Too Busy – Now What? An effective pricing strategy.
Recently an owner of a heavy construction company asked me to coach him on an issue they were having: they had too much business.
HE WAS DEBATING WHETHER HE SHOULD:
1. Hire more staff.
2. Start saying no to new business.
Neither of the options are easy, and hiring highly specialized and qualified staff is very difficult. Training takes time and money. He would also have to purchase several million dollars worth of excavators, front-end loaders, dump trucks, and earth movers. Saying no to business was against his entrepreneurial convictions and could mean letting down potential clients.
I offered him a third alternative: raise the prices. I told him that if his business is so busy that he can’t keep up, then his prices were too low. The price is determined by the value of the product and demand. If the demand increases, the price should increase as well. When demand decreases, the price often decreases with it.
Raising the price is the most effective way to increase the bottom line.
Every single dollar that we increase the price by goes directly to profit.
Let’s look at this hypothesis through a few examples.
If my client is working on a $3M project and his rate of return is 20% he would be profiting $600,000 from that project.
Profit: $ 600,000
If he were to hire extra crew members to take on other projects at the same time, his business would most likely struggle to maintain 20% of the profit because the new crew would not be as efficient and initial cost would be quite high. However, let’s assume that he can maintain the profitability of 15% on other projects of the same size. In that case, the two combined projects would generate revenues of $6,000,000.
Lastly, let’s look at the scenario where he increases his fees by only 20%. He may only get one project of the two, but his rate of return would increase to 33%.
Therefore, the increased pricing strategy could yield as much profit on one project as running two concurrent projects.
As you can imagine, running one crew and financing a $3M project is considerably easier and has less risk associated with it than running two projects. In business, we often focus on revenues, and the number of employees a company has. My point is that a much better measure of success is profit and ease of achieving it. In my simple examples, the business owner can take home at least the same amount of money by increasing the prices instead of increasing the numbers of crews, and his quality of life would be significantly better.
This strategy isn’t for every business, but if you have more work than you can handle and don’t plan to continually expand your market share, then focusing on profit can be the right strategy for you.
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