Episode 24 Podcast Transcript

Speaker 1 (00:00):

Don’t get into price wars, you’re better off going broke, sitting on the beach, drinking, pina coladas than you are dropping your pants to be able to get a job across the line at the end of the day. Hi everyone. Rob Kropp here and welcome back to another episode of The Trade Den podcast. Good to have you back, Dan.

Speaker 2 (00:20):

Thanks, Rob. Good to be here. Ready for part two?

Speaker 1 (00:23):

Oh, wasn’t part one. Great. If you haven’t listened to that, make sure you go back and listen to it, but wasn’t it a cracker there?

Speaker 2 (00:30):

It was so good to come back and really stop and explore all the stuff that we teach. So often it’s a conversation around pricing we have all the time. What should I be at? What should I be doing? What’s the next guy doing? Getting rid of all of that and really focusing into and making that commitment to learn the levers and the different factors that go into your pricing and the need to understand that there’s not one size fits all, knowing that is really the key.

Speaker 1 (00:56):

Yeah, I think we had to start there in our first episode more around the principles of pricing because often we just get asked what price do I need to be at or what margin should I be charging? And I think they’re just the elements and we’re going to be talking a bit about cost based today and margin in our next episode, but I think we really needed to start at the principle level. I think if you understand the principles and the factors that influence your pricing strategy, that’s something just to anchor on going forward. Those principles are enduring.

Speaker 2 (01:30):

They are, and I think it’s not so much the answer of what price do you land on? It’s understanding the questions to ask in terms of, well, what needs to go into this price that I’m building up, which is probably more into what we’re going to talk about today, but really taking a step back from having that rush in terms of well, what should that number be? And understanding the different elements and building blocks that go into that number is really the secret to your success.

Speaker 1 (01:53):

Yeah, today we’re going to be talking a bit about this concept around the pricing pyramid, and this is a big one and you alluded there before, it’s so many people are worried about, well, what price do I need to get to? And they don’t understand the different elements that you build a price from the ground up. And so we’re going to be talking about this pyramid today around the different elements of it. Obviously you do get to a sales price, but this will just help you have so much more confidence when you do deliver a price that you know are on the money for your price. So that’s going to be a big part around today. And then the second part that we’re going to be talking around today is around the four key elements are required to establish the cost base of your price. And so there’s four different elements there. We’re going to unpack them in detail and it’s just going to be able to help you pull apart your pricing and how you go about it so you don’t make mistakes in a road margin in the end of the day because you’ve just missed things out of your pricing. If you give a price and you’ve missed it, guess who’s wearing the cost of that? You are. So it’s a big, big, big one today around cost base. Looking forward to getting into it.

Speaker 2 (03:04):

It is. I think the other thing on the back end of that is understanding a cost base and these four factors that we’re going to go through, these four key elements, it then takes out the guesswork. Well, I’ve got enough in there, I’ve thrown everything I need to because just as people miss these factors, the other thing people can do is they overcompensate for that and they throw too much in there and they think, well now I’ve got it all in there. This is great. And then they come up with their price at the end of the day and go, holy hell, I can never compete. Why the hell am I in business and what’s the point of all this if that’s what I have to charge? The answer is that the secret is that the answer is somewhere in the middle. Once you understand cost base that we’re going to go through today, you’re going to be a lot more confident in terms of what goes into that number at the end of the day.

Speaker 1 (03:45):

And I know you’re probably thinking, what margin do I need in my materials or what charge out rate for my labour? Don’t worry. Next week we’re going to be talking purely around margin. We’re going to be talking about the difference between markup and margin. And so don’t worry, we’re going to be talking a bit about that next week in our next episode and the mistakes that guys do make the number one big mistake that they do make, which does deteriorate their margin because they don’t understand it properly. So stay tuned for that next week, but today’s more around cost base, next week’s all about margin, so looking forward to breaking them down for you.

Speaker 2 (04:26):

Excellent. So let’s start off then. Let’s get into these four elements that determine a cost base. And when we talk about four elements, these are the four things we want you to go off and explore. We’re going to walk through these slowly, come up with a little bit of homework or things for you to consider as we go through this little part of the conversation. Then we’re going to wrap it up into that cost pyramid that we talked about before, the pricing pyramid, sorry, that we talked about before. So the four elements that we’re going to talk to are materials, labour, equipment, hire and incidentals and hidden costs. So that’s what we’re going to cover off today. First one being materials. So when we talk about this, let’s talk about, I think Rob, there’s obviously a materials quantity and a materials cost. So when we talk about these things, usually there’s a quantity and a cost. Let’s see if we can’t break this down. Let’s start with materials as our first building block as a cost base.

