Residential estimating software is designed to make the process of creating estimates for residential construction projects more efficient.
5 Common Residential Contractor Pricing Mistakes (and How to Fix Them)
Does the thought of pricing make you want to bang your head on the nearest desk? Fear not, you are not alone!
Pricing can quickly turn into a nightmare for any contractor, builder, or residential salesperson. Simple mistakes at any point in the pricing process—from the initial cost calculation to the presentation of the final cost to the client, and every step in between—can lead to a range of problems for you, your client, and your reputation.
However, having a solid price strategy can help to minimize potential mistakes in the pricing process.
What is price strategy? And why is it important to your business?
Price strategy refers to the way companies price their services and products. It is the most valuable resource a successful company can use when trying to increase its competitive advantage.
Most companies have achieved profits using traditional methods of price strategy: cost-cutting, implementing new industry technologies, outsourcing, and updating any outdated or no longer effective processes. That being said, it’s important not to rely solely on these methods when putting your price strategy into action, and to look at other areas where you might not be maximizing your profits.
In this post, we're going to tell you the top five mistakes companies are making in their pricing strategy, and how to avoid them.
Mistake #1: Basing prices on costs, rather than customers’ perceptions of value
Companies, understandably, put a lot of energy into understanding their costs, and they use cost to determine price. Costs are undoubtedly important, but not focusing on value is a huge mistake when setting prices.
When price is based on cost and not the client’s perception of the value of the product or service, the client will likely see the prices as either too high, or too low. Both are bad for your business!
We know you're wondering: "But won't lower prices give me a competitive edge and attract more clients?"
The answer is yes—sometimes. In other cases, your clients may question the quality of your product or service. If the price seems too low, they might believe your product is cheap or low-quality. And while you might be attracting numerous and speedy sales, you'll ultimately see minimal profit.
Understanding your product or service's value is essential when delivering a price to your client. Clients will pay for perceived value, so it's necessary to have a strong connection between your price and your client's perception of value. When the client's perceived value of your product or service is high, you can increase your price.
Mistake #2: Charging the same price in all market segments
It’s easy for companies to miss out on profit opportunities when they don’t understand the market their product or service exists in. Specifically, not understanding the various market segments they serve and how their needs differ.
For example, you can charge different prices in different cities where your product or service is sold, based on the demographics of that city.
Some segments will place higher value on your service or product than others, and there are a number of reasons for this. Their desire for convenience (AKA: the number of problems your product or service solves for them) will influence their perception of value.
Understanding what your different clients need and what's important to each of your market segments will allow you to maximize your profits by charging more.
Mistake #3: Basing prices on “the marketplace”
We've already mentioned that it’s important to understand your market and the value of your product or service within that market. But it’s also important that you don’t allow “the marketplace” to dictate your prices.
Though the marketplace can provide wisdom in its united judgment of the value of a product, allowing your company to use marketplace pricing can lead to your company’s product or service being seen as "common-place" or ordinary.
Basically, the marketplace is where potential profits go to die.
Rather than utilizing marketplace pricing, where profits will be small, it’s important to emphasize to your clients what makes your product or service different from all others in the marketplace.
To stand out from the crowd, you need to stress to your clients what your business does that is better than your competition.
Some things that might make you a front-runner in your clients' eyes:
- Professional presentations and operations
- Speed and efficiency
- Outstanding customer service
- Addressing customer pain-points
- Guaranteeing your product/work
Differentiating your business will create additional value in the eyes of your different market segments, and therefore your business will have unique value to offer—which means higher prices than those found in the marketplace.
Mistake #4: Keeping prices the same, despite changes in costs and the competitive landscape
Changing your prices, daunting and annoying as it can be, is an important process to keep up on. The marketplace changes quickly and drastically with the influx of new products, services, and technologies, and this means the value of your product or service changes as well.
It’s important to stay on top of your own changing costs, the changes in your competitor’s product or service, and your clients’ wishes, so that you can accurately update your prices when it becomes necessary. Waiting too long to update your pricing can lead to a larger price increase, which may scare away both new and old clients.
When most clients are "one-and-done" customers, it's important that you set the right price. A couple that's renovating their basement won't be in the market for that home for another 20 years, so you need to grab their attention while you can.
While we don’t recommend changing prices every day (or even every month for that matter) we do suggest you remain up-to-date on the changes in your industry and keep your clients informed of price changes, as it’s a good customer service practice.
Mistake #5: Lack of transparency
“There are two numbers the owner hears and remembers: the first and the last.”
Providing a cost estimate is one of the most important elements of any project. If a project isn't properly estimated, you may end up undercharging for your product or service or—if prices are higher than originally discussed—you might end up with unhappy clients who were promised a much lower price.
Say it with us: "Estimates shouldn't be top-secret."
Rather, they should be a collaborative process that you feel comfortable sharing and inviting others to view. Collaboration also means that someone is more likely to identify an error before it becomes a costly problem.
Because owners often set their budgets and secure their funding based on early estimations, it’s important that all schematic estimates, early concepts, and design requests are discussed with your team and with the owners, and added to the estimate.
Collaboration can be tricky and there are many moving parts and changing plans when working on any project. That's why it's important to communicate openly with your customers through visual and easy-to-understand estimates and proposals.
Creating the perfect price strategy is hard, and it can often feel like you're in over your head. The key is understanding the value of your product or service, and knowing how to get your clients to perceive you as valuable.
Yes, you need to know your costs to set your prices, but don't get bogged down by setting your prices just marginally higher than your cost. Instead, take the time to listen to your clients, your potential clients, the marketplace, and your competitors—find what makes your company valuable and make sure you're charging prices that reflect that value.
Having a proper pricing strategy is an important part of your overall sales structure.