Episode 23 Podcast Transcript
Speaker 1 (00:00):
There’s no point pricing incorrectly and growing this business off the back of a shitty pricing model. It just doesn’t work. Hi everyone. Rob Kropp here and welcome back to another episode of The Trade Den, good to have you back. Dan. How’s things?
Speaker 2 (00:19):
It’s great to be back, Rob. Yeah, very well, thank you. Looking forward to a big series. It’s good to be getting into a bit of a deep dive again, which will be cool.
Speaker 1 (00:28):
Yeah, it’s been a little while since we’ve done one of these and for you listening here today, we’ve actually, Dan and I have made the decision that we’re going to be doing a big deep dive on this whole topic around pricing. And the reason why we’re doing this is because it’s one of those topics that whenever I’m having a conversation with clients on the front end before they even jump on board with coaching, one of the biggest areas that we focus on in our strategy sessions is pricing. There’s pricing’s just a huge topic. Get it right and it can be one of those big things that helps you build a profitable business, get it wrong, and it can cause so many problems on so many different levels. So Dan, it’s just such a big topic and that’s why we’re kind of breaking it down over three parts arn’t we?
Speaker 2 (01:16):
It’s massive. It is one of those things that people make a lot of assumptions around. Everyone’s got it. Everyone sort of understands the concept of a price. Everyone’s got their own sort of preconceived ideas about how they do it or what they do, but it never really gets talked about or broken down into the component parts. And I think we always find that when we have these conversations with clients that the minute you really scratch beyond the surface is where you find some easy changes to make in the relative scheme of things, but you’ve really got to sit with it and learn and understand some of the principles we’re going to be talking about.
Speaker 1 (01:50):
It’s just never taught. And I think that’s the problem with so many business owners that they’ve never actually learned how to price to make profit. A lot of people price to win work, but they don’t actually price to profit and that’s symptomatic because they don’t even know their numbers. That’s a big problem of it, but I think most people are never actually sat down and shown how to price correctly for their business. And that’s a big part of what we’re going to talk about over this series is how do you price to make your business profitable? And if you get it right, it’s just a game changer.
Speaker 2 (02:26):
It is. It’s one of those sort of black box topics in a business, isn’t it? It’s where it’s sort of locked away somewhere. One person, maybe two, know how it works and the way it really does work is usually it’s looking at grabbing information from an old employer or something that’s laying around or some bit of information that they’ve got that goes into their little black box. And that’s our secret way of pricing. But the more you talk about it, the more you understand it and learn, like you said, the more you dedicate yourself to learning the art of pricing to profit, it’s just an absolute game changer.
Speaker 1 (02:58):
I think it’s really topical at the moment in the marketplace with what’s going on. I think when you’re in Voyant Times and work’s just flying around left and centre, people just throw a price at something and people win work despite their ability to price. Well sell well and close good deals. Anyone can make money in the good times, but what we’re seeing at the moment is the market’s tightening, it’s getting challenges out there. There’s plenty of businesses falling over, going broke and all those types of things and there is a lot of blame on material shortage. There’s a lot of blame on price of labour going up. There was a lot of blame of Corona and all those things in the past over the years gone by. But if we really be honest with ourselves, a lot of those factors which we’re going to talk about over this series are definitely external factors that we have to be mindful of. But fundamentally so many businesses price incorrectly. And when I think about prices, if you price too high, you miss out on the work. If you price too low, you set yourself up for failure and if you price too low, this is then when businesses cut corners on safety, they cut corners on quality, they cut corners just to be able to get through. And so pricing is one of these delicate topics that you’ve got to get right. Otherwise there’s no viability in a business long term.
Speaker 2 (04:23):
You end up chasing your tail. You go down so many rabbit holes in so many ways of trying to backfill a fundamental flaw in your pricing that it just takes you away from the work you need to be doing and you’re a mile away from being profitable by the end of the job.
Speaker 1 (04:38):
This topic is actually also a big part of our launch programme because pricing is a fundamental area of your business. You have to get right from the start. And so in launch we teach this under our unlocking the vault part of our framework and we spent a lot of time digging into this with clients and we’re just big believers here that before you even think about scale, growth, expansion, if you don’t get your pricing right from where you are, you can set yourself up for fail your big time. So yeah, should we get into it?
