Pricing and Profits
Ahhhh, the age-old dilemma that has become part of every type of business, especially dealers. Never goes away and becomes part of every sales meeting whether it is on the agenda or not.
And that topic would be PRICING.
What got my attention about pricing recently is an article written by April Maguire titled “Name Your Price” which covers every type of pricing scenario available and then some. It also contains some thought on “Setting the Right Price” considering Cost, Customer types, Competition and Tiered Pricing. It appeared in www.procontractorrentals.com. Although the article is not directly geared towards dealers the concepts discussed fit each and every business out there that needs to negotiate pricing, and I can’t think of many that don’t
Digging a little deeper into price negotiations a business owner must consider how much aggressive pricing is hurting the bottom line.
Or is it? Do you really know what impact your pricing strategy is having on profits and cash flow?
Aggressive pricing is normally used to increase market penetration or attract more from current customers to increase the top line. Initially, aggressive pricing may be financially unsound if you have substantial fixed costs to hurdle over. You know how it goes, you must cover fixed costs and then variable costs to generate a profit, and normally a successful pricing program will accelerate growth and fixed cost coverage and generate higher profits. You have probably experienced this scenario many times in your life with Amazon being a prime example of how this strategy works.
On the other hand, competitive or aggressive pricing which is thought to reduce margins, may not reduce margins at all. Maybe the pricing strategy currently being used produces above average margins because the other component of the transaction is being properly managed and planned for, with the other part of the transaction being COST, which in this environment is decreasing because of technology and other methods of efficiency. Let’s see if we reduce revenue by reducing pricing and costs have been reduced more than the price reduction….you wind up with more margin dollars, especially if overall sales dollars increase from the current level.
Applying new technology and efficiency is a must for every business. For certain companies it may be a simple and cost-effective change. For more technical and large projects, it could be considerably more expensive requiring expert implementation of new systems and procedures. The former providing a short payback cycle, the latter a longer payback period requiring constant supervision to meet goals.
So here I am writing this when a perfect example of the variables and how they work together to produce above average profit jumps out right in front of me.
I was in the market for new gutters and leaf guards for a house in Wisconsin, and went through the process of interviewing various vendors to discuss products and pricing. Before these meetings took place, I spent some time searching the web to get current pricing for the materials and labor for this type of project. After taking to four different companies I selected one that met the “web” pricing along with a nice product line.
The “winner” sent out an experienced estimator who provided pricing in about 15 minutes. We were instructed to contact dispatch to set a date and time for the work. So far all very efficient. I signed the bid on August 9th and the work was completed on August 20th. And I can tell you this would not have been the case with the other vendors.
I couldn’t help myself and had to think how my chosen vendor could make a dollar with the pricing they gave me …. especially when compared to the other vendors.
Well let me tell you how.
Dispatch called and said they would be there at 9am and this was 8 am when they called. At exactly 9am a white school bus with an extension on it (this was a BIG bus) with the name Pinnow Sheet Metal, Inc. from Oshkosh Wisconsin pulls up. Once parked five people came charging out the front door and are on the roof within 60 seconds confirming the gutter measurement and tearing the down the old gutter system. Person on roof measures and yells to supervisor or conveys the measurement to person in the bus who pushed a button to produce a seamless gutter for the exact size needed, along with the downspouts to compete the job.
Here is the best part.
THERE WERE BACK ON THE BUS AND LEAVING 40 MINUTES LATER! I kid you not. Both the house and garage had new gutters and guards on them. A chat with the supervisor explained that they have their system down with each crew member knowing what they need to do, they work with the same crews and have been providing this service for many years. And believe me the work was excellent with my house looking a lot better.
So, I believe they made a nice margin on the work they do using the pricing that they consider reasonable. No doubt their pricing gets them more work without scarifying profit. And to top it off the supervisor did not stop to converse with us to go over the invoice etc. Nope…. hop on the bus and corporate will send you the invoice for payment saving another 15 minutes in terms of non-billable labor waiting on the bus.
This is a perfect example of the simple fix with immediate feedback. Have a system. Continuously update the system. Find ways to get more efficient. Be on time. Have your crew under control. Have equipment you need up and running. In short, the bus contained the crew and the equipment to produce the gutter and downspout to complete the work schedule for that day. I kept looking around and asked my wife “Where did they go”. I also said “Boy, that was a nice ROI for 40 minutes or work “
I guess the bottom line here is if you really understand and have your costs under control, you can play with the pricing alternatives mentioned in the pricing article and not hurt margins.
Garry Bartecki is a CPA MBA with GB Financial Services LLC. E-mail [email protected] to contact Garry.
