You Get What You Pay For
I can’t remember the time I first heard the phrase “Reassuringly Expensive”, but it only recently resonated with me. When I was first starting in business my goal was to be the cheapest around so people had to use our services.
As time went on, I soon realized that being the cheapest makes it crazy hard to make money, and as importantly, generate cash.
When we start a business our only concern is getting enough work to sustain and live another day. Sometimes this burden can drive a business owner to make irrational decisions like pricing cheap.
On the surface it sounds great to get that new shiny contract and add more revenue to the business. In reality, if you discount you are crafting a bigger anchor.
discounts damage margins
Have you ever noticed that when you discount jobs, or do them for cheaper than you normally would, that it is hard to finish them on time with acceptable quality and have a satisfied customer?
With a little digging it is easy to understand why this happens. Let’s have an example.
If you have a sale that is $1.00 let us break down the amounts of that sale into its components.
- Cost of materials (COGS) = $.33
- Cost of labor = $.25
- Overhead = $.25
- Net profit = $.17
In that example, that would be a pretty healthy transaction. Basically at the end of the day you have a 17% net profit. Not bad right?
What happens if we give a 20% discount on that same job?
- Sale of new discounted job = $.8
- Cost of materials = $.33
- Cost of labor = $.25
- Overhead = $.25
- Net profit = $-.03
So, the net effect is our costs stay the same but our profit margin suffers. I know, I know what you're thinking. You bid that big contract and you are going to save money for efficiency, or buying materials or whatever justification you give for it.
I am here to tell you that generally does not work out to your benefit unless you have a major shift in your process to become efficient enough to overcome a 20% swing in your numbers.
For further explanation of the hidden dangers of discounting and a free discount calculator, check out this article by Business Coach Martin Holland.
For our business to, not only survive, but to be healthy we must NOT discount. Even if it means you may lose the job.
But how do you do that? How do you not discount when a great contract is the balance?
It is time that you let the customer know why you are “Reassuringly expensive." When explaining to our customers how we settled on prices for our Lockdowel cabinet components, we communicate three key things so they understand what exactly they are paying for.
We are “Reassuringly Expensive” because:
Our Price Provides You with More Value
We value your (the customer) jobs and want to make sure we can appropriately manage the job front start to finish. While keeping costs down is a main priority for our business, having a happy customer each and every job is top priority. If price is the only concern then our price, while it may be a bit higher provides you, the customer, with more value.
We Are In It For The Long Haul
Instead of merely giving you the lowest possible price, I am pricing your job appropriately so that our business will be here for all your future projects. We are partners in business and I want you to succeed so that you have future work, and I hope you want us to succeed so we will be here for all your future work.
We help Maximize Referrals
We all know that 70% of new business is generated from referrals and word of mouth. By using a reputable business you can count on, like us, you are putting your business in a position to maximize the amount of referrals you will get because of your excellent service and product. Think of referrals as the engine of business. If you put good gas in the tank the engine will stay healthy. We are not only clean fuel, we are high octane!
know your value
Take time to take a good look at your own business and identify why your product is worth the price. Then, don't be shy to communicate that. Letting your customer know why you are reassuringly expensive will make the discussion of high price a little easier to navigate.
The key is being confident in the quality of what you have to offer. If you know your value, you can price your product appropriately. You will not feel pressure to discount when you know the worth of what you are delivering and how it will benefit your customer.
If you are unsure of the quality of what you deliver, take a step back and think about what you need to improve to be confident in your price. For an overview of every area of your business, take a look at the Four Fundamentals of a Successful Business. See if you can point out which area you are struggling in. Also, make sure you are applying the key steps to making it in the cabinet industry.
put pricing into practice
To practice these tips, try taking a small job and when you get push back on your price, have your argument prepared. If your argument fails, opt for making design changes before discounting. As a last ditch effort, have a couple value engineering items ready if the price tag needs to go down to make the sale. If there are some “value engineer” items you can come prepared with to the meeting that would help.
Never, never, never discount just for the sake of discounting. You have to make money to stay in business so don’t waste time on the contracts that don’t make money.
If you use the tips in this article and land a job we would love to hear your story. Tells us the details that led to the sale and we will celebrate with you!