Speaker 2 (05:12):
Yeah, let’s go through it. Maybe let’s just spell out a little bit about the next three episodes, what we’re going to cover off to give people a sense of where we’re taking this topic and how we’ll break it down for you so you can follow along as we go through each episode.
Speaker 1 (05:24):
Yeah, this week what we’re going to do is talk about actually price to profit principles. So we’re going to talk about the principles of how do you actually price work to be profitable, not just to win work. We’re going to talk a little bit about when to review your pricing and how the different types of jobs or services that you do offer also impact your pricing strategy as well. So that’s going to be a big part of today’s episode next week. On next week’s episode, we’re actually going to talk a lot around getting your cost base correct in your pricing strategy and the different mistakes that a lot of trades businesses make when it comes to their cost base, where when they get it wrong and actually erodes their margin big time when they get that job out of the ground. So week two is going to be a real cracker and then week three is going to be a huge topic because it’s all around margin and so many trades businesses don’t understand the difference between markup or margin or what margin should they actually be charging on top of their cost base to be able to remain profitable.
(06:34):
So we’re going to talk a lot about market versus margin and also some industry standards around there so you can kind of gauge where you sit in the marketplace. So three big topics ahead of us over the coming weeks.
Speaker 2 (06:47):
And if you really want to make sure you don’t miss these as they come out, let’s make sure you are following the podcast. You’ll get notified for that. So if you haven’t already subscribed on whatever platform you’re listening to us on and make sure you’re getting this information sort of as soon as it becomes available because as you build one of these topics on the other, that’s when you’re going to get some real momentum in terms of shifting some of those dials that are going to make huge differences to the success and profitability of your business.
Speaker 1 (07:14):
What we’re going to talk about today is we’re going to start off with a principle and then we’re going to talk around various internal and external factors around when you should be reviewing your pricing. What we’re going to do is teach some stuff, but we’re going to intertwine a lot of stories into today because I think if we talk about scenarios, examples and stories of guides in that trade space where we’ve been able to make some really good changes, hopefully you can see it’s possible within them and it’s totally possible for you as well. It’s a bit hard. We are going to be talking about hard and fast numbers and all those types of things, so bear with us as we do tell these stories, but we’re going to try and tell as many as we can so you can take these learnings and roll ’em out to your business because in the end of the day, knowledge is power, but it’s more powerful when you get this knowledge and execute it well. So make sure you do take these principles and make some positive changes. Let’s start with principle one.
Speaker 2 (08:10):
Yeah, let’s do it. Principle one, which is there’s no one size fits all when it comes to pricing. We can’t understate this principle. It is probably one of the first things we do when we get a group of guys together and start talking about pricing. All we hear is, well, how do you do yours and what are you doing? How do you do it? And everyone’s looking for that magic number or that magic rule, but principle number one that we want everyone that’s listening to take away is that there is no one size fits all.
Speaker 1 (08:37):
This is so big because I’m a part of so many trades specific groups, whether it’s a sparky group or a plumbing group, all on Facebook and everything. And I reckon multiple times a week someone will put in there going, Hey, I’m thinking about charging this. What are you boys charging? And this is the job that I’ve got, how would you guys go about it? And I think it’s good that guys are asking that question because what it means is they want to understand how to price, but it’s so often then you get this whole ream of comments going, this is what my hourly rate is and this is what I charge and this is what you should be charging. And this is the problem in the industry because no one knows how to price and everyone’s just comparing prices and this is where the whole race to the bottom issue comes because even though most tradies are in the same similar industries, every business is unique to some degree, aren’t they?
Speaker 2 (09:37):
Yeah, and I think that’s the whole point. There’s some factor that will exist in your business like a fingerprint and you will be different to the next business there. There’ll be a factor that contributes to your pricing you are probably more sensitive to than the next business or the guy next door or the guy that you’re talking to online. There’s going to be something that’s a little wrinkle in there that if you blindly adopt it and follow it, it’s going to be to your detriment, probably to their benefit. But you’ve got to understand where these levers and where these little factors are.
Speaker 1 (10:08):
We’ve probably got about half a dozen different factors which contribute to the uniqueness in the business. Where would be the first one for you? What’s that one unique factor that does influence pricing?