Speaker 1 (05:17):

Yeah, quantity is a big one. And when it comes to the materials quantity, this all comes down to the accuracy of the takeoffs that you have from the set of plans, for example, that you might be quoting from. And so it’s so important that you have that set of plans. You having higher levels of accuracy and attention to detail is super important and it’s your ability to take your time to actually mark out off those set of plans and get the quantity correct because if you miss things on your plans and you price it to be able to complete that job, guess who’s going to wear the cost of it if you miss certain levels of quantity. So having the quantity is super important to be able to get the cost base for your materials right from the onset.

Speaker 2 (06:10):

Absolutely. So break it down is what we’re saying. Slow down, break it down. This is going to be a big part of getting your cost base right? If you try and rush this thinking, I’ll just quickly run through this and then I’ll throw something on the end and let’s see how it ends up. That’s where you’re going to really trip yourself up as a first hurdle. So materials, quantity, accuracy and attention tick. Alright, what about materials cost then?

Speaker 1 (06:32):

Yeah, this is the question that we ask clients a lot when they’re reviewing their pricing was when was the last time that you actually reviewed the cost of your materials? And this is a big one and because let’s face it, the cost of materials with inflation over the last couple of years has gone up and up and up and up and up and this is why guys get caught because they price today off yesterday’s or last week’s or last year’s cost base of their materials and then they may not start the job for another 3, 6, 12 months time and the cost can be completely different from when they’re quoting it to when they’re starting it. And so getting the base cost of materials aligned with the quantity, if you can get both of those two factors when it comes to materials, this is what sets you up to ensure that you get your cost base for your materials, right?

Speaker 2 (07:31):

Absolutely. So in terms of quantity and cost, it seems sort of pretty obvious, but we see these mistakes all the time being made constantly as simple as we break down quantity and cost. What do you think the biggest mistakes or where does it show up? So if someone’s listening to this, where would they be looking to ensure that they’ve got that eye on the details that they need to have?

Speaker 1 (07:51):

Big one. When it comes to materials, cost is not everyone’s running estimation software or job management system. Not everyone’s pricing through software. A lot of people price on spreadsheets and it’s either a spreadsheet that they’ve built, borrowed or grabbed from their old employer. Now spreadsheets are good because they can be quick and fast and you can navigate around them pretty easily. But like anything with a manual input, you open yourself up for error. And when the price and material is constantly changing like it is at the moment and you might have thousands of line items of materials that go into jobs, if you are not constantly updating the cost where you buy it from your suppliers, then you might be pricing incorrectly based on historical prices. So one of the biggest mistakes that we see is trades business owners not updating their manual inputs on their spreadsheets for pricing and they’re setting themselves up for failure before they even win the job.

Speaker 2 (08:54):

Definitely. And it’s not just those manual ones, either those direct feed systems that are becoming more and more prevalent where you’ve got direct feeds not updating those is another cardinal sin or paying attention to how those are shifting. A lot of guys will hit buttons, not look at it really, and they’ll miss out on a whole heap of stuff. And if you haven’t looked at that and you’ve just had done about 3, 4, 5 updates in a row, you can be miles out on your pricing or erod eroding your margin as you go along.

Speaker 1 (09:21):

Even where you’ve been into your suppliers based on a previous episode we had around going and negotiating with suppliers, how often do we see it where a client are going in negotiate with a supplier and then that updated pricing list reverts back to old pricing coincidentally, and then it doesn’t then reflect going forward because something broke at the supplier end and it reverted back to the pricing that you didn’t negotiate and then all of a sudden it’s feeding directly into your job management system at old pricing, you’re not getting the benefit map from actually going in there and negotiating. So if you haven’t listened to that episode in the past around and negotiating with suppliers, make sure you go back and do that. But this one’s a big one. If you have negotiated specific certain pricing for your business, make sure that that pricing model is feeding into your estimation software or your job management system.

Speaker 2 (10:18):

Yeah, bottom line, never assume, right? Yeah. Alright, let’s have a look at our second element that we need to have for an accurate cost base and that’s labour. This is a big one and it can vary as much as anything in terms of when we look at pricing inputs, but let’s talk labour and again, let’s start off with quantity and cost is our two areas, but labour quantity.

