Deciding on a Fair Pricing Strategy for Your Firm

No doubt you have found the kitchen and bath market to be more competitive than any of us can remember. This is the result of the market for our products and services shrinking faster than the number of providers.

Unfortunately, there are more “remodelers” than ever, as former foremen and job superintendents set themselves up in the business, adding to the competition. Unfortunately, many of them lack the business background to accurately determine how to price their services.

This month we will take a look at how to target your market, how to determine a fair price for your products and services and what that strategy means for your bottom line.

What is Your Market?

Some of us have a tendency to want to be all things to all people, offering any and all services and products regardless of whether we have a particular expertise or experience with that field. Others tend to focus on what we have always done and ignore opportunities in areas where our core expertise may make us a viable competitor.

If you’re one of those that have maintained your focus on a narrow area, say, selling cabinets and trim to custom builders, you’ve already learned that this market has shrunk to near extinction, and you’ve likely had to expand into retail remodeling services. Likewise, if you’ve been concentrating on kitchen remodeling, you have likely expanded into bathroom remodels, minor (or major) additions and, perhaps, added a “handy-man” service to increase the number of potential clients for your services.

Expanding your range of services in a tight market is a reasonable strategy, as long as your firm has the resources and expertise to compete with those already in that area of the market. If your field crew consists of finish carpenters, you should think twice about going after a roofing project. On the other hand, you can obviously sub out the roofing if it’s part of a larger remodel project.

The key here is to make a conscious effort to identify areas where your resources and expertise will allow your firm to be competitive. It only makes sense that people in the construction trades that perform the same tasks on a regular basis will be more effective and efficient than those who only perform those same tasks occasionally. Herein lies the danger of trying to be all things to all people.

Competitive Pricing

In the current environment, pricing has become a much bigger issue than most of us have experienced in many years. While there have always been clients who insisted on multiple “bids” for their work, price was seldom the major factor in their final decision. Today that seems to have changed, with potential customers nearly always insisting on getting more than one estimate for the work.

The easiest way for customers to get multiple bids is to separate the design function from the build portion. While this separation has long been the norm in new construction – and to some extent, in major remodeling – combined design/build has been the rule in residential remodeling. Recently we are seeing a trend where clients with even minor projects are anxious to have plans that they can shop around to several contractors.

It cannot be said that bidding for work can never be a profitable strategy – after all, most large construction projects are handled that way and there are certainly many large contractors that have been quite successful. But the reason they are successful is that the focus is always on cost control and efficiency. So, if you’re going to adopt this strategy, you need to be prepared to run a pretty tight ship.

Having said that, running a tight ship is equally important even if you are able to maintain the design/build, negotiated contract form to your business. In all likelihood, before you sign a client to a design retainer, you have already been through a ballpark estimating process with the client, who has probably already obtained similar preliminary estimates from your competitors.

To tighten the ship, start with a review of your entire process, including your overhead. Speak with each sub-contractor about the need to trim any “fat” they have in their operation so that they can give you the most competitive price possible. Most of us have adjusted our expenses to the current climate and have eliminated the luxury indulgences such as expensive, gas guzzling “work” vehicles, company tickets to the local pro sports team, etc. If your subs seem to be hanging on to these in hopes that the market will come back, you may want to talk to some of their competitors about doing your work.

Once you feel that you have these variable job costs minimized, it’s time to look at your overhead. Have you looked at every line item of overhead to make sure it really is necessary and that there is not some other, less expensive way to accomplish it? Look at out-sourcing as a possibility or, conversely, having your staff perform some tasks previously farmed out.

Setting Prices

Once you feel that you have trimmed your costs to a minimum, you need to review how to set prices so that you’re sure you will make a profit if you do get those jobs.

Let’s assume that you’ve determined that you have overhead costs, that cannot be further reduced, of $30,000 per month, and the current market conditions will only allow a gross profit margin of 20% (after all job costs and commissions). That means you will need to generate sales of $150,000 (30,000/.20) to cover these overhead costs and break even.

Keep in mind that overhead costs are never entirely fixed and, as your sales volume increases, even these costs will tend to rise over time. Remember not to confuse mark-up with gross profit margin; a 50% mark-up only generates a 33% gross profit margin.

The important thing to remember in any pricing decision is that the critical issue is gross profit, not raw sales numbers. It’s easy to get caught up in the allure of chasing that big job, and then cutting the price to “get the job,” only to find that all the time and effort it took to manage that project did not generate enough gross profit to cover overhead.

In this economy, profit margins may well be slimmer than we have enjoyed in the past, but if you manage them to generate the necessary gross profit, you will be one of the survivors!”

 

A native of the Pacific Northwest, Bruce Kelleran has worked as a CPA for Arthur Anderson & Co., CFO of a local millwork manufacturing firm and partner in a residential cabinet and millwork supplier. After buying out his partner, this firm moved into kitchen and bath remodeling and then expanded into full service remodeling. Kelleran retired in 2010 and now serves as board member and advisor to his former firm.

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