Want to increase your profit margins? Raise your prices.
Many people say, "But we can't raise our prices because of our competition." Wrong. Does your competitor set your prices or do you? If you are letting the competition set your prices, you're doomed, because there are too many bad business owners out there.
There's a contractor in Delaware with a sign on the side of his trucks that proclaims he is the most expensive. He has more work than he can handle.
Some people have said that the rapid rise in steel prices might be the best thing that has happened to the construction industry in years. They say a lot of contractors haven't raised their unit prices in years will be forced to raise them, which is the best thing for them to do.
The reason people are afraid to raise their prices is because they are competing on price. You must learn to compete on value. Peter Senge, author of The Fifth Discipline, said, "Our organizations work the way they work, ultimately, because of how we think and how we interact."
So if you want things to change, you need to change the way you think. Instead of thinking how your company can do it cheaper, the question must be how can you add greater value.
Pay attentionThat doesn't mean ignore costs. Unnecessary expenses, whether paid by you or the customer, are not good. But only focusing on cost reduction is not the way to grow a business. This is especially true in HVAC, where you deliver complex products and services.
Here's an example that illustrates this concept. A company was a $20 million-a-year general contractor with a net profit in the range of 1.5 percent, about average. They went back to all their customers and asked if there were additional services they could provide that they weren't currently providing. They received a long list of desired services. They went back to the clients and said, "If we do all these extras we will need to charge an extra 1 percent in fee." The customers all said, "Fine."
This resulted in an extra $200,000 in income, but the cost to the contractor was only $18,000. How many contractors make a 1,000 percent profit? This contractor had that kind of return on the amount invested on the additional services.
The reality is that 17 percent of customers only care about value; they simply want the best. Another 27 percent only care about price, so why should you worry about them - they don't worry about you. They are never loyal to the contractor or the designer. They are only loyal to their price. Send these people to your competitors. Maybe you can get a referral fee. Heck, any referral fee might be a larger profit than you will make off doing the actual job.
Left outBut this leaves 56 percent of the people. You must focus on these people, because they are the ones who care about value and price. They buy based upon price when they can't differentiate the difference in value between the two contractors. Many contractors themselves can't say what makes them different from the competition down the street.
If the contractors can't differentiate themselves from each other, how do they expect the customers to differentiate them? The customer resorts to the lowest differentiator: price.
A common question in seminars is: "What's the purpose of a business?" Someone always responds, "Make money!"
It's the absolute wrong answer. Why? If you are worried about making money, you tend to make short-term decisions. When you make short-term decisions, you focus on your company, not the customer. If no one is worried about your customers, how many customers will you have? None.
If you have no customers, you will not make any profit. It's not that you don't want to make money; after all, that is the reason for being in business. But the business focus can't be on making money. The company must focus on getting and keeping customers.
When a customer says your costs are too high, what are they really saying to you? They are telling you that you are not delivering enough value for what you are charging. Look, you make that analysis every day of your life when you go to the store. You decide rather to have the money or the item. Depending on your perceived value of the item, you make a purchase decision. Your customers are no different.
Start a dialougeTwo major issues must have greater dialogue. The first is you must do a better job of educating customers about the value you deliver. You need to educate them to the problems of deleting jobsite personnel to save money, which results in mistakes that are more costly to fix than the savings in personnel. You need to educate customers that cutting design prices is a mistake because it results in higher construction costs.
The reality is the general contractor and architect fees represent about 10 percent of construction costs. But construction costs represent only about 10 percent of the total lifetime cost of a building. Therefore, the general contractors' and architects' prices represent only about 1 percent of the total lifetime cost of a building. Yet, misguided owners focus on this 1 percent in the hope of saving money. When they do this, often the remaining 99 percent in cost goes wild.
You need to communicate the concept that it's more important to select the "right contractor and designer" than to select the cheapest. You must educate customers to focus on the idea that the right team can create significant savings in the other 99 percent of costs.
Another important issue in delivering greater value is to understand what the customer really needs. This only occurs when there is an open dialogue with them.