PRICING PHILOSOHY – BIG SUBJECT – SOME THOUGHTS

Randy DeCoster

Following the HMI Discovery & Training program there are often more questions about pricing. A recent online inquiry from a Concrete Lifter finally motivated me to put some thoughts in a blog format. The post was: 

“When you raise prices, what does that process look like?  We have 1 sales guy and he is closing 60-70% We are backed up on production roughly 3 months. I want to raise prices to get more out of the jobs and slow down demand and production strain. Any advice is very appreciated!” 

My reactions were immediate and sequential.  

• You are in business to make a profit not to get more work. Anything you do to achieve the goal is marketing.  
• If no one has complained about your pricing in the last 60 days you are probably not charging enough.   
• There is a closing ration sweet spot for maximum profitability probably somewhere between 50-55% (greatly dependent on your individual cost structure and competitive environment.)  
• HECK YEAH! – raise the price 3-5% and measure results (under scenario painted above what is the risk? In this case you could probably do it twice to maximize profit.)  

PRICING PHILOSOPHY  

It is your business so you can deploy whatever pricing approach you wish. However, simplistically you have 4 options.  

1. COST PLUS – With this method you merely calculate all your costs (including material), add in the percentage of profit you want to make and establish a cost per pound of material installed. HMI developed a matrix that allows you to equate the square foot material usage depending on the project and therefore easily communicate to the customer in square foot language. (Ideal since most alternative solutions will be quoted by square foot making it easy for the customer to compare.) This is HMIs recommended approach for residential work. If you are using the exclusive HMI customer “Estimate Rocket” all the usage numbers are preloaded allowing you to change prices across your enterprise in seconds with 1 keystroke. (You are always benchmarking your price against competitive alternatives.)  
2. COMPETITIVE MATCH – Just what it says – you will match competitor pricing.  This is ill advised since it is saturated with assumptions surrounding the sophistication, costs and profitability of your competitor’s.  
3. PERCEIVED VALUE – This approach is recommended in commercial applications. Very often in these cases your process provides much greater value to the client than competitive alternatives. This is most evident in industrial and commercial facilities when considering equipment downtime in the repair. Merely estimate the value to the prospect of a ½ day repair vs. 3 day loss of productivity. (This is not a recommendation to gouge prospects, but it is reminder to be compensated for the value you deliver.  
4. NONE – No consistent pricing philosophy or pulling numbers out of the air. High potential for disaster with this approach. With the cost of polyurethane material, a miss could have big costs and big losses. “Show me a man who lives by the crystal ball and I will show you a man destined to eat glass.” 

For more texture on the material above or a refresher on HMI recommended pricing approaches contact the HMI service or marketing departments. 

Take away: You are marketing and doing the work to MAKE A PROFIT not to get more customers and more work.  Continually test the elasticity of the market to maximize your profit.