Speaker 2 (10:20):
I think you can start off with, I mean the basics are there, like market conditions for instance, it’s a big factor and pricing will change over time depending on what sort of market we’re in. So I think there’s that one and there’s the basic economics of supply and demand. I think the big one are the things that swing that people probably don’t pay attention to is things like I’m going to start at the bottom and sort of talk around location and service offering in general. I mean we’re going to talk more about those too, but just taking something as simple as location capital, city versus regional, that sort of stuff is a sensitivity that’s absolutely real. And if you ignore it, you’re going to do that at your own peril.
Speaker 1 (10:57):
Yeah, because we coach trades businesses all across Australia, capital city and regional, we definitely see this because it is more costly, for example, to be able to hire a tradesman in Sydney than it is in a regional area. And so immediately there that might be an extra $10 or $15 an hour extra just to have that Trae on the books, which naturally means that that pricing model for the Tradie in the capital city is going to be much higher than the one in the regional area. And so if you’ve got someone in a regional area asking the question of a guy in a capital city saying, what should we be charging? And the guy in the capital city saying we’re charging out at this rate. And if that guy in the regional area then starts putting that into their pricing model, they might price themselves out of work in that regional area and they’re wondering, why am I going wrong? Well, I’ve just got to slash my prices and get to the race to the bottom. So there’s a prime example where geographically it can have a huge difference, cn’t it?
Speaker 2 (12:06):
It does, and that feeds into those market conditions like we talked about, but also things like input costs, things like labour or purchasing power, what is the price of materials in that region versus another region? So I think all of that factors in, and it’s not that they all follow linearly, it’s not just because this is the rule for regional, this is the rule for capital city. There’s little elements and there’s a plus on one side where it’s a minus on the other. So unless you really understand these inputs as they go through, then you are going to make that same mistake, trip yourself up and have an assumption in your pricing that you’re going to have to chase all the way through a job, which is what we were talking about on the intro. I think the other one, Rob for me, is when we start looking at business models and service offerings, that’s a huge one. Even though guys can be in the same trade, there’s a world of difference in terms of that business model that they’re running or the service offering that they’re providing to the market, which has huge ramifications as a pricing.
Speaker 1 (13:02):
Yeah, definitely. And we’ll tell a couple of stories around this and when we do use some examples, but when we mean about different service offerings, that means the volume game versus high end space, it’s maintenance or service versus construction. And sure, you might be able to do flat rate model pricing and that’s the equivalent of $160 an hour plus GST for a tradie in the service space. If you try and charge that in the construction space, you’re going to lose every single job hands down. And so this is the danger of comparing spreadsheets or asking for advice for guys or people in your peer group within the same industry. You’ve got to be so aware of the conditions, the supply and the demand, the input costs, the competition where you’re located, what type of work you do. You’ve really got to reflect internally in your own business to be understand well what are all these internal and external factors are going on for the market that I’m in? Then you’ve got to make sure that you price correctly outwards into that market. Otherwise, if you are borrowing all these different pricing strategies from other people, you are going to set yourself up for failure in the long term.
Speaker 2 (14:22):
Yeah, you’ll get picked off every time. And I think it’s not just comparing across businesses to A, B, C versus X, Y, Z, it happens internally as well. And I think you mentioned some of those examples, but examples where guys have had, they’ve got different service offerings in their own business and this idea, well, I’ve got a price that’s my price. These are the same guys, they’re doing different work. Why do I need to change that? Can you go into a little bit more about how it works internally in a business that’s got multiple service offerings?
Speaker 1 (14:51):
I’ll use an example around this. We’ve recently done some work with a Sparky in our launch programme who’s been on a big journey to get his pricing model right over the last couple of months and this happened, this has come about because he had a service arm and a construction arm to his business. Now he was heavily geared towards service and maintenance and a smaller proportion to his business was in construction. And what happened was he had a flat rate pricing across the board. Now that worked when he had a couple of builders that he did work for, had really good relationships, he almost got away with it and then he made that decision to be able to go, well, I’m going to move more into construction, and this isn’t the opportunity where if you’re listening today to be able to go, oh, who’d want to work for builders?
(15:44):
Let’s go service. It’s who cares? It’s what you choose in the market you’re in. The market that you’re in influences the pricing that you’ve got. And what was happening is Sam was having a flat rate price across the board. He started changing the blend of work that he was doing away from service and more to construction. And it’s not that builders are bad, it’s just that there’s a market sensitivity to what you can charge in that market. And what was happening was he started pushing, doing all this bd, trying to chase these new builders and these builders were like, mate, you are way too expensive. And he was spending hours and hours and hours getting knocked back. He was pricing work and getting knocked back and he was like, what am I doing wrong? And fundamentally he was just pricing himself out of the market because he was trying to adopt a service maintenance pricing strategy into a construction game and it just didn’t work at all in his space.
