Published in The Tennessean February 9, 2015
By Ed Rappuhn – SCORE Nashville
“We provide high quality, custom products to homeowners and contractors. Our sales are increasing but profits are down. Our competitors’ prices are considerably higher than ours. With our three largest customers representing three-fourths of sales we fear increasing prices will cause one or two of them to leave. Any ideas?”
Why are you so underpriced? Is it because you did not raise your prices as labor and material costs rose? If so, you took the easy route of not rocking the boat. Now moving to market prices will shock your customers.
Start by talking directly to your large customers. Explain what happened and that you need to move towards pricing comparable to others that do similar quality work. These customers are almost certainly contractors who also deal with increased costs and will understand you must do the same. They obviously like your work and want you to stay in business. And where are they going if your competitors are truly more expensive?
Next, consider a tiered pricing structure. Tier 1 might be retail pricing, the highest price, which you would charge a homeowner directly. This will be somewhat above contractor price but in total will be no higher to the homeowner since there is no middleman mark-up.
Tier 2 could be contractor pricing for new business and would be in line with current market pricing. Will you get every bid at this level? Probably not – but if you did, you’d be pricing your offerings too low. And remember, you only need to sell half the number of jobs if your profit margins are twice as high.
You can offer your large customers Tier 3 pricing, somewhere between your current prices and market prices. Promise them they will continue to receive preferred prices because of their loyalty and volume of business. Just like you expect perks such as frequent flyer points or loyal shopper rewards, your best customers deserve special consideration.
Beyond price adjustments, if at all possible, diversify your customer base. If losing a customer because of a price increase gives you reason to pause, pricing isn’t your only concern. What if one of these customers goes out of business or begins to date someone whose brother is in your business? It’s risky to run a business with most of your revenue tied to three customers. Your goal needs to be where the loss of one or two customers would not be devastating.
Once your pricing is in place, do periodic reviews and make adjustments. It’s much easier to sell a small annual increase than a significant increase every four or five years. And continue to add more and varied customers to help relieve some stress.
Ed Rappuhn is a mentor, workshop facilitator, and the past-chair of SCORE Nashville. SCORE mentors guide entrepreneurs in starting and growing their businesses. Sign up for a free SCORE mentor, find out about our reasonably priced workshops and other services, or volunteer to become a SCORE member at www.scorenashville.org .