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How to set the perfect pricing strategy for small and medium-sized business (SMB).

July 17, 2017

Most contractors (even me!) never know how much to charge, or what their overhead is. We just say, “I’d like to make 30% on this job.” The question is whether 30% enough — or is it too much? Can I do the job a little cheaper, get the bid, and make money — or do I have to charge 40% to break even? If so, I need to reduce my overhead as much as possible. We all have an idea of the right price. We just need to know if it’s correct!

Secrets to Pricing Your Services

Friends, the key is market-based services and pricing.

When you have a high customer retention rate, you can charge more. A simple formula can help you set your pricing in relation to your retention rate: keep raising prices until the retention rate drops below a certain percent.

Just like both low and high blood pressure can kill you, you can get in trouble with prices that are either too low or too high. If your prices are so low that you never get a price objection, you’re probably giving your labor away and existing at deficient profit levels. If you get a lot of price objections, and have a low retention rate, then you probably won’t be in business much longer. People might use you one time when they are in a jam, but they will probably make a mental note to do a better job of shopping around next time.

That mental note is an important thing to think about! There is a difference between remembrance and retention — people can remember you but not want to use you again. In fact, the more notorious your reputation, the higher your remembrance and the lower your retention. That is why when we survey your customers we ask them if they remember who has done work for them recently, and then ask them if they would use them again; we want to get them talking about both remembrance and retention. Remembrance is based solely on how many people remember you, while retention is based on how many people remembered you and would use you again. Of course, retention requires remembrance — they can’t use you again if they don’t remember you. That’s why customer remembrance strategies and mailings can do so much good.

Back to pricing . . .

When you have good retention, you can raise your prices and start targeting customers who are willing to spend more money for better service and warranties.

Steps

The first step to better retention (and higher prices) is remembrance, but the second phase is service or perceived value. Customers who are willing to pay more also expect technicians to wear booties, send a text before arriving, lay down mats to protect floors, show up on time, and offer great warranties and service agreements. We call these sorts of customers your Hilton customer. A Hilton customer expects more than a Hotel 6 customer, and they also know and accept that they will pay more. Hilton customers care about your brand because they see it as a promise. Your reputation reflects how well customers think you deliver on that promise.

When you are targeting Hilton customers, you can safely charge more and have a lower retention rate. The Hotel 6 customers won’t call back, but you may still make up to and beyond 20% net profit with your Hilton customers. The key is not to fall below that magic number for your retention rate, and to have strategies for times where business is slow. At Contractor 20/20, we know how to target those Hilton customers. We can effectively send your message to people who put a high value on your promise, fine tune your retention rate, and offer you successful strategies for rainy days.

Bottom line

Your price point depends on your retention rate and your targeted customer. Of course you should consider other things, such as your overhead and your geographic location, but not to as great a degree. To fine tune your pricing and find the greatest success you need to be looking at that retention rate and the value you can offer.

Need Our Help?

Have questions? Ready to go deep in the numbers and fine tune your pricing? Give us a call for a free consultation!

Call (607) 770-8933 x80 and join our 20% net profit team of plumbing, HVAC, and electrical contractors throughout the U.S. and Canada.

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