Speaker 2 (16:51):
Yeah, for sure. Absolutely. So I think that principle, I think we’ve now tackled that idea of one size fits all. It just isn’t the case. It’s very much horses for courses across businesses, across industries, and all of those inputs as you go, you’ve got to be sensitive to all of ’em. You don’t get to pick and choose and there’s no shortcuts.
Speaker 1 (17:11):
The best thing about this example was is that once he adjusted his pricing strategy for the market that he was in to meet the sensitivity within the industry that he was doing work in, once he got that pricing strategy, even though it was still profitable across the board for his business, it’s amazing that he was then winning work, his pipeline filled up. He’s got a very strong pipeline in front of him and he’s set to have his biggest quarter ever. And so I think it just shows that when you’re out in your pricing, it can have huge impact on the work that you win When you have it too low on your pricing, you lose money when you start the job, but when you get that balance just right, it’s amazing that within that sensitivity in the marketplace you’ve got the ability to convert well and still remain profitable along the way.
Speaker 2 (18:13):
Yeah, it’s one of those things that removes all the friction from the deal or getting the job over the line, all that sort of hard work. It’s not that it’s easy, but there’s a lot less friction around trying to win that work and trying to fill those pipelines once you understand those sensitivities and you’re pricing according to what the industry and what the circumstances are demanding. Let’s go on to principle number two and this one, I think this is another one where a lot of guys get hung up. I think people have the idea that once they do pricing, pricing is done. I’ve done the pricing and that’s it. We’ll leave it for a while and see how we go, but principle number two is that your pricing structure has to evolve as your business grows and evolves. Too many guys, I think we see this all the time, is they set and forget. There’s no sort of thinking ahead. There’s no sort of planning or strategic mindset around their pricing. It’s just simply, I’ve got a price that’s what it is, and it can sit there until I have a problem.
Speaker 1 (19:10):
Now these ones are more the internal factors, aren’t they? These are the things internally in a business that we’ve got to be wary of.
Speaker 2 (19:17):
The inputs that come from internally as your business grows and evolves internally, there’s different things that’ll happen within your business that you might take for granted or you won’t reflect as part of your journey or part of your price setting principles as the business shifts and changes around you.
Speaker 1 (19:35):
This is something that we saw a lot of businesses do during COVID times because the rates in terms of labour and materials just changed so regularly that so many businesses got caught out because they price work got locked in and then cost just increased and it just blew a lot of businesses out of the park. But I think this, so that was where it was super relevant, but this is one of those situations that whenever you are tweaking your business, moving into another phase of growth, bringing in additional overheads or whatever it is, you’ve almost got to be aware of where is the business going and making sure you’re preemptive of that growth curve or that strategy moving forward to make sure that your pricing model is reflective of where the business is going, not where the business has come from, and that’s why reviewing it six monthly at a minimum is so important because you’re almost taking stock on where are we? Where are we going, where are we are going? Obviously price, individual jobs, you still got to review and tweak on individual jobs that you’re pricing, but I think at a fundamental wholesale level, you’ve at least got to do that at a six monthly space for sure.
Speaker 2 (20:59):
As you look at these internal factors, I think this is where a lot of businesses start to trip themselves up because they’re starting to, the business is growing and the growth is seen as being successful no matter what. We are winning work, so things have to be going well, but unless you start to shift your mindset into that principle of pricing for profit as opposed to just winning work as your only success factor, this is where the failure to evolve, we’ll bite you really quick down the track because it will start to compound as you start to, you grow your expenses, but you’re not growing your profitability or at least matching the profitability or margins that you need to have to run a sustainable business. So you run yourself very skinny along the way if you don’t grow and evolve your pricing as you do,
Speaker 1 (21:41):
It’s almost like as the business gets bigger, the margins become skinnier, and that’s not because the margins aren’t there available in the marketplace, it’s because the business hasn’t evolved their pricing strategy to keep up with the internal input costs which are coming associated with growing a business. And it’s really important to remember is the pricing strategy that got you into business is not the pricing strategy that you’re going to have today, and it’s not the pricing strategy you’re going to have in 12 months time, especially if you’re growing and expanding and you are naturally bringing on more overhead associated with a business that is growing.
