While most firms in our industry have always faced competitive markets, the downward pressure on prices seems to be accelerating 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 virtually impossible to consistently drop prices without a significant change in operations.
Before acquiescing to your next reduction, 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 business with elements other than price.
Pricing And Profitability
Price reductions can have a surprisingly destructive 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 resources 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 approach to pricing, understand why it works and have the discipline to stick with it.
Well-managed cleaning businesses, especially those who follow the principles of ISSA’s Cleaning Industry Management Standard (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; compensation 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 competitors because this is what your customers are doing.
It may be worthwhile to prepare a head-to-head comparison of the price of your service to your competitor's service.
This may require phone calls and secret shopping to get accurate data.
With this knowledge you can estimate what you expect to sell for the year, perhaps by the number of labor hours or total square footage, and divide that by the number of units to get the service price.
The focus needs to be coming up with the right pricing strategy and model that is more about customers than competitors.
A successful approach is based on the needs and wants of your customers; not merely a reaction to your competitors’ prices.
It will be easier to stand by your pricing when your customers see the value that your business and service brings beyond price.
It is important for cleaning businesses to build brands and service models that speak directly to customers.
Businesses can work to stand apart from competitors in various ways.
Highlight a niche or a specialty service.
If you "own" a market, you have more room to set prices.
If you are the only contractor who holds a certain certification (such as CIMS) or offers a specialty cleaning service, you will have fewer competitors who can meet what you offer.
Work smarter, not for less.
Improve profits through innovative practices.
Use smarter, more efficient cleaning processes and technology to increase performance and value.
Focus on value, not on price.
Deliver a quality cleaning service.
Follow the principles of CIMS to ensure your operation is well-managed and focused on performance excellence and service.
These are competitive advantages that customers will recognize and will allow you to justify higher prices.
Build loyalty to you, not to your price.
Even if you use special discounts or introductory offers to initially attract customers, immediately go to work developing a relationship that keeps customers around when your prices goes up.
The next time you feel the push to slash your prices, remember your pricing strategy and make your choice carefully.
There are other reasons why your customers choose to work with you besides price.
Focus on the value of the service your business provides and your customers will be loyal to you.
Your business will continue on a profitable path as well.
Jim Peduto is the president of Matrix Integrated Facility Management and the co-founder of the American Institute for Cleaning Sciences, an independent third-party accreditation organization that establishes standards to improve the professional performance of the cleaning industry. Matrix Integrated Facility Management recently received the Building Service Contractor Association’s (BCSAI) Safety Award.