Pricing for Profit

The best way to attain profitability is to get pricing right. Yet, for all its importance, an effective pricing strategy that maximizes profitability can be an ongoing challenge. In fact, how to price strategically is one of the how-to questions I get asked most often.

There are four critical factors to build a good pricing strategy: It has to take into account the market you work in; it has to support the long-term sustainability of your company; it has to connect with what your customers' value; and it needs constant monitoring and adjustment for you to cover your costs and remain competitive.

Cost and scope of work

Profitable pricing starts by understanding the true cost of delivering your services in order to determine the minimum price you need to charge to break even. Consider your fixed and variable costs; your labor, materials and sub-contractor costs. Some contractors develop unit pricing —cost plus mark-up — which can be good for small jobs and a way to give your customer a quick number.

Pricing larger jobs can be done a number of ways. Some contractors develop an hourly rate for routine maintenance jobs. The hourly rate will include labor, materials, equipment, overhead and profit. This doesn’t allow for variables, which can result in over- or under-charging.

In my career, I priced work by developing the direct cost and then pricing to hit a certain gross margin. That might be a 50% gross margin, which is easy math because you just double the direct cost. The gross margin is the overhead and profit.

Economies of scale

When you reach a point where your production becomes efficient and your overhead declines as a cost percentage of sales, this savings translates to profit. The larger your business, the more you can lower and save cost and be more flexible in pricing. Any plans you have on the drawing board for the new branch, service or strategic new hires need to include a way to pivot if it doesn’t work out. Add overhead carefully and have a plan for accountability to ensure that each growth step is a good return on investment.

Pricing large maintenance accounts

When pursuing desirable maintenance contracts, you often have to be low, price aggressively or very competitively to get the client to change contractors. Do this on jobs that have the potential to add value. When you take over the job, double down on performance and ask for a price increase at renewal time. If the client goes out to bid, the client is loyal to low price. So, while it might have been a desirable job, it’s not a desirable client.

You are not going to make the same gross margin on large accounts -– jobs with one or more full time people on site, such as a multi-acre campus, mixed-use retail, resort or HOA — as you do on smaller jobs. The best pricing strategy in this case is to price the direct cost as normal, and then break down the equipment cost by piece, associated cost, maintenance, repairs, fuel, plus the amount of indirect supervision and any overhead that is not required to do the job.

For example, you might be able to use an on-site yard for equipment or staging. So maybe you don’t charge for all the yard cost in your overhead in your pricing, or you do not charge the normal part of your administrative labor for accounting since you only send one invoice. In this case, your overhead for bigger jobs may end up being less.

Estimating job costs

Comparing jobs being estimated to existing jobs that you already have that are similar in scope and category — such as HOAs — is a good way to validate your estimates. To get the best result, I estimate three ways: 1) I review production rates; 2) ask my field supervisor or ops manager, who probably knows the job better than me, to give me their production rates; and 3) compare the estimates to benchmarks properties having more or less the same footprint and requirements.