Speaker 2 (22:22):
For sure. Now, let’s look at some of those costs. You mentioned them there that we are looking internally, but let’s sort of break this down. We’re going to do this in the next topic. We’re going to really break down cost basis, but when we’re talking about these internal evolving costs, we talk about fixed costs and variable costs, so just really high level fixed costs. If we look at it overheads like rent and utilities, they shift, they change. You should be reflecting some of those changes in your pricing. Same thing with variable costs or the direct costs related to delivering your services. Things like materials and labour, you talked about the costs and the inflationary impact, things like that. If you’re not on top of these internal cost changes, this is where you get some really nasty surprises. The other one I think Rob worth talking about is customer service and support levels because as a business shifts and changes, that’s one of the biggest things or the biggest component that you end up either spending money on or your investing in, I should say, to help your business succeed.
Speaker 1 (23:18):
The reason why, and you’re right around that one, around additional support and support levels is because especially when we meet clients that get to that million dollar mark, they’re at that tipping point, and this is why it’s such a foundational strategy in our launch programme because when you get to this point, you generally are when you start, you can be a contractor on a lower rate, you put a tradesman and apprentice on. Once you start having a few guys in around you and you get to that million dollar mark, you’ve got to turn that corner to be able to move out of the front office of your home and bring in that extra fixed cost like rent and utilities like you were talking about. Then all of a sudden you’ve got to make that move where you’re implementing a job management system. There comes subscriptions into your overhead cost base.
(24:06):
Then you’re making that move of bringing some more experienced leading hands in, so therefore your cost base of your direct labour is going to increase as you are winding yourself off the tools. You’ve got to factor in pricing when they’re not going to be as fast as efficient as you. Then you’re bringing in administration people, so all of a sudden there’s all this overhead and additional fixed and variable costs come into a business, and that’s why when a business hits that million dollar market is turning that corn, it’s a grow. If you don’t get that pricing strategy evolving as you do turn the corner and grow, this is when so many trades businesses grow broke because they haven’t fundamentally shift their pricing strategy to match the trajectory that they’re on at the time.
Speaker 2 (24:54):
Yeah, there’s so many examples of this. You see guys all the time as you said, I don’t think we can understate it, but I mean I know you’ve worked a lot with Chris and talking through that sort of thing where he started and grew really quickly in the beginning and his pricing reflected the fact that he was nimble and quick and could spin on a dime because it was so easy and he was pricing work at that level, winning it and just getting on with the job, which is all great and exciting, but over time it does require, it requires a shift in pricing because you’ve got things like scheduling to think about and equipment to get and planning has to get a bit more complex. All of those things add up.
Speaker 1 (25:31):
Yeah, Chris is a great example where he came to coaching and he is like, Rob, I’m growing, but my bottom line is not following my top line, and first thing we went to is pricing. His pricing was way out. We unpacked the true cost of his labour. He’s like, but Rob, I’m paying these guys and this is what it costs me. It’s like, no, it’s not mate. Now you’ve got employees and you’ve got their base rate and superannuation and work cover and non-billable time and annual leave and sick leave, and he didn’t really understand the true cost of his labour and then he had to start factoring in his overheads and the moment his eyes were wide open to the true cost of what his labour actually cost him, he’s like, no wonder I’m growing my revenue and I’m bringing more people on, but I feel like I’ve got to work longer and harder because the money is not there.
(26:27):
And so immediately we shifted his purely just his hourly rate, and we’ll talk about this in future episodes, but we purely just shifted his hourly rate by at least $20 an hour and he then further shifted another $10 an hour to reflect the level of support, the service, the market that he was in, in the space that he was in and the types of tradesmen that he was bringing on, and that was a game changer for him. It was a huge change for him, and he was initially worried that he was going to lose customers, but no one dropped off, and that just tells me that he was way underpricing for so long and the moment we changed him was a game changer for him.
Speaker 2 (27:09):
Yeah, it’s a real gut check moment, isn’t it? When guys do that, and we’ve done it with so many, but I think it legitimises their own acumen in a sense or their own business. It sort of legitimises when they charge what they’re worth, but they’re charging for the value that they know they’re delivering. It’s a game changer in terms of what they think they’re then capable of and the confidence they go out to win that work at that price knowing that they’re going to be profitable. All of that is just, you can’t understate it. It all comes from having your finger on the pulse around evolving your prices as your business evolves.
