A business question for all those in service type businesses such as contracting to consider.
Times are tough.
So you find you are not closing on sales the way you used to because some of your prospects and leads are cutting back and they feel they just can’t afford your price for their project.
Let’s say you look at your numbers and you find your business is off 10%. Instead of 50 weeks full of work per year you are looking at only 45.
Should you lower your prices on the jobs you bid to fill your schedule back up?
Replies
Jerrald-
I always raise my prices when things slow down since I have the time. Not to scientific, but it seems to work.
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seeyou — "Jerrald- I always raise my prices when things slow down since I have the time. Not to scientific, but it seems to work."
Grant while you may not see the scientific reasoning the point I just alluded to in another forum was that their is some rational and logical scientific reasoning for at the very least maintaining your pricing. I have to model and crunch some numbers to see how raising your prices would actually work out but off the top of my head I would say there is a fine line you could walk with that strategy that would make scientific sense and work out in your favor.
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Not sure of the scientific reasoning behind it, but giving things away for free isn't a good business plan. Work up your prices them live with them. Vic
How much did a loaf of bread go down? I know what you mean, its a tough call.
Work for less or stay home. I mainly try to sell my quality. It doesnt always work and this has been a terrible year.
I'll admit i've done things this year I would've never considered in the past for what I was paid, but it was usually working for/with someone else.
On my contracts, if the price had to go down something in the scope of the job was changed.
Family.....They're always there when they need you.
MSA1 — "How much did a loaf of bread go down? I know what you mean, its a tough call."
I'm not so sure it's a tough call at all and you are comparing the retailing of a product vs. selling of a service and they are not the same thing.
The grocery store spends money and buys the bread and puts it on the shelf to sell it. If it doesn't sell they've lost the money they have spent putting that loaf of bread on the shelf. As a "service" company my costs are generated until I have a contract to produce a product for a given price. I don't build bathroom remodels ahead of time and put them on the shelf and hope or count on someone buying them. I'm not incurring (project) costs until I have a bathroom remodel on order from a customer.
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"I'm not incurring (project) costs until I have a bathroom remodel on order from a customer."That is true. However, you do have fixed overhead to cover. If you elect not to drop your rates and don't have any work for the period of time in question, are you better off?
Jon Blakemore RappahannockINC.com Fredericksburg, VA
Thats true. You do still have fixed costs though. My insurance bill doesnt go down if I have a bad month.
Some overhead does change, but I still have a steady cost of living.
Family.....They're always there when they need you.
jerrald.... missed you being around
i never lower my price.... i do offer to reassemble the scope to take out some costs... but my margin will be the same OR BETTER
i look forward to your answer and your reasoning
MikeSmith — "jerrald.... missed you being around"
I've been busy with a bunch of interesting things but I do on occasion stop in from time to time to see what's going on here. This is a problem I seem to hear a lot of the contractors I work with talking about (and a solution they often resort to) so I thought I'd get a sampling of the thinking online here too.
"i never lower my price.... i do offer to reassemble the scope to take out some costs... "
Well I certainly agree with that strategy in dealing with potential clients rejecting the prices we put forth with our proposals but that strategy leads right to the problem I am illustrating in with the scenario I described. You might propose a project that takes 50 weeks and costs xyz thousands of dollars and to make it it into something the customer can afford on their budget you cut the scope of the project to 45 weeks and it only costs zyx thousands of dollars. You the contractor have still lost 5 weeks of revenue.
The question I am putting out there for all of us to consider is it wise to lower our price to fill the schedule so that we "keep busy".
In other words is it the goal of a business "to remain busy' or to make money (generate a net profit)?
"i look forward to your answer and your reasoning"
Interestingly "The Goal: A Process of Ongoing ImprovementView Image" is a hint for some of my logic and basis for my thinking on this. Are you one of the people here who have read it?
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I haven't lowered my prices but have thought about the situation were facing a lot lately.
Seems people calling me still have a need for me. Granted their projects of late are less frivilous, more practicle.
I've been asked directly by one if my rates have gone down. I told him no, but I have considered allowing a change in the way I work that might save him money.
I told the client if money was tight and knowing the repair they need done was an unexpected hit to their wallet I would consider offering a "Bob Vila Service" to them. My time would still be at my normal rate but I would guide and cheerlead them on as they tackled their project. I'd direct them to suppliers, tool rental sources and an electricle sub. They could call me anytime, within reason, with any question without charge for the first 10 minutes but a half hour minimum after that.
Does sound confusing but they are seriously considering taking me up on it even though they know they might not save that much and it would take longer to complete.
Point being it isn't money that might need to be lowered but the clients willingness to tackle some of the work encouraged, this can help them with their budgets.
A bit of a babysitting service but it doesn't wear out any of my tools.
