In the previous article, “Pricing Awareness,” we discussed how difficult it is to know what price to set for any job you sell. Will you get the job at that price? Will you make a profit at that price? Will you have any profit at that price? Will you lose money at that price? Did you forget any costs when setting that price? The pricing fears go on and on.
But in actuality, setting the Right Price for any job is really not that hard if you use some basic logic and knowledge to set that price. So let’s look at the five basic factors that are required for setting the Right Price.
The Right Price is not necessarily the price that gets the job. Huh? That doesn’t make sense: if the price you set doesn’t get the job, was it really the Right Price? This will make more sense when we look at the other factors that go into setting the Right Price for a job. So, we will come back to this after we look at a few of those other factors.
The Right Price must satisfy the financial constraints of your company. This is really the important factor for any business if it wants to be profitable. So what are the financial constraints of your company? First and foremost, you must recover your costs. The Right Price must be high enough to cover both your direct costs and your overhead costs. (We will further define both of those costs in a different article.) Secondly, the Right Price must allow for some profit for your company. Profit allows you to fund your future growth and it allows your company to be a great place to work for you, your employees and your customers. So, the Right Price must be high enough to cover your profit as well as you costs. The key to setting the Right Price is knowing exactly what the financial constraints of YOUR company really are.
The Right Price is always determined using simple math. This simple math can be easily taught and easily learned. It can be repeated over and over so you will always come up with the Right Price for any job you do.
There is only ONE Right Price for any job. That Right Price will cover the financial constraints of your company including what you feel is the appropriate amount of profit at that given time. And since it uses a simple mathematical formula based on those financial constraints, then there is only ONE right Price for YOUR JOB!
But here’s the rub: your financial constraints are not the financial constraints of your competitor(s), the other folks that are trying to get the same job. Your competitor’s costs may be lower or higher. He may not need or want as much profit as you. He may not even know what his costs are on a job. He may not even know if he is making money or losing money. So, his price will NOT be your Right Price. Therefore, the only rational, prudent way to set your Right Price is to base that Right Price on your company’s needs, costs and profit.
Which takes us back to the first basic factor in setting the Right Price: the Right Price is not necessarily the price that gets the job for your company. Your competitor will get his fair share of the jobs, even if his prices are exactly the same as yours (or if they are higher or lower than yours.) That is because people make choices based on lots of factors, with price being merely one of them. The Right Price for your company must cover all your costs and your profit. But that Right Price may not be the one that gets the job.
Finally, the Right Price may change depending on the time of the year or the needs of your company. First, your Right Price should always cover the costs of the job. But, at different times of the year the needs of your company will change. For instance, it is difficult to even find a job to bid on in the cold months of January and February. Your company may consider bidding a job with a lower profit level in those months compared to the hot summer months when your techs are very busy. In fact, you may decide to set your Right Price with no profit at all just to be able to keep your techs working. Conversely, in the hot summer months your Right Price may increase because all your techs and all your competitors’ techs have plenty of work and the market will allow you to make more profit. The point is that your Right Price can change based on the needs of your company, but it is YOU that is determining what that Right Price should be at any given time.
The important thing to remember is that the Right Price should always cover your costs and the Right Price should always be calculated using the same mathematical formula.
In Part 3 of the series, “Direct Costs,” I will begin discussing the different types of costs and their affect on finding the right price. If you have any questions or comments about finding the right price, leave them in comment section below or contact cfm directly at 1-800-322-9675.
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