Episode 81 Podcast Transcript

Speaker 1 (00:00):

If you are confident in your pricing and you’ve got clarity and you know that your price is right, don’t be afraid to ask the question to be able to go help me understand where I’m too expensive and let’s pull it apart together. Hi everyone. Rob Kropp and Dan Stones here from Pravar Group and welcome back to another episode. Welcome back Dan. Looking forward to another Money Matters episode.

Speaker 2 (00:27):

Yeah, looking forward to it. It feels like a little while since we’ve done a Money Matters, so looking forward to get into it. Hi everyone and Rob today. I think it’s a real temptation I think is, it is our starting point for this and the temptation to discount it’s real, right? Bills need to be paid all the time. Wages don’t stop. You’ve got to keep covering those and it always feels like that something’s got to be better than nothing, especially when we know what’s happening out in the market and there’s so many fewer jobs to be done. There’s so many more people quoting, we’ve all been there. The truth is that the beast we call our business needs to keep being fed.

Speaker 1 (01:00):

It does. And discounting can come in many forms and we, we’ve got that queued up for a separate episode to be able to show the different types of discounting in the different ways you do do free work. But it generally gets to the pointy end when you’re trying to land that deal and someone always says you’re too expensive, can you just come down? And the temptation is absolutely there, like you said, is just to drop your pants a little bit just to get the job across the line. And in desperate times, a lot of people are doing it in today’s market without really understanding the true cost. Are they?

Speaker 2 (01:36):

Yeah, we talk about the true costs and hidden discounts and everyone sort of is aware that probably there’s a price to be paid to it, but I think understanding the real maths of it and discount maths and what it means in a business sense, I think it’s something that not many people get exposed to. So I think today, let’s start off with just talk us through a discount and let’s break down what a harmless discount. Let’s call it 10% and let’s walk it through. You are the numbers guy, so let’s have you walk us through what the math goes like on a 10% discount on a pretty standard job.

Speaker 1 (02:09):

Yeah, a lot of people say, I don’t discount. Well, if you’re getting a job that you know is you’re quoting a bathroom renovation for example, let’s just use that for an example. It’s a $5,000 job. That’s your sales price that you’ve quoted, quoted the customer, and your costs are $4,000, which includes all your labour materials and all those types of things. It’s a cost to deliver that job. Your profit margin or your gross profit margin should be a thousand dollars, which is 20%. Now let’s not get hung up on if that’s a suitable margin or not. Let’s just use that as round numbers. So $5,000 sale price, $4,000 cost a thousand dollars gross profit margin at 20%. Let’s say that you present that quote to the customer, they say, oh, that’s a little bit over my budget and I’ve also got a quote from someone else, you’re a little bit more expensive.

(03:07):

Can you discount your price a little bit? And you decide to go in at $4,500. So you’ve given a $500 discount, which is a 10% discount. That 10% discount seems harmless overall it’s only 10%, but the customer pays four and a half thousand dollars for that $5,000 job. Your costs stay the same as $4,000 to deliver that $5,000 job, even though the customer only pays four and a half thousand. So your profit, instead of making a thousand dollars gross profit, you now make $500 gross profit in the job. And so the business owners, well yeah, but I only lost a $500. So they only think about it in terms of dollar figure, but what they don’t understand is that you didn’t just lose $500, you discounted by 10%, but you lost 50% of your gross profit margin just by discounting by 10%. And it’s a big number and I know that this is just an example, but this is the real cost because your cost to deliver the job didn’t change every time you’re discounting. What you’re doing is discounting your margin, your pure margin that you make to be able to deliver that job.

Speaker 2 (04:43):

And you add that up like you said, every time you do it. And people do this all the time. So you think about it, the 50% hit on profit and margin time and time and time and time again just to stay in the game. You end up pretty soon, you’re doing jobs over time for no profit at all.

Speaker 1 (05:00):

Correct. Because a lot of guys go, well, I’m going to discount, I’m going to discount by 10%. But I think that the thing that you’ve got to remember is your costs don’t come down by 10%. Your costs are the same. The cost to deliver that job is the same obviously, unless you can go and negotiate better prices from your suppliers and all those types of things, whatever. But you’ve got to remember, let’s assume that it’s still a $5,000 job in the end of the day. Your raw cost to be able to deliver that job is still $4,000. You’ve gone from the ability to make a thousand dollars to now only making $500. And so every time you discount, you are chopping away at your margin and you are wearing the cost of that every time as a business and a business owner.