Seems there is an opportunity out of every difficulity.
jagwah — "I told the client if money was tight and knowing the repair they need done was an unexpected hit to their wallet I would consider offering a "Bob Vila Service" to them. My time would still be at my normal rate but I would guide and cheerlead them on as they tackled their project. I'd direct them to suppliers, tool rental sources and an electricle sub. They could call me anytime, within reason, with any question without charge for the first 10 minutes but a half hour minimum after that."
That's a good idea that we've been thinking about adding as a growth sales channel. Depending upon the business model a contractor operates under it might be a good idea to separate that kind of service as a different brand (and it might also be important to separate it out insurance-wise too).
With an idea like that your taking leads that wouldn't materialize into jobs and turning them into filler jobs that fill the little gaps and lulls that occur in anyone's calendar or schedule.
"Seems there is an opportunity out of every difficulity."
That's great (zen-like) thinking!
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(and it might also be important to separate it out insurance-wise too).
I hadn't thought about that issue. I may need to contact my agent and talk about this with them.
I've read it more than once.
Bottlenecks are difficult to see in a project/service business...
but worthy of one's time and effort..
A La Carte Government funding... the real democracy.
Hackinatit — "Bottlenecks are difficult to see in a project/service business..."
Well I agree with that to a certain extent. I think bottlenecks (constraints) are more difficult to spot in project/service environments becuase they often move around project to project.
There's a new book on TOC I just ordered this past weekend, Reaching The Goal: How Managers Improve a Services Business Using Goldratt's Theory of ConstraintsView Image, I'm looking forward to learning what's in it.
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yes... that's the one that dealt with the theory of constraints , right ?problem with reducing your price is that now you are committed to working which removes you from the availablity pool and ( per the Goal )
constrains your available time to pursue the profitable jobMike Hussein Smith Rhode Island : Design / Build / Repair / Restore
MikeSmith — "yes... that's the one that dealt with the theory of constraints , right ?"
Yup, that's the one.
"[the] problem with reducing your price is that now you are committed to working which removes you from the availablity pool and [that] constrains your available time to pursue the profitable job"
That's exactly the big point that I think so many contractors miss on when they panic in tough times and drop their price.
And another corollary of that is when they drop their price they then
tagbrand themselves with a reputation that they "can be negotiated with".View Image
You need a new middle name, Mike. Do you know how many new babies got christened with that moniker in the last two days?
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"A stripe is just as real as a dadgummed flower."
Gene Davis 1920-1985
you mean i can't keep it as a badge of "hoosier daddy ?"Mike Hussein Smith Rhode Island : Design / Build / Repair / Restore
no....
charge more for incendals and added a fuel surcharge....
Life is not a journey to the grave with the intention of arriving safely in a pretty and well preserved body, but rather to skid in broadside, thoroughly used up, totally worn out, and loudly proclaiming
WOW!!! What a Ride!
Forget the primal scream, just ROAR!!!
I negotiate but not on my rates.
For instance I just landed a bathroom. I almost always work T&M anyways. and I almost never deal with home depot.
This couple owns stock at HD and loves the place and wanted me to buy there. So I offered to do that, and skip any materials mark-up, provided they keep me paid in advance on the job. Walked out with a five thousand dollar deposit, and since I will be billing hourly, they get to pay for time dealing with HD sanafus - all forewarned.
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I had one project disappear because the client could not get financing and it got me worrying. I pondered what strategy to take to help deal with the current financial times including lowering our rates.
The problem with lowering our rates was that my overhead has not gone down at all, it has actually gone up as has the cost of living for me, my family and the crew and their families. Being one who puts all overhead into labor rates, lowering rates was simply not going to help our business.
So like others here have mentioned, I decided to keep our rates the same, tighten up on how much we "give away", stay on top of draw schedules help, clients meet budgets by doing appropriate amounts of work and cutting back to reduce cost.
We have had to forego all capital improvements this last half of the year-no sexy dust collection system for shop, but that helps keep the overhead down and cash flow improves.
I also had a good discussion with the crew about what we will be seeing in next few months to a year and how important that we be super efficient, avoid wasting materials, and continue doing great work for our clients so we keep getting good referrals.
With regard to "keeping busy", I think there are two strategies to pursue. First is to lower rates and hope a lead becomes a project based on pricing only and change the way you do business because lower rate means lower level of service or lower profit for the company.
The second is change the nature of project you pursue. I have been avoiding handyman projects for years because they can disrupt larger projects and are a different type of business than large remodels or new homes. We only did these things for good clients or to fill voids in the schedule. Now we do one or two a month and they are highly profitable because clients appreciate the level of service and expertise we bring to the table. We did change rates for these projects-raised them to cover the shorter days associated with the work.
Good question as always Jerrald and good to see you here again.
