Since
1992,
NSPG has been providing the tools that allow contractors to
increase profits and minimize business hassles. With our
simple-to-use-tools, you can make being a business owner
what you always wanted to it be -
successful, profitable and rewarding.
Cut Your Costs, Give a
Discount, Set your Price
Last month we talked about Crunching your Numbers as
part of your year end strategy. While controlling
your costs and keeping your prices up to date is
important at all times, it becomes critical in
hyper-competitive times like we are experiencing now.
 One
tool used by just about all businesses these days is
reduced pricing on select items to "Get in the door."
Today we'll take a look at how you can use this
technique while minimizing the cost to your bottom line.
But before you can responsibly offer discounts, you need to
know what to charge to make a profit in your current
economic situation.
This is the point where
most people tune out. After all, you Crunch your
Numbers a couple of times a year when you get ready to
print new Flat Rate books or adjust your T&M pricing.
Since what you need to charge to make a profit is
not solely based on your expenses, it is
critical that you do your numbers whenever your close
rate changes.
If you are selling fewer hours,
you need to adjust your prices to cover your costs and
still earn a profit.
 Let's
take a simple example to illustrate what we mean by
this. Say your business has $10,000 per month in
costs. During good times (like two years ago),
your tech sells five productive hours out of an eight
hour day. This translates into 100 productive
hours sold in a month. To break even, your need to
charge $100 per hour. ($10,000 / 100 hrs = $100/hr)
Now that things are
slower, let's say your tech is only selling four hours
per day. This translates into 80 productive hours
per month. If you're still charging $100/hr, you
will lose $2,000 per month. To break even, you need to either cut
your costs, raise your rates, or both.
When
business slows,
it's even more important to keep your numbers up to
date.
Whether you use a
spreadsheet or a tool like Numbers Cruncher to run your
business, you need to keep an eye on your numbers.
Take a look at each budget category, and see where you
can trim some costs. Once you have cut all you
can, you may need to raise your prices to stay in the
black.
Raising your prices in a
down market is not what any business wants to do.
You're already slow, so won't a price increase cost more
business? When you ask yourself that question, you
must also consider the type of business you're running.
Are you competing solely on price? If so, your
only option is to cut prices (and lose more money) during a
downturn.
If your business is based
on selling the quality of your service, price is not the
only consideration for your customers. You must
balance cost cutting, pricing, and marketing to keep
your business going through the tough times.
Cutting your prices to keep busy while losing money
every day
is probably not a sound business model.
So you've cut your costs,
and adjusted your prices. How do you compete?
 Sometimes,
quality based companies have to compete on price to "Get in the
door." They offer free estimates. They offer
discounts on certain must-have items like water heaters
or drain cleaning. The difference between offering
low prices and losing money, and offering a limited
number of discounted items is often just the planning
that goes into it.
Like advertising,
discounts are just another cost of doing business . Your
customers pay for your advertising budget, so why
shouldn't they pay for your discounts? You can
spread the cost of a loss leader water heater or drain
cleaning call across all of your customer base.
This allows you to offer competitive prices for certain
items and circumstances while still earning an overall
profit. Here's a simple example of how this works.
 Let's
say you want to offer a $100 discount on a certain water
heater. You estimate that you will sell 50 of
these discounted units in the next year. This
translates into a $5,000 cost to you. In Numbers
Cruncher (or whatever budgeting tool you use), enter the
total discount amount on the Budget form in the Special
Customer Discounts field. This will put the new
"cost" into your budget, and immediately show you how
much it will raise your hourly cost.
Now you can set your new
prices with this discount built into your costs.
Every hour sold will help pay for this sales tool that
you can use to win that competitive job. You can
even use this technique to get your existing customers
to call you. In a mailing to your current
customers, you can offer special discounts that you have
already built into your budget.
Just like your advertising
budget, this discounting technique can generate more
sales calls, win more jobs, and keep your techs busy in
difficult times while keeping your business profitable.
But
won't I lose out on other jobs because my prices are too
high
now that I've built these discounts into my prices?
 If
you offer an unreasonable level of discounts compared to
your non-discounted business, this could be the case.
Just like any business expense, you must balance the
cost versus the reward of this technique. You
balance your advertising costs versus the amount of
sales and profit each ad brings in. You need to do
the same with your special discount program.
A $5,000 discount example
like the one we used above, will have a small impact on
customer pricing. In a three truck business that
sells about 3,000 hours per year with a 20% profit
target, it would raise the hourly rate by about $1.67.
With a single truck company the hourly increase would be
about $5. This small hourly increase should not
scare away any serious customer.
Whether you have
specifically designed tools like Numbers Cruncher, or
use a spreadsheet you created yourself, you need to take
advantage of all the tools at your disposal.
Targeted discounts can open doors even for companies
that
have built their reputation on a philosophy of quality work
at premium prices. The combination of cost cuts
and creative promotions can help any business weather an
economic storm.
So, Crunch your Numbers
based on the current situation, and
include your own targeted expense cuts to be sure  that
you
are as price competitive as possible while still
reaching your profit goals. In good times and bad, knowing your costs, and making the proper
business adjustments will pay off.
- - - - - - -
Give Mike Conroy a call to
discuss your business, your numbers, your performance
benchmarks, or your flat rate
books. Take advantage of his experience working
with hundreds of companies like yours to help you achieve your own business success.
Measure Monthly, Adjust Quarterly
& Achieve Your Annual Profit Goals
On-Line
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