Speaker 1 (27:40):
And connecting that back to principle one, this is why we say that every business is unique because if Chris put his business up against another business in his industry, in his space, they would just compare hourly rates and they would go, well, this is what I’m charging. This is what you should charge. And then if they go up then and price that job and the builder or the strata manager or whatever says, you’re too expensive, well too expensive for how do you know that they’re pricing correctly?
(28:08):
And then you get feedback, you’re too expensive and then you drop your pants to win work and then everyone starts doing this, and this is the issue in the industry that everyone’s just dropping their pants to win work race to the bottom, and there’s always going to be someone cheaper than you and everyone is just no one knows how to price correctly. And so everyone’s an uneducated business owner all comparing pricing models which are all broken anyway, so this is why you’ve got to go into internally into your business and understand the ins and outs of how you operate and the mark you’re in. This is why we call it the unlocking the vault in your business. You’ve got to know your vault inside and out, so you’ve got the ability for you to have a correct pricing model for your business to profit and then not worry about what everyone else is doing in the marketplace.
Speaker 2 (29:03):
Definitely, definitely. Now it’d be great if it was just that simple of doing your own internal because now we’ve got topic principle number three I should say, and that is your pricing still has to be reviewed regularly. Even if you’ve got your handle on what your business is doing internally, I think you then have to have your eyes wide open to these bigger fluctuations and things that are going on. You can’t just blindly, we’re not saying put the blinkers on and go, well, at least I’m set. And meanwhile, there’s all kinds of things happening around you. So principle number three is your pricing needs to be reviewed regularly given external factors. So do you want to go through a couple of these external factors and we’ll have a look at how they impact the pricing methodologies and what people need to be concentrating on?
Speaker 1 (29:50):
There’s three external factors we’ve got to be wary of. The first one is demand, the second one is economic conditions, and the third one is competition. We’ve got to be sensitive to all three, I think, and I think it’s more just your ability to be aware of what’s going on around you, but not basing your whole pricing strategy purely off these factors. The first one’s market demand. Obviously we’ve been off the back of big construction booms over the last number of years, and I think when you’re in the boom time, guys just throw silly money at jobs hoping they don’t win it, and then they win it and go, oh, there goes’ that. I’ll just land a shitload of extra margin on that job that I wasn’t expecting to win. But I think when demand crunches or there’s seasonal demand, depending on what industry and marketplace you’re in, I think demand, when supply outstrips demand, that’s when you’ve got to be a lot sharper in your approach, and if you don’t get your model right for that, that’s where you can be caught at very quickly.
Speaker 2 (31:03):
And this is a real active thing. This market demand, especially that seasonal demand you talked about. We’ve seen that before with customers where they’re trying to fill a pipeline based on seasonality. There’s a summer or a winter period where it’s quiet or it’s busier, but they haven’t got the pricing sensitivity reflected in that, so they’re going out to sell and fill a pipeline. It’s winter. Now, if I was trying to fill a pipeline coming into spring, summer, I’ve got to make sure that I’m pricing according to that period that I’m looking at. If I don’t, then I’m going to be pricing out a step with the market and I’ll do a whole lot of activity and I’ll either do what we said before, we’ll undercut ourselves or we just won’t win work. Our prices are too high. So you’ve got to be really sensitive to market demand and especially don’t ignore seasonal demand in your industry, in your business.
Speaker 1 (31:50):
What about economic conditions? We spoke a little bit about that under the market demands. What about economically around inflation and recessions and boom times and stuff? Talk us through a little bit more and maybe international factors of things that are going on. Where have we seen this do you think, across the board with our clients around some of these influencers externally?
Speaker 2 (32:10):
I think the main one that comes to mind that sort of the umbrella around it all is the impact of inflation, but you’re sort of talking about economic conditions with inflation and rising input costs, which are the same sort of things for everyone, right? It’s materials and labour and the cost of these things as they sort of reverberate around the world. We have guys that will price and set prices but will ignore the input costs that are happening external to their own business. And they do that again at your own peril because you’re sitting in there going, well, well, I’m going in at this margin. You haven’t factored anything in sensitivity wise about, well, how has, since the last time that I placed that order for that materials, I haven’t adjusted my cost base. I haven’t adjusted or given any thought to reviewing my pricing.
