By Doug Freer
Nothing is more frustrating than providing your customer great value—accomplished by being the low-cost provider and giving service that meets or exceeds expectations—only to lose it to a competitor who uses kamikaze pricing to seduce your customer.
When your competitor is willing to toss around below-cost proposals like hand grenades, your customer can’t help but notice the explosively low prices. In past years, your customers would most likely ignore unreasonably low prices, fearing a service failure or reminding themselves of the old adage that “if it’s too good to be true, it probably is.” But in today’s market, property owners and managers are willing to ignore the risk in the hopes that something good—or at the very least, nothing too terribly bad—will happen.
This season, we have lost jobs that we won in last year’s competitive market to contractors who are doing the work for 40% to 50% of where we priced it last year. And we’re not alone.
In an effort to develop a strategy to combat the contract price terrorism that is driving prices below the cost of actually producing the service, rational contractors are left scratching their heads, wondering what has caused this phenomenon, and how they should respond. What can you do to survive this pricing war and protect your business?
Your values are not their values
Don’t assume that the values that drive your competitor’s actions are the same as yours. What rational person would want to price work purposefully at a loss?
Contractors price for different reasons and from their point of reference. Low pricing, or pricing that is lower than your best price, may occur. Some of your competitors have used synergies, technology and well-honed techniques to reduce operating costs and overhead so they may offer more competitive prices. While some of their pricing may seem significantly lower than your own, a good portion of the difference is likely attributable to their lean business operation. These savvy competitors know their numbers and are making investments in their business to lower costs, which enable them to provide more attractive pricing.
You have had to contend with—and will continue to deal with—contractors who are either ignorant or inexperienced and do not know how to price based on their operating costs. They simply price low, or high, because they don’t know any better. Their ignorance will quicken their demise if they don’t learn from their mistakes—and unfortunately, they represent a significant and consistent part of the market.
Likely you have encountered the “lowball” contractor, whose pricing is based on the desire to win the work, regardless of what it will cost to produce it. The win-at-all-costs attitude overshadows the absence of good business logic, and is exemplified by the belief that losing 10% on the job is OK because it can be made up in volume. Lowball contractors are dangerous competitors because they will always beat you on price, and there always seems to be another lowball contractor waiting to replace the one that became a victim of his own collateral damage.
In today’s market, we are experiencing something that you may not have seen before: contractors who are motivated by factors other than profit. These contractors are making a conscious decision to significantly reduce their price to ensure they win the work, refusing to allow someone else an opportunity to compete. They are willing to accept significantly lower margins to the point where they do not plan to make a profit, and, if motivated, will price to the point where they expect to take a loss, perhaps only to mitigate or offset larger potential losses in other areas of their business. These contractors are willing to cut every dollar out of the snow job to ensure they win just to reach their objective.
Price as a weapon
If you go up against a lowball contractor or someone motivated by factors other than profit, you will lose every time. How is this possible and sustainable? When competing, you may not know whether the pricing is rational, and you may be caught in the crossfire of either the rational choice to ignore profit or the irrational desperation of the lowball contractor. The only way to survive is to know your numbers and when you have to walk away. Do not allow yourself to be pulled into the low price battle for the sake of winning.
There are contractors that were unable to make up the losses they experienced from the downturn in 2009. Cash is the lifeblood of the business, and without it, they fear not being able to make payments and losing their ability to work. They hold out hope that salvation will arrive and that by holding on, even at a loss, they may get through this economic storm. Desperate people will do desperate things, in-cluding blowing your price out of the water just to secure cash flow, even if the work represents a real loss to them.
Competing against pricing madness
When your customer calls and asks you to sharpen your pencil, what is your response? Your client may want to work with you, but they must find a way to justify it if they have received a lower price. By negotiating, or including some value-added services, you may save the job without arbitrarily lowering your price. Simply lowering your price jeopardizes your customer’s confidence, leaving them to wonder why you were charging them more in the first place.
Think rationally and logically about your next move. Your tactics will change from customer to customer and site to site, but your overall strategy should be based on sound reasoning that supports your overall business goals.
Evaluating pricing strategies
You will likely use a mix of pricing strategies across your portfolio. Rational pricing strategies may include purposely low prices, and are not necessarily bad—assuming you are able to recover overhead and earn a profit.
- Retail: Your best price, which covers variable operating costs, overhead and making a profit to meet your budget expectations. This is the ideal price.
- Competitive: Lower pricing compared with retail price, but you are still able to make margins because of synergies. For example, perhaps the proposed site is adjacent to an existing site, and reduced travel or shared equipment gives you a competitive advantage, which you can reflect in your price.
- Aggressive: Pricing that, despite synergies and creative site engineering, significantly reduces your profit margin in an attempt to win the business. Generally reserved for target properties that match your ideal customer profile and you believe are worth acquiring, because over time your experience on site and ability to build off of the work will allow you to recapture margins. Aggressive pricing may also reflect a wholesale or discounted pricing strategy for a larger volume of work.
- Break-even or loss leader: Pricing that assumes no net profit will be made and likely cuts into overhead recovery. This pricing should be used sparingly and be justified in the context that the business relationship is critically important, and keeping or acquiring the work is fundamental to your overall portfolio.
- Buying work: Pricing that absolutely assumes no profit potential, and reduced or possibly no overhead recovery. The goal is to recover some or all of the variable operating expenses. The project will cost your company money, so you are buying or paying to do the job. This should only be used by companies that know and understand their numbers and have a strategic reason to pay for the privilege of doing the work.
Douglas Freer, CSP, owns Blue Moose Co., Inc. in Cleveland.
