Data is the Secret Weapon
Pricing is hard
Pricing home services is difficult. Whether you are looking how to price interior painting, a kitchen remodel, or house cleaning – all of which have varying levels of complexity and associated costs – it’s a challenge to know if your prices are right.
Pricing is the single most important variable in your profitability. If you price too high, you won’t win business. If you price too low, you’re leaving money on the table that could go straight to your bottom-line. In other words, price determines how much margin you keep at the end of the day.
Oftentimes it’s unclear what your competitors are charging and how you stack up in the marketplace. So, you’re left to guess, or if you use estimating software, you’re left to hope that your software is always right.
You’re likely leaving money on the table
Let’s take an example of how to price a custom kitchen remodel.
You may have costs from multiple suppliers – granite for the countertops, new cabinets with custom millwork, large crown moulding, wood to improve the island, glass for the front of the cabinet wine rack, etc.
And, of course, there’s the labor. Estimators, designers, maybe even an architect, a project manager, and the crew to actually get it built.
Those costs you can typically account for.
But, what about other costs you may have overlooked? Things like:
- Contingency costs or unexpected issues
- Lead generation cost
- Shipping and handling
- Change orders
- Disposal of the old kitchen materials
- Permitting costs
- Unforeseen electrical or plumbing work that needs to get adjusted
- Something you missed in the bid process that then requires you to pay your crews extra
And the list goes on.
Is your pricing accounting for all that to ensure you hit your margins on every project? Or, do you find that profitability per job is all over the place?
We find that many companies we work with have job margins that look like the below. Each bar represents one job done during the previous 3-month period.
Notice that some have very high margins, and some have very low margins. That’s a lot of variability from job to job.
Why? Because pricing is all over the map.
Pricing Software Isn’t Always Accurate
Some companies use some form of estimating software to help them with their bids. We find that there is a pricing “sweet zone” where the software is usually dead on the money. But, that it starts to be less accurate in other areas – typically on the very low end and the high end of your pricing scale.
Here’s an example of a company that does interior painting. Prices up to the $3k range are correct, but tend to be much higher than the required labor costs above that range. That’s great for the margins if they can win them, but tough to compete against competitors.
Close rates or job win rates tend to drop in these higher areas as price disparity between you and your competitors gets wider.
Here’s an example of what we tend to see on close rates below. Each job gets bucketed in a $500 increment and then we track how many estimates or quotes get closed that came out of that price range. Anything in orange is below the desired level.
It’s pretty clear where the rates drop as prices get higher.
What’s the Remedy to Poor Pricing?
The short answer is data. Data is a secret weapon. You can see above how to assess prices vs. quote win rates to stay competitive and vs. job costs to control margins. That’s the power of data.
Once you see it, you can start to find ways to make tweaks that enable you to improve.
Results are crazy accurate
One house painting company we work with is part of a nationwide franchise. The franchise average nationally on closing jobs is about 30% – 33%, but there’s a range from around 15% – 18% on up. The franchisee we work with is now #1 nationwide out of over 200 franchisees. They win 40% – 44% of all their bids, and have very strong profit margins.
That’s what we mean by using data as a secret weapon. No one else is doing something like that. By being more profitable, you can invest more in growth, leaving competitors frustrated and jealous and wondering how you got so “lucky”.
How to Price Home Services
(like Painting, Kitchen or Bath Remodels, Plumbing, Electrical, Etc.)
Rather than guessing, or rather than using an estimating software that may or may not always be right, you gather the right information and feed it into a formula that either gives you a correct price, or cross-checks your current price and helps you know what adjustments to make.
Here are the specific steps of how we help home services companies with their pricing:
- Talk through the process of a typical job. What sorts of costs are involved?
- Ask probing questions about costs that may otherwise get overlooked (see the bullets above)
- Understand all the labor or people that might touch a job and what costs do you think will be associated.
- Have a discussion about what healthy margins look like for you and your business.
- Do you want to clear 50% on every job at the end of the day?
- Do smaller jobs have higher margins, say 60%, and larger jobs have lower margins, say 25%?
- Next, look at historical jobs you’ve done.
- How much money did you make on each job?
- How long did the jobs last?
- Were there any cost overruns or unexpected things that beat up your margins?
- What were those jobs priced at?
- Using all that information, you (or we) can build a pricing formula to help you figure out what you should charge to hit your desired margins on every job.
- It usually involves using Excel’s Solver module, and sometimes some other forms of models.
- Bounce the results of the formula against publicly available data from Homewyse.com and Angie’s List, or any benchmarking data if you are part of a franchise or mastermind team.
- This helps us adjust for market specific factors and helps you have a sense of how your prices stack up against the market overall.
- Make any tweaks as needed.
- Create another formula to help you determine job length and understand expected costs.
- Compare the cost formula with the price formula to ensure it’s accurate and is dialed in to help you win the maximum amount of jobs possible while preserving your margins.
Timeframes You Should Expect to Develop a Pricing Model
Steps 1 through 3 above can all be accomplished in about a 1 hour phone call (or you could do it internally with your bookkeeper and it would take about the same amount of time).
Step 4 can take several hours depending on how many jobs you want to look at or not and how much information you need to gather. Or, if needed, you can skip or defer this step.
Step 5 is where the magic happens. This step takes some time to get right but it’s worth it. This is where you build the revenue and margin enhancing engine that propels growth for you.
Step 6 and 8 are both fairly quick – a few hours max.
Step 7 can also be more involved, and isn’t 100% required, but is hugely helpful in understanding how long jobs will take and what to expect. It also helps from a scheduling perspective as knowing this at a really fine-tuned level can help you pack more jobs into the schedule. More jobs = more revenue.
Here’s an example of a project that could be applied to your contractor business on how to price services like plumbing, painting, electrical, remodeling, etc.
Data is a secret weapon, especially because most home services or contracting companies have no idea how to use it. If you do, you can pretty well leave your competitors in the dust, while growing both revenues and profits.
If you’d like help on building something like this for your business, don’t be a stranger! Let’s help you dial it in and win!