(32:52):
Now I’m going to price and I’m going to be out of whack. And sometimes we saw this as COVID was sort of winding down and all that rippled through the industry. It was like 30, 50% increases in materials that some guys were using, old pricing sheets, old quoting spreadsheets. They hadn’t updated that one line and they were wondering why they were getting absolutely ripped apart when they went to deliver jobs, even though their quoting stuff was showing the same margin was still being applied, but they hadn’t had that sensitivity to look into inflation and the rising input costs around them. They just sort of had that set and forget mentality and it bit them on the arse and it happens through recessions, it happens through boom times, international events, things like wars and price of oil and all this sort of stuff. You can’t have your head in the sand with that, and it’s not that you have to try and jump on every wave, but you’ve got to have an awareness of what’s going on around you.
Speaker 1 (33:44):
What about competition? What role does competition have in pricing? You don’t want to get caught in price wars, but where do you have to be wary of competition and their pricing strategy.
Speaker 2 (33:56):
In crowded markets is where competition, where it’s crowded and where you’re not the only one, there’s a sensitivity that you can’t ignore now, it’s not that you have to have a race to the bottom, not always the cheapest version wins. It’s not always the cheapest price wins out, but when you are pricing competitively in a crowded market competitively, pricing is, you could almost say it’s got to be priced for value. Is there value in what you’re pricing and are you pricing according to what your customer values as opposed to just a straight up numbers game? Now some customers will be what’s the cheapest price? Now if you are playing in that space and you’re not wanting to, don’t play that game, you can’t drop your pants, you will get caught out. You will be subject to, like you said before, there’s always someone who will do it cheaper than you will to win the work.
(34:42):
That’s always just a factor. So you’ve got to be really careful against that, but you have to price competitively so that you are still making good money. You know what value you’re providing, so what is it that you can do that’s going to provide the value to the customers that you want, where they’re looking for advice or relationship, something where there’s something other than a number on a page that they’re buying from. And I think a lot of guys just get caught up in that sort of, well, it’s all about number and price, but you almost mentioned it before. When someone says you’re too expensive, the answer should always be compared to who or what because there’s going to be a reason for them. Having that idea about what value you are providing versus the other one. If you can get into a value-based discussion that’s going to change the nature of the whole conversation or how they view pricing, it’s always a value statement based on what the customer perceives.
Speaker 1 (35:29):
Yeah, we are big on our position in the marketplace. We we’re big on coaching clients on where do you sit in the marketplace and where’s your sweet spot, almost creating that niche or that point of differentiation. And when you don’t have that sweet spot in the marketplace, guess where you’re going to be competing on price all the time? It’s always the factor, isn’t it?
Speaker 2 (35:51):
It is, and it is really discouraging after a while because it’s like I can’t, you get frustrated as an owner who’s got pride in the business and the team that you put together and the work that’s gone into even just getting to this point of having the opportunity to look at this sort of work. And it gets frustrating when it comes back and we see guys do this all the time where it’s like, well, it doesn’t matter what I do, it’s just I’ve just got to be the cheapest if I want to win the work, and it’s not true. What you’ve got to do is go deeper and understand, well, what’s the market? I’m really in own that market. Get into that space of niche and being able to charge a premium for what you are offering in your market, in your space and holding your ground on that. Not to gouge and try and maximise profits and do all that sort of stuff, but to get to a point where you stand on your own two feet and there’s people that recognise the value and quality that you’re providing. You’ve got to do the work to find those people and talk to those people rather than the people that are just wandering around going, who’s going to give us the cheapest price?
Speaker 1 (36:48):
And it exists in every sector, and so there’s a lot of tradies that hang shit on other tradies who do work for builders. It’s not just the construction space in the maintenance and service game. You’ve got different ends of the spectrum. You’ve got some tradies who charge 60, 70 bucks an hour, and then you’ve got some who charge 160, 180 bucks an hour or five grand for something that’s really only worth two grand. And tradies are like, how does he making money at 60 bucks an hour? How are they getting away with it at five grand? So even in the service and maintenance game, there’s going to be highs and lows. The guys at the top end let ’em gouge the marketplace, they’re going to get caught out eventually for the guys on the bottom end, let ’em charge their low rates. They can get the customers who only want to work on price.
