In a recent article, I explained why you could not make money charging $25 an hour. The response was extremely positive and readers wanted to know what the proper price should be. Not knowing what to charge and the fear that you cannot raise prices is one of the greatest causes of contractor failure. Let's review some of the issues contractors have with raising prices and how you can overcome them.
No Budget, No Data, No GutsWe have taught basic cost and pricing principles to thousands of contractors. A very curious thing happens when contractors make a budget and raise prices because they clearly define all of their costs. You would think that raising prices would cause a contractor's closing ratio to sharply decline but this is just not the case. In fact, if contractors raise prices based on a real budget and numbers they clearly worked out, closing ratios may even increase. Why? Well, it is very difficult to sell your competitor's price or a job you simply quoted a nickel cheaper than the other guy. And since most contractors are honest, they do not want to overcharge or be unfair to their customers.
So the first rule in raising prices is to have a real price you determined with facts, not assumptions, or by the seat of your pants. I can tell you that most contractors need to be charging $35-45 an hour, plus materials, but if your actual cost is $32 or $49, this is just not going to work. You have to know your costs and determine your own prices.<
No Fear Price RealitiesLet's divide the proposals you give into three customer types. The "give me's," the "maybe's" and the "no's. Suppose you have 10 customers, what will the breakdown of those customers be?
The "give me's": In reality, the referral and repeat customers are not so price sensitive. Therefore, if three or four of the 10 quotes are repeats and referrals, raising your price will have little impact. If people will pay you $40 to cut their yard, they will probably pay you $44. If you are doing a roofing install and the price is $5,000, they will probably pay $5,500.
The "maybe's": There are probably another three or four of these potential customers who are undecided. Doing a better job of selling these people is probably a better approach than simply cutting your price. With better sales skills, you may get one or two more of these jobs.
The "no's": There is another group of potential customers, where no matter what, you are not going to get this job. The simple truth is you probably don't want this job. If the customer is going to obtain four or more quotes, they are shopping price and you will be out of the game plan. The trick is to qualify these people over the phone and try to avoid even giving them a quote.
No Prospects without Separating the SuspectsQualifying people over the phone can be somewhat of an art. You also can use your workload and lead volume as a way to determine whom you will and will not give a quote to. Obviously if you have a one-week backlog of work, you are more eager to run out and write up a proposal than if you had a three-month backlog. Frequently, the person who answers the phone is also the office manager, bookkeeper, receptionists, chief cook and bottle washer. For this person, qualifying customers can be a nuisance, particularly when spring calls are heavy and frequent. As I discussed last month, consider making a checklist the person can use to qualify potential customers. A sample checklist might look like this:
Always ask the customer's permission to ask questions: "So that we may be better able to serve you, do you mind if I ask a few questions?"
Start by asking, "How did you hear about us?" This will determine if they are a qualified or unqualified lead. A qualified lead will be someone who says that you did work for them in the past or you did their neighbor's house. Or maybe they are in an upper-income area where you do a lot of work and saw your truck or yard sign.
Unqualified leads are people who can't remember where they heard of you, got your name from the phone book, etc. You want to qualify these calls and feel out their potential.
Qualifying questions are really common sense questions and after asking these for a while, you can get a sense whether people are really interested in using your company or just price shopping and/or gathering information for a dream job they cannot fund. Sample questions are:
Tell me a little about the job?
Help me understand what you are looking for.
Where is you're job located?
When would you like the work done?
Have you consulted a designer or developed any type of scope of work?
What if you think they are price shoppers or they even tell you they are getting five estimates? How do you get rid of them? The easiest approach is to tell them that with your current volume, you are running about six weeks out to give an estimate. Most will simply go away, if not, you can call them back in a month and see where the status of the job is.
Last, but not least, if someone is in doubt, the owner or salesperson can call and qualify them prior to the final appointment being set.
No Magic AnswerThe size of your business, your current income and your market can all influence your pricing situation. Small- to medium-sized contractors can usually raise their prices easier than larger companies. Common sense also tells me that if I make $30,000 a year, I am not getting rich. I may be able to raise my prices (assuming you are not incredibly disorganized or incompetent). Backlog and renewal rates for maintenance are a huge indicator of what you can do with prices.
BacklogI talk to contractors that have three-month backlogs and are absolutely convinced they cannot raise prices. Once workloads book out four to six weeks, you should begin to raise your prices - not gouge people, just apply the laws of supply and demand. A 5 percent to 10 percent - maybe even 15 percent - increase is certainly reasonable. We do understand that businesses like roofing have a much higher spring lead factor, so selling heavy into the summer may mean a longer backlog but this still does not mean you cannot raise your prices.
No Good CustomersYour customer base has a lot to do with your ability to raise prices. If you are roofing for little old ladies on a fixed income, price increases are going to be more of an issue than if you work for busy executives who just want it done and not to be bothered. If you have a lot of commercial accounts, they may be more price-sensitive than residential accounts, particularly if they go through a bidding process. If you are working for builders, they will obviously be very price sensitive. Determining who is and is not price sensitive makes sense and focusing growth in non-price sensitive areas is the strategy to follow. Remember, even little old ladies have a hard time finding people they can depend on. Is it not better to charge a little more and stay in business and be able to service your customers than to be too cheap and ultimately go out of business? Most of your customers do not want to see you fail and go broke; they want you to be fair and give good service.
Take time to strategically figure out where you can and cannot raise prices. You are probably the biggest obstacle in the way of your raising prices. Don't be so busy working that you don't have time to be successful.