If you’re a typical electrical contractor, at least part of your revenue probably depends on submitting the lowest price among a growing list of competitors. Although this technically qualifies as a pricing method, it is not a pricing strategy. While pricing is a numbers game, there is more to the final bid price than calculations. Strategic pricing incorporates marketing, philosophy, creativity and risk analysis.
A strategic approach to pricing is based on market conditions and the advantages your company offers to customers compared to its competitors. Scope of work, contract terms, scheduling and customer relationships all affect how your pricing is evaluated. The number of clients and jobs you choose to pursue will affect the percentage of your overhead related to estimating. Even how you structure your expenses—which costs you categorize as variable/job-related and which are always labeled as overhead—will affect your pricing strategy.
For the next three months, I’ll review when to raise your prices, when to cut them and how to determine which expenses to assign to overhead. Here are five situations in which raising your bid price is strategically essential to maximize profit.
The difficult customer
It is baffling how often contractors pursue work for owners and/or general contractors who are difficult to work for, don’t pay promptly (or at all), or are simply so unpleasant to deal with that they demotivate any employee assigned to their projects. If you insist on working for this kind of client, it may be beneficial to raise your price substantially. Several things may happen when you are the highest bidder, especially if you previously have done business with this customer. You may lose the job to a competitor, which can actually be a positive outcome. The project can absorb some of your competitor’s capacity, while draining its resources and demotivating its employees. Your company can accommodate other clients that are more pleasant to work with and pay you more quickly, improving your cash flow.
Or, you will be awarded the project and earn enough profit to suffer through the process and perhaps give your employees a small bonus for dealing with the difficult customer. In the best case, the customer will call you to ask, “What’s the deal with your price?” This opens the door to an honest discussion of the issues you’ve had with past jobs, contract clauses, safety issues and other problems. I can say from experience that relationships can improve when a past customer wants to hire you and is receptive to your feedback, and you might be amazed to find out how valuable your company is to such customers.
Reputation for excellence
Expertise should command higher prices. If your brand is known for excellence, you are in the position to attract customers who expect to pay more for the highest quality results, delivered on time. Too many contractors undervalue what they provide in contrast to their competitors. Use your reputation to leverage higher profit. If your company is the Rolls Royce of electrical contracting, don’t price for the Ford Pinto customer.
Supply and demand—capacity
When your schedule is full, the economic principle of supply and demand works in your favor. In my family’s company, my father asked for down payments when we were busy and customers needed a priority spot on the installation schedule. They willingly paid up front to secure that reliability. When your competitors have more work than they can handle, or have closed their businesses during hard times, don’t hesitate to increase your prices to take advantage of this demand.
Do you have a fully developed niche in a specialty with growing demand? Are you on the leading edge of the latest technology upgrades, with trained craftspeople who can provide specialized services your competitors don’t have? Use the timing to keep your pricing at a healthy profit level until there is enough competition to provide customers with comparable choices. Carefully evaluate any required investment to enter a new specialty niche and whether you can leverage the advantage before it disappears.
Some projects are so large, complex or risky that competition is virtually nonexistent. In our family business, we took on the most difficult, high-risk jobs and charged extremely high prices because our competitors either chose not to pursue such jobs or had no idea how to bid them. Despite the occasional painful outcome when there was a substantial loss on one of these jobs, this strategy also produced our highest margin projects. Becoming known for solving design and installation problems resulted in other benefits: architects specified us, contractors referred us to owners, and our proportion of negotiated work increased dramatically, raising our profit margins even higher.
Next month, I’ll look at situations that may require you to lower your prices.