TABLE A: PRICING PRESSURE
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Pricing to win doesn't mean having the lowest price every time. But it does mean consistently pricing products and services
within reach of your lowest reasonable competitor (LRC).
Table A shows the difference in price for you and your LRC. Note that the markup on labor is overhead divided by labor cost.
The LRC has a price 15% lower.
You have a better gross margin, but the LRC makes more money, and consistently wins jobs by undercutting you in the important
larger-job segment. This segment is important because larger jobs generate more absolute gross-profit dollars than smaller
jobs.
TABLE B: PRICING BY JOB SIZE
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Your first decision is: Should I stay in the larger-job segment or exit? If you decide to stay and compete, you must have
a go to market price within 6% of the LRC. Table B shows the effect of variable overhead allocation on pricing by job size.
By shifting overhead recovery to smaller jobs, where it really belongs, you can reduce large-job prices while recovering all
of your overhead. In this example, the new markup of 128% on labor reduces the original large-job price by 9%, putting you
within 6% of the LRC price (15% minus 9%). The prices of smaller jobs increase by 4% to compensate.
The true cost of selling includes advertising, sales salaries, vehicles and administrative expenses. It can be as much as
8% of sales. Given this, wouldn't you want these expenses to be efficiently employed, which means higher closing rates and
revenue dollars per person.
The author is the owner-manager of Kehoe & Co. Contact him at kkehoe@earthlink.net.