Speaker 1 (10:44):

Labour quantity is a big one and I think this is something that labour is one of the biggest margin erosion areas for every trades business and it’s especially important when you’re pricing, especially as you are winding yourself off the tools or are off the tools, you’ve got to price labour quantity for your team to do the job, not for you to do the job. This is the biggest secret around it and we’ve seen it so many times where the owner would be like, they’ve read the plans, they understand the scope and they’re like, oh yep, that’d take me 20 hours to be able to do that. But the owner is generally going to have more urgency and is more efficient than their team and if they’re really honest with themselves it might take them 25 or 26 hours for their team to do it. If you go in at 20 and then it takes you 26 immediately you’ve eroded six hours of labour of margin off that job purely because you haven’t gone into the job correctly with the right quantity of hours for your team to do it in a safe productive manner. And so when it comes to labour quantity, you’ve got to really unpack that job, understand the scope, be really clear in your mind of how you’re going to break up that job and complete it in sections, but you’ve got to complete it for how your team are going to do it, not necessarily how you or the owner are going to do it.

Speaker 2 (12:16):

And I think not just how you’re going to do it but how you’re going to hold people accountable for those hours going through it. If you’re handing off a price or you’re doing the bulk of the sales work and you’ve got a leading hand or someone like that, a supervisor who’s in charge of the job, this is one of those added benefits. When you break this down the right way and you get quantity right, then all of a sudden you can hold people to account for that throughout the job.

Speaker 1 (12:38):

In the absence of having actual hours for jobs. And this is why getting your cost base from an hours point of view is super important because like you said, if you’re a painter, instead of working on a square meterage rate for example, if you break that down into hours you can say, well this room here, I’ve allowed this many hours, that room, that many hours, this room that many hours with three coats of paint for this type of paint. So what you’re doing is defining the type of paint, how many coats and how many hours and if you can get those right from a labour and a material side of things correct, now you can hand that onto your team as you said, and then you can actually drive productivity through your team In the absence of that, if you just throw a price at something, well you’ve got nothing to actually hold ’em accountable to because what are they actually going to be held accountable to in the end of the day?

Speaker 2 (13:35):

Exactly right. And that’s where you start seeing people throw all kinds of different things at it to get jobs done and no consideration for the quantity or the spend you’ve had in terms of getting a job done. Let’s talk then about labour costs. It’s important to understand that true cost of chargeable labour.

Speaker 1 (13:52):

Yeah, this is a big one that a lot of business owners get caught in and we’re not going to be talking about overhead recovery rates and all those types of things. Let’s talk about that potentially next episode when we’re talking margin, but we’re talking pure true cost of your chargeable labour. This is a big one, a real eye opener for a lot of guys that come into coaching here, especially into our launch programme when they’re really unpacking their pricing for the first time. The reality is you might be paying someone $45 an hour for example, for a tradie that’s not the cost of that tradesman when you really start to add in superannuation, work cover, annual leave, sick leave downtime, time for non-productive time or breaks or all those types of things, lunch breaks and everything, it’s anywhere from $70 to $80 for example. I’m just using rough numbers because you’ve got to factor in all that dead time and downtime over and above just the rate that you pay them and that really blows a lot of people’s mind to be able to go, Jesus, that’s what it actually costs me to hire that tradesman per hour.

(15:08):

And so the rate that you pay them is not the true rate that they cost you and I think understanding the difference between those two helps you get your cost base right for your chargeable labour time, which then ensures that you’re charging them out correctly to be able to at least make margin at the end of the day.

Speaker 2 (15:29):

And again, let’s come back to it, we’re going to break it down in a minute, but that idea of we’re having building blocks here, these are little building blocks that you need to understand and know as you build up to what ultimately becomes the number that goes on your quote or the price that you’re giving at the end of the day. So really important to understand these first ones and materials and labour to start with. I think the big punchline is that labour always costs you more than you realise, especially if you haven’t really looked into it before because most guys will put a guy on and think, well, alright, I can pay the guy I’ve met the wage for the week. It’s all done and dusted, but there, there’s just more that goes into it than that. From a pricing perspective, you have to understand what that is.

Speaker 1 (16:08):

Yeah, it blows your mind when you start punching it into uncosted labour rate calculators for example, to be able to really understand your true cost of labour before we’re even worrying about trying to make a profit off that billable hour. The cost is way up there and I think what it does is it gives you confidence when you start talking next week when you’re talking about charge out rates and adding margin to your cost base and everything, it gives you confidence when someone challenges your charge out rates, you can then turn around and go, Hey, this is what it costs me to run this tradesman or leading hand or apprentice. It gives you confidence that you are charging them out correctly because it always costs way more than you realise.

