You have two options when it comes to pricing your jobs. You can get into the bidding game and try to win by offering the lowest price. Or you can sell your products and services at the price you need to pay your direct costs, all overhead, and make a reasonable profit.
It’s a choice every construction-related business owner needs to make. Too many believe they don’t have a choice. They believe they have to bid and win jobs based on price. There’s no nice way to say it: they’re wrong. If your bid results in a price lower than what’s needed to pay your job costs, overhead, and a reasonable profit, you’re losing money.
The people who tell you that you need to be competitive are our customers and others outside our industry. They’re used to buying other products on a competitive basis, like groceries and cars and clothing.
Grocery stores, car dealerships, and clothing stores can offer competitive pricing and great discounts because their products can be produced in a cookie cutter fashion. They can make hundreds, if not thousands, of identical products at one time. They can raise or lower their prices on individual items as needed to increase sales and still make a profit. They make up for the lower profit margin, caused by the lower price, by selling a higher volume. They can do it with little or no increase in overhead. They don’t have to choose between being competitive and being profitable.
You can’t do that in construction. You can’t produce in a cookie-cutter fashion. You can’t make hundreds or even tens of identical products at one time. Instead, you’ll rarely do the same job twice.
You can’t lower your price and expect to make up for it by selling more because there is a limit to how much you can produce. Every job needs to be profitable. You have to choose between being competitive and being profitable.
Many try to play the pricing game anyway because they believe price is the determining factor. They believe price is why a potential client will decide to purchase their service. What they don’t realize is that they consider price more important to the decision process than their potential client does.
I’ll grant that there are clients who only care about price. Those aren’t the clients you want. Let them buy from the contractors who are heading out of business and into bankruptcy.
Surveys have shown that the average homeowner, when asked what influenced their purchase, listed price as seventh or eighth when prioritizing the things that influenced them to buy. If they don’t consider price the most important factor, why should you? If your customers start talking about price, or ask you to lower your price, review what you’ve said to them. In many cases, you’re the one who brought price into the discussion, and they’re simply feeding it right back to you.
So how can you be profitable in this industry? First, recognize that construction is a cost-based business. You can’t base your price on what your competitors are doing. You have to base your price on what you need to cover your direct costs, overhead, and a reasonable profit.
Profitability is a mindset. There are other contractors selling to the same customers you’re calling on who make good money on their jobs. I’m pretty sure you can think of a company in your area that has a reputation of being the highest priced company around. Have you ever noticed that they’re always busy? They’ve made up their mind to be profitable, and they insist their employees do the same.
If a potential client starts talking about price or asking about the cost of things when you’ve barely gotten in the door, you might be marketing to the wrong people. Learn to recognize the wrong customer and walk away. Then get busy and amend your advertising so you don’t attract those looking for the cheapest price.
Practice your sales presentation to remove any suggestion that you’re trying to be competitive. Eliminate any talk of being the lowest bid, having the lowest price, using low-priced materials, being competitive, saving them money, and anything else that gets your potential client thinking or believing that you’ll play the low price game.
Resolve that you’ll be profitable. It requires the ability to sell your services, a skill anyone can develop. Remember, you’re in business to provide a service and make a profit doing it. If you are in business for any other reason you probably won’t survive. Stay focused on providing a good product or service, on time, and getting paid for what you do.
Those who focus on price seldom hang around long, because they don’t charge enough for their work or service. It isn’t long before they can’t pay their bills and are forced to shut their doors.
Forget being competitive, and ignore your competitors. Make up your own mind to be profitable, then act accordingly. Learn to sell.
The knowledge and experience Michael Stone gained in his 60+ years in construction has helped thousands of contractors improve their businesses and their lives. He is the author of the books Markup & Profit Revisited, Profitable Sales, and Estimating Construction Profitably, and is available for one-on-one consultations.
RELATED ARTICLES:
- When Your Client Sets the Price
- Pricing Too Low
- Calculating Your Markup
- Lowball Pricing in Construction
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