Question: I think that we're a little low on our pricing, but I'm concerned that implementing a new pricing sturcture might be a bigger project than we should take on now that the weather and our business is heating up. What would you advice?
Gary Elekes; President, EPC Training:
I don't know the context of what “a little low” means, but I’m going to assume that the questioner knows that they are in fact low. Pricing could be low based on the marketplace competitors or it could be low based on the idea that you're not making the gross profit dollars that you should make as a service business. There's a whole different approach to those two answers, so let’s go with the idea that we’re pricing low and we're not producing the profitability that we want in our company. We’ll leave the marketplace conversation for a different time.
It comes down to one simple thing - how long do you want to go not getting paid enough for the value that you're worth? If that was me, I would establish new prices tomorrow morning. I would stop everything I'm doing. There’s nothing more important than this particular topic. It doesn't matter if the weather is hot or moderate or cold.
In this particular situation, the company is suffering, which creates a problem in terms of profitability and cash flow. It also inhibits your ability to recruit, provide compensation increases, and offer benefits - things that are necessary in order to compete at a high level inside of the trades today.
I can't imagine that there would be a higher priority than this. Let’s establish low pricing as something that we should change right away. Implementing a new pricing structure isn't necessarily a time-consuming project as much as it is understanding the math in your company.
A lot of businesses and owners don't migrate from a pricing strategy like divisor multiplier mark-up to a pricing strategy like gross profit dollars per man day or dual overhead because they simply don’t have the math - they don’t have the data.
We always say, “A confused mind says no.” I would say here that if you didn't have your information for cost, I can totally see why you would pause on that and use the idea of whether as a reason why you shouldn’t make that change.
It's pretty simple. If you know as a business owner that your pricing is lower than it should be, that should probably be in your must-do circles. It’s something that I would identify right away.
We also didn't talk about residential, we didn’t talk about service, so I’m not sure which market segments we’re describing here. Clearly what you want is for you service KPI to be 22%, labor-to-labor-sales with part mark-ups, that's going to be an established rate for service. Then, you're going to want a gross profit dollar per man day - or crew day if you run a two-man crew or more - to be established so that you're creating the profitability in your install business the way you want it to be set up.
For us, our minimum is $2,500 a day. We like to average around $3,000 per crew and a crew day overhead of $800. $3,000 minus $800 is a $2,200 profit on an install job. That’s very lucrative compared to a service call. If the service pricing is set correctly, you’ll be making money on a service call as well.
The last component of that is, in new construction, commercial, etc, we should be using dual-overhead. That tells us that for high-material, low-labor jobs, we’re going to price higher and high-labor, low-material jobs will be more competitive.
So, the short answer is fix your pricing tomorrow morning and I’ll help you!
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