Mar 17, 2023

This Podcast Is Episode Number 515, And It's About What Every Trade Business Owner Should Know About Raising Prices

Raising prices can be a sore subject. Many construction business owners like you assume doing so will spell the end of your competitiveness. But by not raising prices, you're simply letting inflation and your suppliers' maintenance of your margins quietly eat away at profitability. The bottom line is that costs will always rise long-term - at least with inflation.

That means you have to pass on the costs to your customers or consume those costs yourself to the point where one day, you'll have to either suddenly raise prices or accept the eventual failure of your business.

The worst thing you can do is avoid measuring your costs by sticking your head in the sand. Cost rises will catch up with you eventually, so take action to maintain your margins.

Analyze and reduce your costs

Regularly check the accuracy of the prices you use in your forecasts and break-even calculations. If you're using outdated costs, your predictions could be dangerously off course from the actual performance of your business.

Ideally, you should have your figures analyzed by a professional accountant with experience in the construction industry - and even then, you should remain directly involved to maintain an understanding of your books.

But if that's impossible and you have to make your own costs and margin analysis, try using the following tips to help you resolve any profit issues.

• Analyze costs and profits on an individual product and service level first before looking at the business as a whole. You may miss critical financial details if you try and cut straight to the chase.
• Try making minor, subtle adjustments throughout your range rather than hiking prices on one service, even if the margin on that particular item is the one causing the biggest headache. Sharp, sudden price rises are more likely to attract a long-term adverse reaction from the target market than almost imperceptible ones they can easily accept.
• If you find a loss-making product in your books, don't immediately delete it. Consider first whether it's required to aid sales of profitable services.
• Schedule small price increases every six months or years rather than waiting every few years to raise prices more noticeably.

Increase your prices

If your costs are optimal, look at the other end of your margin - the price.

You may be hesitant to raise prices because you think any price advantage you have over the competition is too significant to lose, but if you give customers more compelling reasons to hire you, you may be able to justify a higher price.

Remember, it's all about positioning. Premium pricing reinforces the value of a premium service. If your market research tells you there's a gap in the market for a value alternative, fill it. But if there's also a gap for a superior choice, take that option if you can deliver a product or service to the required standards.

Why? Put simply; there's always someone willing to go cheaper. Look at how large shopping outlets use their buying power to find ultra-cheap stock and take customers away from smaller businesses with tighter margins.

Many small business owners take it as gospel that the last thing they should do is raise prices, but the opposite is true more often than not.

Just make sure that if you do raise your prices, you do so:

• At a fair pace and intervals instead of raising prices in a way that will shock the market
• With consideration of the market's price tolerance

Alter your product or service mix

Any two margins are rarely the same in a range of products, so why focus equally on selling them all if concentrating on the higher-margin products will increase your income?

If costs and pricing are optimal, altering your product mix is the only way to maintain or increase your margins.

This means being ruthless and chopping products or services that may be close to your heart to focus instead on those that bring people in through the doors.

Look at your margins, pick the top earners, and focus your marketing efforts on promoting these products and services above the others.

Pricing Feasibility

Your prices must be set to cover your costs and provide you with a healthy margin, but they also need to be developed considering your target market's tolerance for pricing. If you don't do this, you could price yourself out of the market or underestimate the value of your products or services.

You'll be tempted to let your competitors dictate your pricing, but you need to build a comprehensive pricing strategy that reflects the value of your product and the price your market might be willing to pay for it.

Carry out market research

Finding out the price expectations of your target market may be as easy as simply asking them. The key is to get an accurate idea of your offering's value before you enter the market. The best way to do that is by directly talking to your target market. Conduct surveys or, if you already have a working product prototype or service concept, form a focus group to gain their instinctive responses and opinions on how much value they'd place on your offering.

Ask them:

• The price they'd expect to pay for a product or service like yours.
• Where else do they buy, and why.
• What typically influences their purchasing decisions (you may find competitive pricing isn't as crucial as you expected).

Remember that the prices you choose must reflect your position in the marketplace if you want your brand to thrive.

At the end of the process, you need to know the following:

• Whether your service needs to compete directly on price or whether it's innovative enough to charge a premium for.
• The maximum price ceiling the target market will tolerate.

Consider test marketing

If you struggle to estimate your market's price tolerance, consider releasing your service on a small, limited scale as part of a test marketing exercise.

You'll be able to get direct, valuable feedback from customers on what they think about your product or service and its pricing.

Assess costs and margins

Once you know your target market's price expectations, you can start looking at the feasibility of meeting them.

Assess your cost and supplier options, and produce financial forecasts that could give you a long-term view of profitability.

A cash flow forecast will give you a clear idea of the possible return on investment you could expect, while a break-even calculation will estimate the minimum performance (in units sold or hours) you'd need to meet before you start making a profit.

These forecasts will be critical to your strategic decisions. Consult an accountant to make sure you've accounted for all your costs.

Use your forecasts to answer these questions:

• Will the return on investment be worth your while?
• Can you trim your costs to improving your margins?
• Should you consider a more premium pricing strategy to improve your margins?

Final thoughts

While it may seem scary, remember that your job is to keep prices fair for you and your clients. That means you must charge fees that work for you and allow you to remain operational. It's just good business sense. Whatever the case, research and review your prices often to ensure you position your trade business correctly.

About The Author:

Sharie DeHart, QPA, is the co-founder of Business Consulting And Accounting in Lynnwood, Washington. She is the leading expert in managing outsourced construction bookkeeping and accounting services companies and cash management accounting for small construction companies across the USA. She encourages Contractors and Construction Company Owners to stay current on their tax obligations and offers insights on managing the remaining cash flow to operate and grow their construction company sales and profits so they can put more money in the bank. Call 1-800-361-1770 or sharie@fasteasyaccounting.com