Speaker 2 (05:45):

Yeah, absolutely. So that’s the maths of a basic 10% discount and let’s lock that away. The maths was pretty simple and we’ll assume that you guys have all got that in your head and you can hold onto that. But then comes the devil’s advocate side. So what am I supposed to do? And you don’t understand, Rob, I would have no work if I didn’t discount by that much. So I think if we turn the corner now and look at the right way to handle a price conversation or when you’re getting pressure on price, like when a client says it’s too expensive and I think the one thing we can not do is immediately drop price. There’s a number of things we can do, but the first thing isn’t to just go straight into that pricing war or discounting straight up.

Speaker 1 (06:32):

Correct, because this is when it becomes a race to the bottom and everyone loses, the whole industry loses. Now there’s always going to be people who just come in cheap because they don’t know their numbers, they don’t value their service, they dunno how to price correctly or they’ve got lower overhead base to cover and all those types of things. So you’ve got to remember there’s always going to be someone cheaper out there than you, isn’t there?

Speaker 2 (07:03):

And it sounds so easy to compete, they were $500 off, I’ll just go five 50, then I’m knock going to an extra 50 bucks off, which now that you’ve understood the maths, that’s even more margin that’s being eroded. So you really don’t want to get caught up playing in that game.

Speaker 1 (07:17):

Correct. So sometimes you do have to walk away from the job, but if you don’t want to walk away from the job because you know that this is a job that you want, you really want to be able to deliver, the first thing you’ve got to be able to do is take price out of the equation for the moment and have your ability to demonstrate your capability as a trades business to be able to demonstrate who you are, what you do, the quality of your workmanship, the quality of your service. And it’s not about justifying your price, but your demonstrating the capability not even against who else might be competing against. It’s you, against you demonstrating your capability to put yourself in pole position to be able to win that job.

Speaker 2 (08:00):

Yeah, it’s the justification for why you’ve set the price that you’ve set. If you haven’t got a reason for setting it that high or whatever it is, then you’re always going to be subject to being pushed around or knocked off price where you started. And I think there’s a couple of ways we can do this. One for me is just the similar type of work you’ve completed and experienced. You talked about newcomers coming into the market and just dropping their pants to win work at any cost might work for a period of time until they start to build up any sort of momentum. But showing the similar work you’ve completed and giving certainty to your customer that you can deliver a result, not just a result, but a better result is quite often enough to try and get people to put aside some of those fears or some of those anxieties they’ve got around a price difference.

Speaker 1 (08:42):

And the way to be able to demonstrate that certainty is sometimes showing the process about the way that you communicate the team, that you’ve got the process of delivering the job, the winning the job, the process during the execution of the job, and then what happens after. So I think demonstrating the communication and the way you go about delivering that job does give the customer confidence to be able to go, well, yeah, he’s a little bit more, but I’m happy to go with him and I’m happy to pay more because I can see that they’re a lot sharper, they’ve got greater systems in place and I’m willing to pay more to get a better quality job because I’ve seen it and I can see what they can do.

Speaker 2 (09:23):

And I think people underestimate the certainty that you bring as the person selling the work that is worth a premium. People do it, right? We do it again. Another one is, an example is qualifications and insurance and warranties. It’s all based on this idea that our capability justifies the fact that we charge the way we do.

Speaker 1 (09:40):

The best way around this is also through testimonials and case studies and third party advocates of where people tell their stories and reviews and all those types of things where someone can do some research on you and then go, ah, yep, I love what they do. I can see that they do a great job. I can understand their process. Bob, Mary and Frank over here said how great it was to be able to work with them. Yep, I’m going to go with them. It’s going to cost me a little bit more, but I’m willing to be able to go with them because they’ve demonstrated that it’s worth it in the end of the day.

Speaker 2 (10:11):

Yeah, really good point. And I think the other thing just as we get through this one is it’s not about slagging off the competition and saying, Hey, they’re cowboys. They’ve only been around for us. Don’t talk about the competition like you said before, it’s you against you in that sense. And can you prove your capability for the things you’ve done, not what other people haven’t. It always sounds, I think as a customer or a consumer, it always sounds almost tacky to hear people slag off competition for no real reason, they wouldn’t really know and it doesn’t really affect my decision, it just makes you sound desperate in a way. Let’s go to our second one and I think this is a big one in terms of how do you navigate this way around price and that is making sure that the comparison being made is equal. What we mean by that is like an apples for apples comparison. Quite often people will get told, Hey, you’re too expensive and they never ask the question, help me understand what you’re comparing this to compared to who or what. Am I more expensive? I need to understand that. And are the quotes exactly the same scope of work for instance? Or how have you come up with this idea that all of a sudden we’re too expensive.