Speaker 2 (16:52):

Definitely, definitely. Alright, so there are two big ones to start with. Materials and labour. Let’s get onto the next two. First one is that we’re going to talk about is equipment higher Now, this is an interesting one because guys that we say, well, I don’t hire equipment, I’ve got my own, but we have a pretty specific way of looking at equipment higher when we start building up pricing.

Speaker 1 (17:11):

Yeah, you’ve got to factor in both as if you were either hiring it or owning it. If you’re hiring it out, it’s pretty simple. You hire that bit of equipment, add margin to it and then factor it into your sales price or in this instance, you’ve got to make sure that you factor the cost, that equipment higher cost into the cost base of your job and just not pay for it out of margin or as an overhead into your business. But if you own the equipment outright, you got to factor that cost. You’ve got to factor that cost in because at one point you bought it and paid it off and you incur the cost for that. You’ve got to recover some of that, so it doesn’t matter if it’s a digger, a site toilet, a little excavate or a little bobcat, whatever it is. If you’ve got equipment on site, even if you own it and are leasing it or own it outright, you’ve got to have that charged into your billable time, sorry, your charge out rates to be able to factor that into your cost base.

Speaker 2 (18:18):

That’s right, and if you don’t, then these are the holes that we talk about when you talk about we’ll do it next week, but margin erosion and gaps in your prices and all this sort of stuff, this is exactly what we’re talking about. So making sure you’ve got these blocks in is absolutely critical. The next one I think we can break down into a couple of common ones, but what we then talk about is incidentals and hidden costs and there’s some good stories around this. What I’ll get you to tell in a minute, Rob, but what do we mean by incidentals and hidden costs as the next sort of little building blocks we’re going to put into our cost base?

Speaker 1 (18:48):

These are all the little things that are small in cost, but they add up to a lot over a year and they definitely add up, especially job per job. So there’s probably a few of ’em that we can talk through. First one is time to unpack and time to pack up and you’ve got to think about it. I want you to think about on your own jobs, the jobs that you’re running at the moment, if you’re listening here today is how much time do your ground crew spend unpacking and packing up? There’s time at the start of every job or start and finish of every day if you’re on more of a project side of things and if you’re not factoring that downtime into your cost base for time allocated for that project, then that’s just coming straight out of your own back pocket because you haven’t factored those hours into it. And so unpack and pack up is a big hidden cost. The next one would be time to pick up materials.

(19:56):

A lot of business owners are worried about charging the customer time to get materials, but in the end of the day you are getting materials from suppliers for that job and so you’ve got to charge for that. If one of your tradesmen or apprentices going to the suppliers and picking up materials, there’s a cost incur for that, so you’ve got to make sure that that’s factored into your cost base. Consumables, consumables is a big one. It’s one of those things where it’s this little things along the way where there’ll be fuel or little consumables, rags and all those types of things that are just little odds and ends but they add up, don’t they? In terms of with clients that we’ve seen across the board, and it might be insignificant per job, but it definitely adds up to tens of thousands of dollars over a year period.

Speaker 2 (20:48):

Another one that’ll just suck profitability straight out of a job if you’re not looking at it over time especially. And then usually consumables are little things, but they’re the things that you race through them, you churn through this stuff so quickly you barely pay attention to it, but you need to be recovering those for sure.

Speaker 1 (21:06):

Yeah. The last one is travel time and site meetings. This is more important, especially if you run more a project style business.

(21:14):

The admin costs are associated with running that job, but then it’s the site meetings. How many times do we hear someone who’s doing work for a builder and then the architect wants a meeting and then the client wants a meeting and then the builder wants to catch up on site and you’re doing site meetings and all of a sudden there is just hours burnt. And so I think it’s being aware of the type of work that you do and if you do run more of a project style business, you’ve got to factor in these travel time and site meetings into your cost base to be able to make sure you’re getting paid for this level of work and service you’re providing.

