Strategic pricing is not a one-size-fits-all system, and it requires constant analysis. Electrical contractors who understand and monitor market conditions, as well as their own estimating procedures, will make the best choices each time they submit a bid. Last month’s column suggested five situations in which increasing your price could be a useful strategy. This month, I examine the times when cutting prices makes sense and when temporary pain may produce long-term benefits.
Reward best customers
Don’t take your best customers for granted. If you have the good fortune to work with owners and general contractors who purchase your services at a price that allows a reasonable profit, offer fair contracts, manage their jobs safely and efficiently, and pay promptly, they deserve an occasional price break. Ensure that any highly valued customer knows what effect the relationship has on the price you are submitting.
This strategy can also be used with other customers. Smart contractors offer alternative pricing options tied to variances in the scope of work. Fewer contractors offer pricing adjustments tied to contract terms, such as payment flow or retainage release. Discounts for prompt payment (e.g., 2 percent net 20 days) can improve cash flow significantly. Price breaks for line item release of your company’s retainage can expedite the receipt of thousands of dollars by months or even years. Such alternatives pave the way to establishing future best customer relationships, and all parties will benefit.
To weather the economic downturns, you need to have bread-and-butter projects that pay your overhead and keep the doors open. Pricing at cost, or even below, may be necessary to retain your carefully trained employees and maintain a motivated, secure workforce while your competitors lay people off. The upside of deferring profits temporarily is balanced by the reputation your company will earn for protecting its loyal employees, and you may benefit from attracting better qualified people, while also retaining your own.
Use this strategy carefully and only for low-risk projects, or you might dig a financial hole deep enough to bury you. The intent is to keep your core business operating; if you lay off too many skilled craftspeople or staff members, it will be nearly impossible to rebuild when the economy rebounds.
Enter new markets
Make a habit of continually tracking niche opportunities. When a new specialty appears, demand is often created faster than new suppliers can enter the market. As an early entrant into a market with pent-up demand, you can normally charge higher prices. However, when you decide to add a new niche to your performance portfolio and you must compete with already-established competitors, a low price will make you more attractive. If your company has the financial resources to undercut competitors’ prices, this strategy can help diversify your brand.
Consider the impact of your company’s learning curve when you price repeat work. By the time you have completed your tenth big-box store for the same owner and general contractor, you should have figured out the likely cash flow, scheduling and design issues and become fairly efficient in performing the work. This enables you to solidify such relationships by offering a repeat-work discount. You might also have the option of locking in a sole source role in exchange for a long-term, multiproject, negotiated pricing structure. Customers want the security of predictable, on-time performance as much as you want predictable revenue for your business.
Big fish competition
If you are the largest competitor in your market area, or if specialty and new competitors are starting to nibble at your customer base, the traditional strategy is to slash your prices until you drive them out of your geographic area or out of business entirely. Basic economic principles teach that competition increases the supply of goods and services, causing prices to drop, so even your most loyal customers will eventually be tempted to try out a different electrical contractor. When this happens, the competitor may actually perform well, and you will lose a steady relationship.
On the other hand, the work may be performed poorly—or not at all—and the customer returns in a panic, providing you an opportunity to charge premium prices for an emergency fix of someone else’s botched work. In any case, cutting prices to reduce supply and recreate demand is a risky strategy, and the time it takes for vanquished competitors to realize they actually are broke may be long enough to seriously damage your financial strength.
Cutting prices is never desirable, but a careful analysis of the risks and benefits will reveal that the long-term benefits to your relationships and bottom line will often outweigh the short-term financial impact.
Next month, I will complete this series with a look at overhead allocation and how it may affect pricing strategy.