My Two Cents: The Price is Right – Or is It?
It’s time to review the issue of pricing. I say that because, based on some of the pricing we’ve seen going around, contractors are no longer using the proper systems for establishing prices. Now, I understand what is proper for one contractor may not be proper for another, but the important thing is, as a contractor, you use consistent methods for developing your pricing. We believe this to be extremely important because we receive a lot of referral business. When a customer refers our company to another customer, we want to make sure that new customer receives the same level of pricing we gave the referring customer. The only way this can happen is if your pricing is consistent.
CRUNCHING THE NUMBERS
Consistent pricing starts when you develop your budget. Within this budget, you will have established the percentage of overhead you anticipate as well the desired net profit. We’ve developed some easy-to-use budgeting systems as well as pricing spreadsheets. If you contact me at the email address at the top of this page, I would be happy to forward those to you.
Once you’ve established your budget, you’ll see that your overhead costs are going to be X percent of your annual sales. These are not imaginary numbers; in fact, they are very real. That means your sales for the year must include enough money to cover the overhead percentage you have calculated. One important thing to remember: If, for some reason, it appears your sales are going to fall significantly short of your budgeted number, then you need to revisit your overhead percentage. For most of us, in the short term, our overhead does not drop significantly with a 10 percent or even 20 percent sales drop. Very much of our overhead is fixed and remains even if we’re doing less work. Therefore, if your sales are going to be less, your overhead percentage will increase. As a result, it may be necessary to raise your prices in order to still cover your overhead.
Once you’re through budgeting your overhead, it’s time to determine what you want to have in the way of return — your net profit. I’m a firm believer that we, as HVAC contractors, are in a relatively volatile market. That is the reason the life expectancy of an HVAC business is only about four years. Because of the risk we’re taking, we’re entitled to a fair profit on the work we perform. Everyone’s definition of fair profit may differ; however, I believe we should all come up with a reasonable number. To me, that number doesn’t mean gouging someone just because you can, nor does it mean giving things away. The truth is, all of our businesses need to make a profit in order for us to survive and grow. If you want to grow your business and you approach a bank to seek a loan to finance that growth, one of the first things they’ll ask is, ‘Have you been profitable, and will you be more profitable after this growth occurs?’
Obviously, there is a fine line between seeking enough profit to be properly profitable without setting goals that require your salespeople to resort to unethical tactics in order to obtain that pricing.
You should also review your budget numbers at least quarterly, if not monthly, to make sure the numbers you have established are correct. Remember, too, to be sure to account for any increases in direct costs, such as equipment, materials, and labor, when reviewing your pricing.
It should be clear from all of the above that pricing is definitely a moving target. Make sure the systems you have in place allow you to be flexible and grant you the ability to make changes when equipment, overhead, or any other items change price. Ensure you’re covering those additional costs while still bringing in a fair profit in your final bid numbers.
Publication date: 8/15/2016