High, low or somewhere in the middle? Where to pitch realistic charge-out rates is a common conundrum faced by small trade businesses.
In fact it’s probably one of the most difficult tasks. You have to be careful not to under price as this will reduce profits, but at the same time, overpricing for labour and material mark-ups could turn customers away.
Setting charge out rates is just as important as market awareness, product development and advertising. You can do all these things excellently and then undo the lot by setting charge out rates too low or too high.
Pricing is a complex strategy which should be carefully undertaken and reviewed.
Know Your Overheads
First of all you must know what it costs you to operate your business before you start to set a charge-out rate. Your accountant can help you prepare this information. In particular, you’ll need to look at:
- Annual budget
- Budget for investment in stock, work in progress and debtors
- Cash-flow forecast.
It would also be a good idea to start producing periodic accounting reports, say monthly, so you can check how the business is going compared to the budget.
Customers Don’t Choose on Price Alone
Once you’ve worked out your bottom line, don’t simply jump in with the lowest rate. There is no doubt that charge-out rates are of concern to customers but contrary to what you might think, they are not the only thing customers take into account when choosing a tradesperson.
Far from it. In fact astute customers tend to choose tradespeople primarily for reliability. Other factors which enter into the buying decision include:
- Technical and back-up services
- Punctuality – turning up on time!
- Refund policy
It would help to do some research on what goes into your customers’ buying decisions before setting your rates. For example, looking at what your competitors do and how they charge could be one way of determining what customers in your area are looking for.
Do your competitors offer round-the-clock and/or prompt service, do they give guarantees or are they renowned for quality work? If they are flat-out busy yet charge a high rate, chances are customers care more about the service than the money they have to spend.
In the market place you’ll find many businesses charging 5%, 10% and 20% higher than their competitors, yet still run very profitable businesses. In fact these businesses are often the most successful because they have achieved excellence in those areas listed above.
Setting Prices Too Low
Clearly you need to base your pricing strategy on much more than price alone. So what does happen if you set charge-out rates at the lowest end of the market in the hope of attracting customers?
Some people advocate this is the only way to build market share in a competitive market. To increase profit margins you simply increase prices later once you’ve reached the desired market penetration. This strategy, however, comes with potential risks.
Once you’ve introduced a product or service at a low price, it creates a low price/value relationship in the customer’s mind, and once there it’s very difficult to remove. When you want to increase the price, you might have to spend a lot of money on advertising and promotion to change that image.
Understanding a customer’s perception on pricing is one of the key elements in developing pricing strategies for tradespeople. Most importantly, the lowest price is not necessarily the best price. Customers ultimately look for the best service at a realistic price.
Give us a call if you'd like to chat about your pricing. We'd love to help.