Speaker 2 (21:50):

Yeah, absolutely. Otherwise it just becomes, it’s almost in some of the bigger jobs, it becomes almost a game. You’ll end up spending so much time in site meetings and you’ll incur so much cost and it’s all at your cost. You are the one paying for it, you are the one coordinating it, you’re doing all of that stuff and I think it’s mindful as you break down these building blocks that we’re talking about, really examine where you play a role in this stuff as well. I know you talked about deliveries and picking up stuff and getting stuff to site. We have sort of a running joke if you like that some of the most expensive delivery drivers are business owners. It’s amazing what guys will do and not charge for and then they compound it by using the most expensive resource in their business to do some of this stuff.

Speaker 1 (22:34):

But don’t forget, Dan, the business owner’s, time is free, remember?

Speaker 2 (22:38):

Oh yeah, of course it is. Of course.

Speaker 1 (22:42):

I’ll keep my apprentice busy on site, but I’ll just go and pick up materials from the supplier and as long as I keep my guys busy on site, then that’s the most important thing because I’m free in the end of the day. How many times do we see that?

Speaker 2 (22:53):

Heaven forbid. Absolutely. We couldn’t have the first or second year go off and do a delivery. It has to be the business owner. Amazing.

Speaker 1 (23:00):

Shout out to a new client that we just started the other day. This is a bit of a sideline thing to this, but we’ve identified that he spends, oh by the way, he’s working crazy hours, nights and weekends, but we identified about an hour and a half per day of packing up and unpacking five days a week. It’s a whole day just purely by getting his apprentice into stock van and unpack at the end of the day where everything comes back to the workshop. We’ve just bought that guy back about eight hours a week immediately that he can delegate low value tasks. So not only do business owners not factor it into their pricing, but they’re expending their time. It’s free and they’re spending their own time for it. So that’s a bit of a sideline tip.

Speaker 2 (23:43):

Yeah, absolutely. Well, let’s have a couple of stories. I mean I can think of things like when we talk consumables, it reminds me of Lee who is a diesel mechanic and he had all kinds of problems with not so much winning work but actually being profitable with that work. When we started to really unpack and understand it travel time and fuel costs, it was just sort of an unwritten understood thing of well, that’s just the nature of what we do.

Speaker 1 (24:14):

He doesn’t sell materials, he sells purely labour and the amount of labour that he sells in his industry is off the charts and how he goes around building up his cost base is purely number of hours out of labour costs plus all the consumables on top of that to build out his true cost of the labour for that job. And consumables were part of that and he was just pitching it in terms of the cost of fuel and travel costs and everything and once he got that right, it just added tens of thousands of dollars to his bottom line per year.

Speaker 2 (24:52):

And I think the thing is the attitude of all can I charge for that? There’s that. There’s sort of a fear when you start to put these blocks together, but I think the bottom line is that a reasonable customer wants the service that they’re getting and they’re not here to gouge you out of things, but at the same point, they’re not going to come out of the woodwork and go, well, yeah, we’re happy to pay for that. You’ve got to ask for this stuff. You’ve got to break down and show that you understand your business and the pricing that you’re putting forward, and if it is justifiable, fair and reasonable, most good customers aren’t going to knock that back or at least there’s going to be a conversation to be had to make sure that it’s fair and reasonable.

Speaker 1 (25:30):

Correct. And this is going down a bit of the sales line, but if you’ve got a scope or a set of plans for a job and you get the materials and the materials cost and then you get the labour and the labour cost and all the other incidentals and then you add an appropriate margin to your cost base to get a sales price for you to be viable and run a profitable business. If the customer then turns around and says, well, that’s more expensive than I was expecting. It’s not where most business owners go wrong is they discount and erode their own margin to appease the customer rather than going back to the customer and educating them on what it actually costs to do the job is when you’re dealing with moms and dads in the B2C space or even builders in the B2B space or whatever it is, regardless of what industry you’re in, a lot of people don’t understand the true costs of what it actually takes to deliver that job. And you’ve got to remember, you are the professional, you’re the subject matter expert in this field. It’s your job to educate them on what’s the actual cost and why we have to charge a certain amount of margin to be viable in the end of the day. That’s your job in the end of the day as a salesperson, isn’t it?

Speaker 2 (26:52):

Yeah, absolutely. And this is where the minute you hear someone go, well, we know that that’s what everyone else charges, that they’re in the exact same boat. They don’t know the building blocks of the price either, so you stand out and there’s a real credibility I found sitting on the other side of some of these negotiations and contracts that get issued and things like that where you have got someone that’s fair, reasonable, but well-educated and understands the mechanics of their own business. When you get that, you have a confidence in that person as opposed to someone who’s sort of just putting a finger in the air hoping to win work and hoping that they can deliver at a price that’s going to somehow make them money.

