? How about going to watch your favorite football, basketball or baseball team? It even costs more money to watch a high school football game.
When you start cutting your prices to get jobs, you’re ignoring the reality of business. I have a favorite saying when I find someone who is set in their ways and can’t or won’t consider change: “Be as stubborn as you can afford to be.”
Don’t cut your prices. Know your value and learn how to sell it. Unless you need practice losing money, let someone else get the job and lose money.
Stone, of course, is correct. If you have enough leads/volume and the ability to convert the leads into business effectively, you should be able to manage your backlog/capacity so you don’t find yourself feeling forced to reduce costs to bring in at least some cash to cover your overhead.
The trouble, alas, is that many contractors and businesses only decide they need to “do marketing” when things turn not so good — and they are cash strapped, and (alas) most marketing initiatives have costly/poor immediate payback, especially if you’ve been passively relying on “word of mouth” and easy inbound inquiries for your business. Really effective marketing requires experimentation, testing, and time — qualities you don’t easily have when things are difficult.