This has been a time of challenges and blessings, as long-unseen product shortages temper the hype of the highest demand in decades. This leaves business owners walking a tightrope to balance the highs and lows and end up with a suitably profitable fiscal year.
For certain, this isn’t the time for discounts. Demand levels don’t require it, and the cost of products, materials and labor don’t allow it. In fact, times like this can be deceptive: The overwhelming amount of business can make profitability seem a certainty, but it can go the other way. If you don’t price correctly, more work actually means more opportunities to lose out.
Do you need to raise prices and, if so, how much? Follow these tips to assess your situation.
° Step up your fundamental skills.
To know whether or not you need to raise prices — and if so, by how much — you need to fall back on some important, and underutilized, business practices.
Not only will they help avoid overcharging or undercharging, they also provide solid backup if clients protest any increases.
First, comb through your company’s financials to take a holistic view of your costs. It’s true that some of the increases are drastic. Some products have gone up three times in a year. Everybody is dreading expected increases in gas. And signs indicate impending and drastic hikes in insurance premiums.
But don’t focus solely on the increases. In this strange economy, some prices are also going down, which may temper the hikes. For instance, with most people grounded and social distancing, companies are saving on travel expenses, whether because of canceled industry events or making sales calls virtually. And with so many meetings taking place remotely, you can fit more into a day.
Look at all your costs, then determine how much they are going up in total, advises Carla Sovernigo, president/CFO of Alka Pool, a pool/spa builder in Burnaby, British Columbia.
“I spent a solid month tearing apart my books and looking at it from angles I hadn’t looked at it before,” she says of her budget review for the upcoming fiscal year. “If you’re not someone who does that, you should.”
When doing this, also review your invoices from distributors and vendors to make sure you are up to date on your charges.
As another starting point, make sure you have a solid pricing system in place so you can back up price increases anytime a client protests.
“You also need a system of estimating where you know exactly what price you bid that unit at, at the time you did that bid,” says David Peterson, president/CEO of Watershape University, who teaches a pricing course.
If you’re a builder, you can refer back to that detailed bid to reference how you costed out a particular product and how it costs more at the time of construction.
With solid metrics in place, you can help your company and the market in general.
“I think that keeps everybody on the same playing field, and if somebody’s calling around to try to find other prices, it legitimizes what everybody else is charging,” says David Hawes, CEO of H&H Pool Services, Inc. in Dublin, Calif., and CFO of the Independent Pool and Spa Service Association.
° Prepare for leaner times.
None of these experts would advocate gouging customers now or anytime.
However, with demand currently outpacing supply, there are legitimate reasons to raise prices past what you need to recover your own increasing costs.
Some builders and service firms are raising prices as a means of slowing down demand. But even if you’re not interested in doing that, you should consider the future and how the company will get along during economic dips. With some wondering what will happen when the current demand crests, this takes on particular importance.
This is a time to invest in your company in ways that you won’t be able to in the next downturn, Sovernigo explains. If you need a larger staff, it will take advertising to bring in new hires and training to get them up to speed. It might be a good time to update computers and technology or other goods. Vehicles and facilities may need upgrading.
Companies should also take advantage of the opportunity to build reserves to help in lean times. This came into stark relief at the beginning of the pandemic, when professionals didn’t know if the industry would hold steady or fall off a cliff.
“If COVID has done anything, for me, it’s really had me look at my rainy-day plan,” Sovernigo says. “You have to look at things both short-term and long term. Have things in place so that, if things happen, you can at least weather six to 12 months.”
These reserves can also serve in times like these, when you may need to stock up on more equipment, materials or supplies than normal to help weather the shortages.
° Consider making course corrections now.
If you have been underpricing or choosing not to charge for certain services, give serious consideration to fixing that at this time.
Service companies should review their margins. As Hawes sees it, anything less than 15% net poses a red flag. “That’s my absolute, baseline, never-to-go-under margin that you need to be making,” he says.
Ideal margins should be higher. He advises 17% to 22% for larger companies that can take advantage of economies of scale, and 35% to 40% for single-polers who have to think about their own taxes, benefits and retirement funds.
On the builder side, contractors have more bidding opportunities than they can accommodate. If you’ve wanted to charge for designs but have hesitated to pull the trigger, now may very well be the time. Not only does it ensure that you profit from the time you devote to a homeowner, but it helps differentiate between serious prospects and casual browsers at a time when managing leads is a full-time job.
“This is definitely the time to flip that switch and stop giving away their intellectual property, time and value for free, because they’ll never get that back,” Peterson says.
Some have even begun charging a fee for the first meeting, which sometimes can be applied to the construction contract if the homeowner chooses to sign on.
° Find indirect ways to control costs.
Most of these professionals have been able to limit their price increases because they so closely calibrated their costs leading up to the pandemic.
If that’s the case for your company, or you have other reasons to feel less comfortable about bumping up your rates, you can manage costs and demand by practicing more selectivity when taking on new customers.
On the service side, for instance, Hawes spends more time than before vetting pools and their owners, looking for indications that problems with the installation or the prospective client’s attitude may drag out regular visits. He’ll try to employ Google Earth to get a peek at the backyard as a pre-emptive measure. And, in talking to an inquiring homeowner, he’ll gauge their reaction as he explains how they perform service throughout the year. A certain amount of resistance might provide a red flag to indicate the prospect isn’t a good fit.
“We’re not going to take on pools that are going to require more work than we have time for,” he says. “So we haven’t necessarily raised our price, but we are saying no to a lot of work.”
° Help customers know what to expect.
When companies must pass on price increases, there comes the fear that trust, and perhaps clients, will be lost. The surest way for that to happen is to catch customers off guard. So make sure they are prepared.
For instance, service firms should try to restrict price increases to once a year, when contracts are renewed. Customers will expect this, but more frequent hikes could leave them feeling nickeled-and-dimed. Of course, this means you must do your best to predict how your own costs will rise or fall during the duration of the contract.
When you expect increases, let current clients know in quick order. Just as your vendors give you plenty of notice to make adjustments, so should you do for your own customers.
And be quick to reflect current or anticipated increases in the prices you quote inquiring service prospects, Hawes suggests.
GOOD NEWS
During these times, costing your work may prove more of a tight-rope walk than normal. However, the industry does have some forces working in its favor.
First, Hawes says, clients don’t seem to be pushing back against price increases. Companies that have spent the time to nurture their relationships and develop trust with customers especially have enjoyed a smooth road. Most understand the supply-chain crunches that currently result in cost hikes. And when dealing with the occasional naysayer, professionals stand on firm footing.
Hawes also finds that, with people spending so much time at home, they are placing greater priority on quality and service than price. “We’ve had people come on service who [previously] were paying as much as 20% less than we charge, but they view us as worth the 20%,” he says. “Because people are home, they see the job that’s being done. They’re a little bit more tuned in to the pool because their kids are swimming all the time. So they’re more acutely aware of the work that’s being done at their homes.”
Finally, these professionals add, if you follow all the tips above and keep at them, you’ll have developed practices that will serve your company well in the long-term, regardless of the economic climate.