Bruce
Edited 11/6/2008 7:05 am by Hiker
Hiker — "...The problem with lowering our rates was that my overhead has not gone down at all, it has actually gone up as has the cost of living for me, my family and the crew and their families."
I wonder why these contractors I talk with who talk about having to drop their prices don't see that logic. Actually I do know why they don't see the logic and its becuase they don't really understand their numbers or what it takes to really run a business.
"...Being one who puts all overhead into labor rates, lowering rates was simply not going to help our business."
The choice of markup methodology isn't necessarily going to lessen the pain of damage done to a contractor that lowers his or her price although I do think it can be argued that a Capacity Based Markup (putting all overhead costs into the labor rate) is the better and safer one to use in this kind of business environment. In fact there are job scenarios where a Capacity Based Markup contractor will definitly lose the job on price to the Total Volume Based Markup contractor because of the pricing method used and the the Capacity Based Markup contractor will be happy in losing it knowing the Total Volume Based Markup contractor is bleeding money on that job. (More about how that work out in a week or two)
"So like others here have mentioned, I decided to keep our rates the same, tighten up on how much we "give away", stay on top of draw schedules help, clients meet budgets by doing appropriate amounts of work and cutting back to reduce cost."
Without a doubt keeping on top of cash flow (stay on top of draw schedules) in tough times is vitally important (I learned that lesson the hard way in the last recession we went through) but while we don't want to literally give away cost items for nothing there are little things we can do for clients that often don't cost us much if not anything at all that we should look to "add on" in times like these becuase the enhance and enrich our value propositon and selling on value in tight tough times is perhaps more important than when times are flush.
"We have had to forego all capital improvements this last half of the year-no sexy dust collection system for shop, but that helps keep the overhead down and cash flow improves."
That's also really good thinking. I tell my consulting clients (or I should say try to tell them) that you can't just go out and reactivly cut your price and expect it to solve anything. If you asolutley have to resort to price cuts to get the work required to pay the bills and keep afloat then you have to proactivly plan for that possiblity ahead of time. Putting major capital purchases hold is a great example of smart proactive thinking that is needed long before a contractor resorts to price cutting...
"I also had a good discussion with the crew about what we will be seeing in next few months to a year and how important that we be super efficient, avoid wasting materials, and continue doing great work for our clients so we keep getting good referrals."
...and eliminating waste (see Muda and the 7 Wastes of Production) from your systems and adopting Lean Thinking are also ways to prepare yourself and your business.
Great thinking and comments Bruce.
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Hi Jerrald,
I never lower mine and just lost a job becaue of it. I do offer to take things like painting or flooring out if they want to handle it themselves.
Reason being is I already feel I am fairly reasonable and the folks can get a guaranteed suberb job. I give them my credentials and references when I meet them.
If they don't want to pay for quality then thats OK.
A fellow I met years ago told me when folks do that to him he says:
"Go to McDonalds and order a Big Mac. When they tell you its $2.19 (or whatever the price) ask them if they will accept less? When THEY do, so will I"
Mike
Oak River Mike — "A fellow I met years ago told me when folks do that to him he says:
"Go to McDonalds and order a Big Mac. When they tell you its $2.19 (or whatever the price) ask them if they will accept less? When THEY do, so will I""
I like that expression. I'll have to file it away in my head just in case I ever need it.
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Jerrald,
the first time I ever entered a Breaktime discussion it was essentially this very same topic.
My position has changed in the 9 or 10 years since then.
the slower I get-the more inclined I am to RAISE prices.
I notice there is no real Rhyme or Reason as to when my actual sales occur------I can go weeks without my phone ever ringing----and at anytime I can come home and there will be 8 or 9 blinking lights on the answering machine----4 of which will be people accepting proposals I wrote---some from YEARS ago.
I take the long term view of things---and when sales come back to me-- I want them to be high paying profitable sales.
ALSO-- i can tell you that when times are slow---despite maintaining or raising my prices-my closing ratio will actually improve( although volume will be down of course)--- I think the ratio improves,despite the high price---because I then have the energy and time to make a really good presentation---conveying my enthusiasm for doing the project and highlighting the VALUE derived from my personal approach to the workmanship the materials outlined etc.
The work available may skew more towards repair work for the next 2-3 years.-- In roofing related work I find it important to keep the repair price high----and to make sure that whatever repair I suggest will absolutely solve the problem.-Manytimes a prospective customer is getting several opinions from different contractors--and gravitates towards a less expensive repair.-- If that less expensive attempt fails-they will often call me to proceed with what I proposed----and I want to do it at MY price.
as far as cutting price to fill out your schedule--the fallacy in this was laid out to me at a roofing sales seminar years ago.
