raising standards Pricing War? Stay out of it. Want To Win A By: Jim Peduto W While most firms in our industry have always faced competitive markets, the downward pressure on prices seems to be accelerat-ing and, for many, is becoming a way of life. Many building service contractors (BSCs) have been conditioned to quickly reduce their price when faced with a competitive situation. However, they fail to fully understand that the typical BSC cost structure makes it vir-tually impossible to consistently drop prices without a significant change in operations. Before acquiescing to your next reduc-tion, first consider the impact the proposed price reduction will have on your profitability and operations. Next, develop a pricing strategy that makes sense for your business — and for your customers — and stick to it. Finally, focus on differentiating your busi-ness with elements other than price. Many building service contractors have been conditioned to quickly reduce their price when faced with a competitive situation. Pricing And Profitability Price reductions can have a surprisingly de-structive effect on profitability. Let’s look at a few examples assuming that your firm has a 20 percent gross profit margin. ■ If you reduce your price by 2 percent, you will need to increase sales by almost 9 percent to maintain the same number for gross profit dollars. ■ A 5 percent reduction requires over 26 percent more in sales volume to make the same dollar amount of gross profit. ■ Offering a 10 percent discount means you will need to sell 80 percent more just to stay even. The bottom line is that even a modest price cut usually takes such a big bite out of gross profit that a disproportionately large sales volume increase is needed to earn the same profit as before the price cut. In addition, the growth requires more re-sources to support it … at the same time margins are being compressed. Astute managers should think long and hard before resorting to a knee-jerk price cut. Businesses need to have a planned ap-proach to pricing, understand why it works and have the discipline to stick with it. Pricing Strategy Well-managed cleaning businesses, espe-cially those who follow the principles of IS-SA’s Cleaning Industry Management Stan-dard (CIMS), have a pricing strategy. This strategy starts with determining the cost of the service your business is selling and what that cost needs to be in order for your business to be profitable. There are a number of factors business owners need to know when developing pricing . Know your customer: Do a little market research. Survey existing customers and take a look at the various types of customers you could have — from the budget conscious to the efficiency seekers to the quality-focused. Decide which type of customer you are targeting and price accordingly. Know your costs: You will need to cover your costs to help determine pricing. Costs include the cost of providing the cleaning service; the cost of marketing and selling the service; operating expenses for owning and operating your business; com-pensation for yourself and employees; and capital you will need for growth. Know your revenue target: A revenue target is how much of a profit you want your business to make. Take that revenue target, factor in your costs listed above and you can come up with a price per service — based on hours or square footage — that you want to charge. Know your competition: It is important to compare your business with your com-petitors because this is what your custom-ers are doing. It may be worthwhile to prepare a head-to-head comparison of the price of your service 54 CM/Cleaning & Maintenance Management ® • November 2013 Image courtesy of Nikolai Sorokin/Hemera/Thinkstock
CMM – Archives November 2013: 54
