Does Cutting Your Price Really Help Make the Sale?
There is no retail price for being a roofing contractor. As much as we might think, as hard as we try, this is the case. Yes, many folks quote square footage guidelines but are they really accurate? I say no and so will any other experienced salesman or estimator. Square footage prices are averages. If I had one foot in a bucket of ice water and another foot on a hot stove, by average I would feel ok.
Too many contractors’ solution of having little work, is to merely cut prices. While at first glance this makes economic sense, the reality is that cutting your price does not ensure you will be awarded the job. However, cutting your price does ensure that if you get the job, it will not be profitable.
With consumer sales, let’s suppose a professional contractor that knows his or her costs prices a job at $10,000. Others who estimate poorly or may not know what their overhead costs are may bid $7,000 or $8,000 for that same job. So if you cut your price 10 percent, you still will not be low bidder. It only ensures that if you get the job, your company probably will not profit.
If your company did $1 million in sales at 30 percent gross profit and your overhead was $300,000, you would need 100 jobs at $10,000 to break even. If you cut your price again by 10 percent to $9,000, your gross profit would shrink to 20 percent or $2,000 per job. You would now have to complete 150 jobs to reach your $300,000 break-even point.
One of the problems in cutting your price is that you also cut your price on customers who will buy the job anyway. Research shows that if you quote 10 jobs, 20 percent of those customers will probably buy from you as long as your price is within reason. In fact, some research shows that one out of five people only get one bid. So cutting your price on these two jobs just ensures you will do the work without a profit. When bidding those 10 jobs there are another two or three jobs you had no chance to earn. The customer was not really interested, did not have the money to do the job or was just trying make sure the “contractor” relative he or she was going to award the job to had a fair price.
Even cutting your price on commercial quotes does not ensure you win the contract. The CM or general contractor may have a favorite contractor that is asked to match the price or it may simply be a negotiation ploy and you are already the low price.
So what should you do rather than just lower your price?
- Be more strategic. Understand the segments of the market and the customer base where you are most competitive. Stick to your core competency.
- Don’t assume it’s always about being low price. Ever quote a job where you were not low price and you were still awarded the contract? Sure. You probably won the job because the customer thought you were more competent than the competition. What did they tell the other bidders, you were better? Of course not, they said they had a different price or had to think about it.
- Qualify better. Ask the caller questions. Probe. If they’re getting four or five quotes, it’s doubtful you’ll be competitive. Look up the property on Google Earth and see what the value of their home is. Is it a target neighborhood where you do a lot of work? When bidding commercial work, ask more questions rather than wasting the time to throw out a price on a job you have no chance of winning. In many cases the person looking for a price has nothing to do with the actual awarding of the job.
- Spend more time with jobs you have a chance to win. Sell better. Communicate better. Ask questions. Find out what the customer’s real needs are. Then offer product options and alternates that fulfill those needs. Get to know the customer and what they want.
- Learn to be a better salesperson. Improving your sales skills is one of the few areas where you can increase profits without taking more time and creating more stress.
- Work existing customers harder/develop more referrals. Look for an ‘in’ rather than merely bidding public projects or blind Internet calls. Build quality leads by working your customer base.
In closing, cutting your price is probably a knee-jerk reaction to poor marketing and staying on top of your backlog. You may find it much more effective to merely cut overhead or trim your team rather than create a pricing structure where it is impossible to be profitable.