Speaker 1 (27:29):

Correct, and this is why pricing is one of the most important things to get done. Not at nighttime when you’re tired and worn out, but during the day when you are fresh because when you’ve then got a set of plans that you’re pricing, as you said, it’s all a confidence game that it’s accurate, there’s attention to detail, you’ve got your takeoffs right, and you’ve really thought through how you’re going to complete the job and then when you get pushback from the customer around, oh, your price is too high, you don’t just go and drop your pants to win the job, you’ve actually got something to lean back onto and say, well, this is what it actually costs. Here’s the plans here, there’s the scope. Let’s compare apples with apples and let’s look at the other competitors’ price. By the way, they’ve missed this, this and this. That’s why they’re cheaper. That’s why our price is this. And when you build a price from the ground up and you really get your costs accurate, then it enables you to compare apples with apples and have confidence in what you’re delivering in the end of the day.

Speaker 2 (28:36):

And it’s that confidence that drives the next bit of growth. It’s not the wow factor on the sticker price. And we saw that with a number of guys, sparkies, especially guys that have transitioned from being more service work into commercial work or more project-based work. Those guys that have done that had to learn that the hard way, I’m thinking around Matt and Chris and Andrew and how they had to start charging for work that the complexity of the work grew. It meant that the cost base changed because the amount of time they were spending, not just onsite doing the job, but in preparation and site meetings, but even design work.

Speaker 1 (29:11):

Yeah, these guys that you just mentioned there, they were, especially in the construction game, they’re in the high end space and they’re dealing with high net worth individuals, architecturally designed homes and high attention detail in the builds that are getting completed, like multi multi multimillion dollar homes, especially the Chris and Andrew one, they were trophy homes on Sydney Harbour and they were on a job for 12 to 18 months, sometimes two years, and they’d get to the end of the job and go, fuck, we just made no money on that after two years. And then they look back through all their labour and they’re like, man, we blew some labour on that and when we unpicked it with coaching travel times, site meetings, client meetings and it’s like, man, we’ve just blown all our time because of all that stuff. And then so going forward, what they did is just started factoring all that into their pricing going forward. Sure. They started losing a couple of jobs, they became a bit more expensive, but the work that they did win, they knew they were going to be profitable after 12 or 18 or two months, two years at the end of the day.

Speaker 2 (30:22):

And it’s a game changer the way that they operated. Everything changed from that moment, everything they thought they could do as long as it was going to be fair and reasonably priced and they were going to be profitable, why not? If it wasn’t, then it was a big question around, well, do we even do it?

Speaker 1 (30:34):

Yeah, and we spoke around in last week’s episode is you’ve got to be confident in your pricing and there’s always going to be someone cheaper than you. And if you are confident in your pricing and you miss out on the job because someone’s willing to drop their pants to get that across the line, don’t get into price wars. You’re better off going broke, sitting on the beach, drinking pina coladas than you are dropping your pants to be able to get a job across the line at the end of the day. And so it’s one of those things that when you get your cost base right in terms of materials, labour, equipment, higher and incidentals and other costs, it’s just a game changer of for you to be able to know how to price correctly from building it from the ground up.

Speaker 2 (31:21):

And let’s jump into that. You did a great job there breaking down those building blocks as we said, and we said at the very beginning, we’re going to get into our pricing pyramid concept. Let’s sort of bring this together now with the building blocks that we’ve sort of got scattered around. If you’re thinking about this and playing along with us, you’ve got these building blocks that you’ve now got and created and you understand how do we put them together and what do we mean by a pricing pyramid as a concept?

Speaker 1 (31:47):

Yeah, pricing period is a concept, is that thing. There’s three different layers to it. You’ve got your cost base, which is the four elements that we’ve spoken around so far, that’s the base layer. Then you add margin on top of that cost base, which then gives you a sales price, which is the pointy end of the pyramid. So cost based margin equals sales price, but what you’re doing is building the price from the ground up. It’s a zero based pricing model where you’re building it from the ground up to be able to get to a sales price rather than going, oh, it’s roughly going to be around 20 grand. Let’s just work it out once we start the job.

Speaker 2 (32:34):

When you talk about this and pricing and guys have got opportunities galore that they’re trying to do and try and work their way through quotes and piles of quotes, speed becomes the key thing. What’s the real benefit to this? Slowing down and building it up from the base as you said, sort of going up in this pyramid sort of concept.

