The Truth about Pricing, Profits, & Value
Discover What They Want; Give Them What They Need
Ask 1,000 contractors if, given the choice, they would rather their customers choose a high-efficiency system with all the bells and whistles or a basic system that will keep them comfortable. I would bet that 98 percent would prefer their customers choose the high-efficiency system with all the bells and whistles. After all, high-end systems cost more and bring more cash into the business. In fact, most companies would find it hard to get by without the additional revenue these systems generate. Many companies even offer their people bonuses and other incentives to sell more high-end systems.
Selling systems at a higher price point makes good sense, especially when the economy is growing, unemployment is low, and credit is readily available. Unfortunately, this has not been the case for several years. Today, companies must offer systems with a wide range of price points to appeal to the majority of the people in the market. Offering moderately and lower-priced systems takes us back to the original problem of how do we survive without the additional cash from high-end systems? Don’t worry; by the end of this article, you will be able to cover your costs and profit, no matter which system your customer chooses.
Value Versus Affordability
We have all heard that you have to give more if you are going to ask for more. Some have interpreted this to mean that if you keep adding longer warranties or guarantees with extraordinary benefits, you can keep asking higher and higher prices. This comes down to the often misunderstood concept of value. Reduced to its most basic form, value is a question; “Would the customer willingly give more money for the product or service than the money I am asking?”
For example: One customer may pay $800 for a 10-year warranty; to them, any system with that warranty would be worth, at most, $800 more than a system without that warranty. Value is different for everyone. While one customer would pay $800, it may only be worth $500 to another. This can make putting together the features to include with your systems very challenging. To determine the value of your guarantees, warranties, or other features, survey people in your community to find out what value they put on these items.
Never forget that affordability beats value. You may think a Corvette is the pinnacle of automotive engineering, but if you are on a Camaro budget, that’s what you’ll be driving. To have the most opportunities, companies must offer systems with the most value while remaining affordable.
Pricing and Profit
Whether it was multiplying cost by some number or dividing cost by a certain percentage, there have been a number of methods contractors have used to determine the amount of the systems they offer. Each of these methods will produce a profit if enough systems are sold at a higher price. Regardless of the method used, however, it’s the cost to install the system that determines the price of the job. Basic systems, with their lower cost, do not produce enough revenue to cover overhead and profit, forcing contractors to push high-end systems.
Instead of using a multiplier, a better method would be to use the company’s budgeted profits and overhead as well as the direct cost to determine the price of each system. Using this method, it no longer matters which system the customer chooses, the company will still profit. Customers will have options that are affordable and the company will close more sales.
You will need three pieces of information to use this pricing method:
1. Overhead covered by the installation department in dollars for the year;
2. Profit contributed by the installation department in dollars for the year; and
3. The number of jobs budgeted for the year. You can obtain this information from your budget. If you do not have a budget, you can use your end-of-year profit and loss (P&L) statements for the last couple of years and add an amount for growth.
To see what this would look like, assume we have a $1 million company. The installation department is budgeted to contribute $800,000 in revenue. The overhead is budgeted to be 45 percent, or $360,000. Profit is budgeted at 10 percent, or $80,000. Based on current capacity, they anticipate installing 140 jobs this year. Formula 1 shows that each job’s share of overhead and profit is estimated at $3,143.
Once we know each job’s share of overhead and profit we can determine each system’s price by adding it to direct costs. Direct costs include equipment, labor, warranty reserve, and commission. Formula 2 shows us comparisons of two systems on each end of the spectrum.
Some systems produce a higher profit percentage than others. Regardless of which systems are sold, the company still earns the budgeted profit.
Some people need a sub-micron filtration system while others are happy with a disposable. Being able to adjust the temperature from the other side of the planet makes communicating thermostats a must have, unless you’re home every night and just want to be comfortable. Instead of persuading customers of the value in an option they could care less about, let them choose the options they want.
In any heating and air conditioning sale, there are three choices that have to be made:
1. The type and efficiency of the system;
2. The type and efficiency of the IAQ; and
3. The type of thermostat control.
Within each choice there can be many options. It is best to limit the options to three or four that will cover the widest range possible. Providing too many options will confuse the customer and they will seek other bids. The choices might look something as depicted in Table 1.
Since overhead and profitability are covered in every system choice, it does not matter what other choices the customer makes.
Give Them What They Want
Offering a wider range of systems will appeal to a broader range of customers, but there is still the matter of them being able to purchase what they selected. Most people simply don’t have the ability to write a check for several thousand dollars, no matter how much they want or need a new system. Contractors must be able to offer financing from companies that will lend to customers with good and poor credit.
Working with two or three finance companies will allow you to offer financing for most situations. Choose finance companies carefully. The service they provide to your customers will reflect on the contractor.
The Truth About Sales
Sales is helping customers understand what they need, discovering what they want, and helping them get it. If you offer customers systems they can afford with valuable features, priced so you will always profit, you will be successful.
Publication date: 5/12/2014