I no longer have the exact figures---but I recall the main thrust of the situation was that if you cut your price by say 15% it would be impossible to make up that 15% in volume.
all your costs like labor and overhead and materials etc.-would remain the same-----so the only place to cut that 15% from was profit--and that would take a HUGE chunk out of your profit---it would be impossible to increase sales volume enough to make up for that lost 15%
Personally- I approach things different than most----and pricing things in good times in order to be able to out wait bad times is part of it.---- you,possibly have employees you are concerned about--and if so, I would suggest being rather ruthless about things by politely explaining that untill the economy improves hours are being cut to perhaps 28 hours per week.
Best wishes, Stephen
Hazlett — "I take the long term view of things---and when sales come back to me-- I want them to be high paying profitable sales."
Exactly! You've built a great brand. Think long term. Don't damage it by lowering your pricing.
"ALSO-- i can tell you that when times are slow---despite maintaining or raising my prices-my closing ratio will actually improve( although volume will be down of course)--- I think the ratio improves,despite the high price---because I then have the energy and time to make a really good presentation---conveying my enthusiasm for doing the project and highlighting the VALUE derived from my personal approach to the workmanship the materials outlined etc."
While it's purely an anecdotal observation I think that's true too. I/we give better presentations when we slow down and aren't just cranking them out.
"...-and pricing things in good times in order to be able to out wait bad times is part of it."
More smart thinking (proactive planning).
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Thanks for the great discussion. I hopped on to get the communities take on this very subject.
I had potential client email me today with the following..."because of the current market and economy and because I am offering steady work through the winter I will be paying a general contractor $30- an hr. and will not be offering any markups on materials as this is mostly a labor job."The job is a whole house gut and remodel. He's right, it is steady work through the winter...which would be great for my guys and I but i'm not willing to knock my wages down 25% for it. ...the depression hasn't started yet!I also like the McDonalds analogy. Why is it assumed our prices (especially T&M) are negotiable? Seems like a tough way to start a job. The whole deal makes me seem a little uneasy now.
"While it's purely an anecdotal observation I think that's true too. I/we give better presentations when we slow down and aren't just cranking them out"
Might also be because there are fewer tire kickers asking for prices on nonexistant work.
Great discussion and timely. I agree with not lowering prices and instead maybe re-tuning the way business is done.
About two months ago I noticed many carpenters workers working out of the trunks of their cars. I figured it was a sign of the times and knew they were probably "flying under the radar", at reduced prices, but also reduced quality. Today I passed a deck remodel I had quoted and there in the driveway was a pile of tools next to a car. No doubt I was under bid, but also the customer is not going to get the quality or services that I offer. I'm good with it, but frustrating all the same.
Mark
Jerrald,
i forgot to mention that several weeks ago I did some work on a large home of a doctor.- the doctor had got my name from one of his nurses who I had previously worked for.-- the doctor referred me to his neighbor who wanted a price for replacing his roof in the spring( doctor wanted the same thing as well)
while talking to the neighbor-he asked"since construction has essentially shrunk to zero--how much are you reducing prices in order to get work?"=== this was immediately on the heels of"---what sort of discount will you give Dr.T and myself if we both let you do our roofs at the same time"
I explained that I don't do any new construction and so new construction slowdowns have virtually no impact on me--because I specialize in work on older homes and the great majority of my customers come to me directly from referrals.
the neighbor said" so what you are telling me is that you don't really care if you do this job or not1" I replied" I wouldn't phrase it quite that way--what I WOULD tell you is that if I am not working HERE, I assure you, I WILL be working somewhere else"
A few weeks later I recieved a call from a lady he has been friends with for 30 plus years on his REFERALL!.- I ended up doing a project for that friend which took 32 hours-at top price---- the friend was ecstaic with the work and I am about 75% sure i will end up doing the roofs for both the doctor AND the neighbor in the spring---at completely FULL price.
Stephen
Mike touched on something earlier ( don't recall how he worded it) about lost opportunity cost - when you bod low to get a job and keep busy, then you are tied up and unable to take on work that is more profitable.I learned that a long time ago. There was a big project in a small town that had everyone's mouth watering so all these guys were cutting bids and prices to get the job and sub positions. Myself and a couple others stayed out of that game.So we were free to take on the other jobs around as they came up - at increased prices because there was no competition. The other guys were all tied up on the big one where they were complaining that they were just barely making costs.
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My two cents,
In order to handle the slump, I've raised my prices and reorganized the way that I calculate by bids. I've also expanded the type of jobs that I bid on. For example one could branch out into decks if thats not something that you normaly do.
This kinda parallels what we're talking about. Quite a few years ago, the Shiner Brewery here in Texas was struggling and the beer was being sold down on the "Old Milwaukee" end of the aisle.
Their marketing boys slapped a label that said "Premium Beer" on it, raised the prices and it started flying off the shelves.