Speaker 1 (32:53):

A couple of things. One is around pricing and one’s around operationally. Once you’ve won the job pricing wise, it makes you far more accurate in your pricing and you can be so much sharper on your price to get the job across the line because like we’ve spoken, if you are too low on your price, you’re going to lose money. If you’re too high, you’re going to miss out on the job operationally, especially if you work in project work, if you break that down into different sections of the job and then you’ve got the ability to break it down into quantity and costs and really break down the job, what it means operationally is once you win that job, it’s already broken out and broken down. And so it’s so much easier to hand that into your ground crew to be able to go, here’s the job, here’s how we’re going to run it, here’s what I’ve allowed for, here’s how I’m going to hold you accountable. So by breaking it down, it helps you win the job, but it also helps you manage the job profitably at the back end once you’ve got it across the line.

Speaker 2 (34:05):

Yeah, I think that’s an important point. I mean so many people will quote a job thinking they’ve nailed this, we’ve won the work, how good’s this, it’s job done now we’ve just got to deliver it. But if you haven’t got a way of holding your team accountable of being able to report on your costs, then how do you know that what you quoted and what you had delivered came out at the way you expected it to?

Speaker 1 (34:27):

Yeah. One story that really stands out for me there is Ben from runs a Sparky business out of Brisbane. We’ve heard him from a client feature and a big part of that client feature on the podcast here was all about his pricing and getting that right. And that was a huge thing that he did in his business around using the pricing pyramid, zero base, costing accuracy around the different types of work that he did, service versus construction, and then his ability to really break these jobs down into operationally how he was going to deliver them. That’s what transformed his world and transformed his business because when you get the pricing right as the lead domino, it sets you up for success to be able to profitably deliver the work. But if you get the pricing wrong from the onset, you’re doomed to fail. And that’s why pricing, this whole conversation around pricing is so important that you factor everything into your pricing because if you miss something that’s coming off your bottom line in the end of the day.

Speaker 2 (35:34):

For sure. Absolutely. And Ben is, he’s a prime example of the principles we talked about last episode, getting his cost base right now and what we’re going to talk about next week in terms of margins. Do we want to run through an example of how this plays out in terms of the cost base and how most guys do it and just sort an example of how getting it right looks and how getting it wrong and the comparison between the two?

Speaker 1 (35:58):

Yeah, bear with me as I run through some of these numbers. I’m a numbers guy. You know that Dan.

Speaker 2 (36:04):

I do. I’m going to be very quiet in this section. So yeah, go on.

Speaker 1 (36:09):

Bear with me guys and I want to be able to run through these numbers. This is what happens when you get the cost base wrong, but you get the markup right? And so in the end of the day, you can have the right margin on the job, but if you get your cost base wrong, this is what happens to your bottom line. So let’s talk through different couple of different scenarios. Scenario number one is the cost base of labour materials, equipment hire and other is $15,000 XGST. You add 30% markup to you get to your sales price is 19 and $5,000 plus GST. So 15 grand plus, 30% markup, 19 and a half scenario B, the cost base, labour materials, equipment high. Another, you priced it incorrectly and you left out some materials. So you worked out that your cost base was 12 grand, you add 30% markup.

(37:08):

So same markup between scenario one and scenario two and your sales price is $15,600 plus GST. Even though you can have the same markup in your spreadsheets or your job management system and your markup and margin, which we’ll talk more about next week, is being determined to ensure that you run a profitable business. If you get your cost base wrong, then that’s going to hurt your bottom line. So in this scenario, you are going to wear the cost of $3,900 purely because you haven’t got your cost base right Now, if you start that job and you realise that your cost base is incorrect and you’ve got no way of being able to charge a variation or go back to the customer and go, look, eyeballs up, help me out, they’re going to, you are going to wear the cost of that. And where most business owners then how they navigate that, they compromise on quality time and safety and because they’ve got to claw back that $3,900. And so this is what happens and why so many business owners get caught growing and unprofitable business because they don’t get their cost base correct and they price things wrong on the start and then they’re doomed to fail at the back end operationally.

Speaker 2 (38:33):

Yeah, absolutely. So in that example, it went against, and then I think what we could if we wanted to is talk through what happens next time. It’s like, well, I’m not going to price it that way again. I’ll just take another stab at it. I’ll increase my price, but then they’ll miss out on the work because now they’ve got that sensitivity to the cost base isn’t there. But all I’ve done is just added some more money at it thinking hopefully I can make money this time, but now I don’t win the job. So it’s really interesting to see how these dynamics play out and it all stems not from the price, but from the inability to understand the cost base, which is why we’ve spent so much time today breaking this down for people. It’s not hard to get your price right if you understand your cost base.