Speaker 1 (11:15):

It’s too expensive to what? And you’re right, especially when you are dealing with customers who may not be educated in your trade, they may not be educated in your process and they’re not necessarily educated in the real costs of what it takes to deliver a job. In today’s market, so many consumers are uneducated around the cost of that delivery or you might be working with builders who they’ve quoted without using your price and they’re now trying to scramble to make their own margin. So I think you’re right. It’s your ability to make sure that your quote versus a competitor’s quote is actually comparing apples with apples with the person that you’re quoting for. Because otherwise you might be more expensive, but you’ve included, you’ve got inclusions in your quote that someone else has got as exclusions, and so naturally you’re going to be more expensive, but they might go with the other person, but they’re going to get a rude shock at the end of the day when they get a variation down the line.

Speaker 2 (12:23):

And you’re absolutely right, you make that comparison and you sort of say, well, compared to who or what, and the person on the other end is always trying to get the best price they can and understand it. So I think if you can play along with them and say, Hey, I’m willing to have a look at it, I really am. If I’ve got it wrong, happy to change it and have a look at it, but can you share with me what you’ve actually got as a quote or something else that I can see? Because often there’s a number of things, if you can get your hands on that other quote, it stands out really quickly.

Speaker 1 (12:49):

Then it’s getting into the granularity of the quote to be able to make sure that the materials that you’ve specified is the same specification or the quality. It’s making sure the timeframes, like you’ve said, it’s going to take this long. How long have they said it’s going to be able to take? It’s making sure what your inclusion list and exclusions list is the same as their conclusions and exclusions list. And then making sure it’s got the same quality standards across the board. So there are a few areas that you can look for your quote back to front and you should know how to price because you’ve gone back and listened to our pricing episode here in the podcast. If you are confident in your pricing and you’ve got clarity and you know that your price is right, don’t be afraid to ask the question to be able to go help me understand where I’m too expensive and let’s pull it apart together.

Speaker 2 (13:42):

And that first two things then almost go hand in hand as you’re doing that and you’re pulling it apart together, you’re showing your capability, so you’re almost reinforcing the certainty as you go that it’s fair, it’s reasonable, and we’re the right people to be doing this for you. So it’s a really good way to do it.

Speaker 1 (13:58):

If you haven’t gone back to that pricing episode, that was episode 23, 24 and 25 that we did on the three parts of pricing. So make sure you go back and listen to that to be able to get your head around how to price to actually make profit.

Speaker 2 (14:10):

Yeah, for sure. It’s a while ago now.

Speaker 1 (14:13):

It is.

Speaker 2 (14:14):

Very good, but the foundations absolutely apply. They do not change. Alright, number three, I think this comes up after you’ve done the other two, but realigning expectations and resetting scope, that’s what this is all about. I know you’ve said this a number of times, you say it on calls and every time you talk about this, but it’s not about getting price to meet scope, it’s about getting scope to meet price. Can you explain your theory behind that as you talk this through?

Speaker 1 (14:42):

Everyone wants a high quality product or service, but most people are on a beer budget and sometimes budgets do not match expectations of scope. And so I think where a lot of business owners go wrong, a lot of tradies go wrong is that they get a set of plans or a job, they price it to make profit in their own world and they go back to the customer, whoever it is, whether you’re in the B2B market or the B2C market and you say, here’s the quote to deliver that job at that scope. And more often than not, some people will get, they will get shock, and if they don’t get the quote shock, you probably haven’t price it correctly, you’re too cheap. But if some person goes, oh shit, that was a bit more than I was expecting, and they say, can you do it cheaper? And you’ve been through the other two steps, then what you’ve got to be able to do is work with that customer, not to just go straight into dropping your pants to be able to get the job across the line. It’s about understanding their sensitivity to their budget and working with them to align the scope of their project to meet their budget commitments, not you delivering a scope of a project that far exceeds their budget and you wearing the cost of it in the end of the day.

Speaker 2 (16:16):

And I think this is where you’ve got to turn the corner from it being a pricing conversation into a scoping conversation. I think that the most important question you can ask is, well, help me understand what’s most important to you in this project. If you understand that, then you can build your price around that and make sure you’re holding onto the most important elements of what’s involved in the project or the job. You’re not letting go of those, but then you can emphasise, well, that is the cost to deliver the most important piece. And then around the edges you start to play about how can we adjust the rest of the scope to suit your budget.

Speaker 1 (16:49):

Correct. Because then what you’re doing is you are helping realign the expectations of the customer to deliver a scope that meets their budgets. It’s ensuring that it’s a win-win outcome because they get a great job and you win because you get paid for what you’re worth. Otherwise, if you don’t, there becomes an element of resentment because you are just dropping your pants to win the job, and you also then preserve your margin percentage that you want to be able to go in. Now are you going to lessen the scope because the job then comes down? Absolutely. But you’re then not doing shit for free. You’re getting paid what you’re worth, you’re protecting your profit and the customer’s happy in the end of the day because they get a great job.