(37:40):
You’ve just got to find your sweet spot where you can remain profitable. And then if you’re doing work in the construction space, for example, you’ve got to be sensitive to the price that you charge. You’ve also got to remember there’s always going to be someone cheaper than you. There’s always going to be someone more expensive than you and just don’t get disheartened when someone says you are too expensive because you never know if that builder mispriced something in their own estimates and they’ve got to go to the cheapest price to make them viable to win that contract. And so there’s so many factors going on here around pricing. The best thing that you can do is understand that your model’s unique. There’s internal factors that you’ve got, there’s external factors you’ve got to be aware of, but you’ve got to understand your own numbers, your own business model, the sector that you’re in, the market that you’re in, and those things define your pricing model, not trying to copy everyone. And I think that’s the punchline out of today’s episode, isn’t it?
Speaker 2 (38:44):
It really is. That’s coming back full circle into reviewing your price regularly. If you understand these inputs and factors and you really learn this and you really take on board what you should be looking for before you even look to set a price, then you can be a lot more flexible. So you can start to look at, well, what’s the market doing? What do I need to be charging? And I can adjust my prices as many times as I like. You can adjust your price from job to job if you know what it is or who you’re dealing with or the market that you’re in. There’s nothing to say that you can’t do that people don’t do it because they don’t understand how these levers interact with each other. So hopefully today just looking at these couple of quick principles, it should hopefully make you feel more confident in terms of, well, there’s a way to do this that I can price profitably regardless of what the conditions are or what the pressures are that I’m subject to, but I’ve got to be able to stand on my own two feet with the price that I’ve got.
Speaker 1 (39:39):
Yeah, why price cheap and go broke? You may as well go broke sitting on the beach drinking a pina colada. There’s no point pricing incorrectly and grow on this business off the back of a shitty pricing model. It just doesn’t work.
Speaker 2 (39:53):
No, not at all. And that’s why it is, if anything, it is always fluid, it’s always shifting, it’s always changing. All sustainable businesses have that thing. If you’re going to be around for a long time, you’ve got to be able to be profitable in good times and in bad. And a lot of that comes from knowing how you set your pricing and what are the big sensitive levers, internal and external that you need to be setting in your own business.
Speaker 1 (40:15):
I’ve got a few key summary points that you’ve got for those listening today.
Speaker 2 (40:21):
Yeah, I think my first one is that there is that no one size fits all. Please take that on board. If you’re listening today, stop basing your price on what others are doing in the market. They’ve probably got no idea of what your model needs to be, and they’ve probably not even got an idea about what their own is, to be perfectly fair. So really understand that there is no one size fits all pricing model. It doesn’t exist.
Speaker 1 (40:43):
Yeah. The big one for me is you’ve got to be preemptive in terms of where you’re going with your business and making sure your pricing strategy is reflective of that, and it’s super important to remember is what got you here is not going to get you to where you’re going to go. That’s true for your pricing. It’s also true for the customers you do work for and the business model that you run. So it’s about understanding where you’ve come from, where are you at the moment, where are you going, and you’re making sure that your pricing model mirrors the direction that the business is moving and grooving in.
Speaker 2 (41:14):
Yeah, for sure. I think there’s one little one I’ll throw in the end, Rob, but that’s if you get your pricing wrong, you’re destined to fail and you’re going to fail, not probably because of any one sort of price that you put in there, but because you’re going to start chasing your tail, you’ll cut corners, you’ll start to chop stuff out, you’ll start to shift things that you don’t even know what the unintended consequences of chopping that out or changing or adding some more cost to a job. All of that stuff really does add up. So really take the time, go back and learn these principles, have a really good, think about what you’re doing and how you are doing it, and then let’s get these techniques that we’re going to go through in the next couple of episodes that we can get those in place and get rid of the flaws for good rather than chase problems and try and fill gaps.
Speaker 1 (41:56):
Yeah, hopefully you’ve enjoyed part one of this three part series around pricing to profit. Next episode, we’re going to be talking a lot around your cost base, and this is the difference between making money and not making money. So getting your cost base is absolutely one of the most important things that you do before you even think about what margin should I be charging on top of my cost base. So looking forward to coming back to you next week around that. We’re going to do a big deep dive around cost base, and it’s going to help you pull apart your pricing and get it all right from the very beginning and you’ve got a better chance of setting yourself up for long-term profitable success. Looking forward to talking to you next week. Thanks heaps.
Speaker 2 (42:34):
See you next one.