Speaker 1 (39:15):

Correct. And you’ve got to remember that you’ve got your scope, you’ve got your set of plans, your costs are your costs, and that’s the most important thing that I want you to take from today’s episode is if you price correctly, your costs are your costs. And then when you are up and getting to the pointy end of winning the job and someone says to you, you are more expensive than Bob down the road, then if you’ve got confidence around your cost base, it’s your ability then to compare apples with apples. You can look at your quote versus their quote and get a seat at the table to negotiate to be able to go, well, these are my costs. And you can’t change your costs. You can change your margin to get a different sales point, but you’re going to be discounting, but your costs are your costs and you can’t change that. And so getting your cost base accurate in your pricing model is super important for setting yourself up for long-term success.

Speaker 2 (40:12):

For sure. Now, I know we do this usually at the very end of an episode, but action steps and homework for someone who’s now encountering this for the first time, we’ll get to our key takeaways in a minute, but what would you say would be a great way for someone who hasn’t done this before, it’s their first look at this to go around really starting to build out these building blocks from a cost-based perspective before we get into next week’s episode around margin.

Speaker 1 (40:39):

Yeah. Four action steps out of today. So there’s four and let’s talk through them. Number one is slow down and focus on accuracy for this week’s quotes. Like really slow down. That’s number one. Number two is understand the real cost of your ground crew. Really understand your on costed chargeable rates for your ground crew, the real cost of labour for you. Number three, if you use a manual pricing spreadsheet, you got to spot check. Get an updated pricing list from your suppliers and spot check to make sure that it’s been updated recently. And number four, for those who do have an estimation software package or a job management system that you price from, make sure your feeds are populating correctly from your API connection. And if you can get those four things done over the coming weeks and really tighten up on that, what it’s going to help you do is really understand that your costs say your costs.

Speaker 2 (41:45):

Absolutely. And then you’ve only got that step or that next layer that we talk about next week, which is how do you apply margin to a cost base as a question as opposed to trying to sift through all of this in one big jumbled pile. So really good. I love those four action steps. Absolute game changer for everyone. Alright, shall we wrap up with key takeaways from today? I think we’ve covered off a lot of ground. I know there’s a couple of really big key takeaways. What do you got?

Speaker 1 (42:09):

Yeah, number one, the pricing pyramid helps you determine your sales price, which is determined by your cost base and an appropriate margin on top of it.

Speaker 2 (42:19):

Yeah, absolutely. I think the big one around this is understanding your costs. These inputs, it is a way of stopping the agonising over, am I charging enough? Are they charging too much? What’s everyone else doing? They’re looking over your shoulder, they’re looking into the sky. Whatever it might be that you’ve been doing that’s causing you all the stress and anxiety around pricing, understand your cost base and you will reduce that overnight.

Speaker 1 (42:42):

Yeah, love it. Great episode. There’s a lot in here and someone could listen to this multiple times over to grab so many nuggets. So what a cracker.

Speaker 2 (42:53):

Been great. Absolutely love it. This idea of slowing down and getting this right, it should really ring home for a lot of people. And really there should be some big wins and some big gains that come out of this if you do it properly.

Speaker 1 (43:07):

This information’s great and please go away and action this to be able to make some changes. We’d love to be able to hear about some of the changes you’ve made from last week’s episode and this episode and also next one as well. But if you are one of those guys who just like to have a personalised approach to this and you just want to be able to understand how this applies to your business, the theory is good, but how do we practically get rubber meeting the road for your business? And you want to be able to get a good jumpstart on this, then book in a call strategysession.com.au and let’s get a time squared away in each other’s diaries and let’s chat through these principles and how they specifically relate to your business. And then we can talk a bit about if you’re a great fit for coaching, see if we can help you really implement this stuff. So yeah, if this is you and you’re a bit of a fast action taker, then yeah, get a call booked in and looking forward to chatting to you soon.

Speaker 2 (44:03):

Absolutely get on board, absolutely worthwhile.

Speaker 1 (44:06):

Looking forward to talking a bit about margin next week and rounding off this bit of a series around pricing profit.

Speaker 2 (44:13):

Yep, great job. Look forward to seeing you all then. Thanks.

Speaker 1 (44:16):

Bye.