Speaker 2 (17:34):

Yeah, absolutely, a hundred percent.

Speaker 1 (17:37):

I’ve got an example around this recently of a client who is a trades business who was doing a renovation for a renovation, a building company, and this quote through, and they priced it all up, they got really clear on their labour quantity, their labour a cost, their materials cost, their materials quantity, all the incidentals. So they priced it correctly, had an appropriate level of margin on it to be sustainable for their business. They presented that quote and the customer came back and said, it’s too expensive. We can’t do that. Can you do it for any cheaper? And using that whole scenario that we just spoke back there before this client then went in there as a trusted partner and said, great, let’s work together. Let’s work here. Tell me what your budget is and let’s see if we can work together to be able to not compromise on the design, but let’s work together to be able to get this within your budget.

(18:36):

And the client loved it because then all of a sudden they’re becoming a partner in this process. So what they did was, number one, they removed non-essential elements of the design that didn’t compromise the design. It still had the essence of it, but they moved some of the non-essential stuff which was designed in there, which was expensive to the end of the day, which added no real value. So that was number one. The next thing they did is opted for alternate materials. So how can we use this material and that material, this one more costless here, and this will bring the cost of the job down. They talked about phasing the jobs over different stages to be able to work within their budgets and their cashflow requirements. And they then just looked at different options to be able to work on different things at different price points to be able to keep the essence of the job.

(19:28):

So ultimately what this trading client of ours did is they helped take the scope and the design, retweak it in a way and get it to meet their budget. And the scope was correct, but our client didn’t drop his price, didn’t compete on price. He protected his margin all the way through because we hammered this home in coaching that your number one job is protect your margin. And in the end of the day, they delivered the job, the customer was happy and our client delivered the job at a great outcome, got a great testimonial, and they won on a margin point of view as well. So there’s a great example that when you find the real budget of what that client can work towards, don’t just get caught into that dropping your pants to win the job, work with them to be able to match the scope to their budget and be a valued partner to be able to make it a win-win situation.

Speaker 2 (20:30):

And what I loved as you explained that, and it was a big emphasis in the coaching process for it, was to realise that your job’s not to reduce the sales price, it’s to reduce the cost of delivery of the project.

Speaker 1 (20:40):

Correct.

Speaker 2 (20:40):

That’s got to be the mentality as you’re doing this whole process. Yes, it always is a customer led sales price conversation, but the way you can get to be happily discounting if you need to do it, or you can do it in a way that you’re not going to grow broke, like we said at the top, is to be able to make sure that you’re bringing down the cost of delivery. If you can do that, you don’t necessarily automatically give the discount, but at the same time you can give it if it does come to that and you can drop the price to meet the scope, you’ve made an appropriate adjustment on the cost of delivery which maintains the profit rather than slashing it. Like your 10% example at the top.

Speaker 1 (21:16):

Correct. And it’s not by compromising on quality or taking shortcuts. Don’t do it that way. You work with the customer to realign expectations because the worst thing in the marketplace at the moment is you’ve got all these renovation shows online and they show you how cheap you can do it, but a lot of the marketplace is under financial pressure at the moment, and they genuinely don’t understand the real cost of what it takes for a trades business to run these days. And it’s your job as a tradie to educate them to the point where if they can’t wrap their head around it and they’re still insisting that someone else can do it cheaper for them, you got to have the balls to walk away and know that there’s a better profitable job out there in the end of the day.

Speaker 2 (21:59):

100%. Absolutely true. I think, Rob, at the end of the day, as we wrap this up, I think we know the market is tough, like you’ve said, but prices are really the problem. It doesn’t need to be a price problem all the time. We hear it so often in coaching, but over time with clients we work with, we gradually move away. We don’t end up having, we haven’t early on in the coaching journey, but as guys develop and they get coached through the programme, they understand that it’s not really a price problem. The price is the price. Margins are what matter.

Speaker 1 (22:27):

Yeah, absolutely. So instead of racing to the bottom on price, it’s your job is to demonstrate your value, clarify what’s being compared, and adjust your scope to meet their budget. Don’t slash your margins to meet wishful thinking of the customer in their expectations. The way to weather tough markets is to protect your profit, not by giving it away. If you are looking for ways to be able to price to profit and protect your margin, then jump across to strategysession.com.au book in a free discovery call, and let’s help you build a profitable business that doesn’t rely on you being the cheapest quote, because competing on price is a race to the bottom, and no one wins at that game.

Speaker 2 (23:09):

Absolutely. And that’s it for today’s episode. We hope you’ve enjoyed it and we look forward to catching you on the next episode of The Trade Den.

Speaker 1 (23:17):

See you then.