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You know the basic principles of pricing, but why stop there? Wouldn’t you rather get an inside look to see how your price book stacks up against some of the best businesses in the industry?
This week on Cracking The Code, Drew Cameron discusses the pros and cons of several different pricing systems for residential add-ons. You’ll also learn how to match the benefits of your pricing system for the customer with profitability for your business.
Audio Transcription (in Beta Test)
On today’s show, learn how to build your price book.
Today, we have a very special segment from Drew Cameron’s brand new price book course. Now, as always, when we launch a new course, we’d like to give all of you a sample of what to expect before you dive into it. So let’s join Drew now and dive right into this topic. Hi, Drew Cameron with Flow Odyssey and Energy Design Systems, and welcome to EGIA Contractor University Studio, and in this session we’re going to be talking about pricing for profit.
Now this content is in no way designed to trump or replace any of the content that is already existing on the EJA site or any of the classes that you have attended, uh, videos that you’ve watched, materials that you’ve downloaded. This is just a different approach. Not better, not right, not wrong, just a different approach.
Gary’s way is a way, but Gary actually has embraced this way as well, because you’ll understand when you see it, uh, that we’re making sure that we cover, you know, our costs as well as our overhead, as well as our. Profit objectives and making sure that we get the results that we want because that’s you know, that’s our goal here to include in our price book.
Right is to help you grow your business and grow it profitably so that you can stay in business. So that being said, I just want to make sure as a disclaimer here that you have, uh, uh, no misunderstanding as to the intent of this content. So that being said, uh, we’ve got a PDF that will kind of outline, uh, what it is that we’re going to talk about that I want to go to now.
And that PDF that you’re going to see here of our price book. On the screen is designed to kind of give you an overview of what you’re going to see in this arsenal of resources that I’ve put together for you that will culminate in a price book or an investment guide or menu based pricing for in home sales for residential replacement add on services.
This is not for service. This is not for maintenance. This is not for commercial. This is not for residential new construction. This is a price book for add on residential replacement. Uh, if you will, so, uh, the first page kind of gives you an overview of what’s going to be covered within the material, and then we kind of have a on page two here, a discussion about what is the purpose of business is to stay in business, and the only way that you stay in business is that if you bring value to the market, and continue to bring that value to the market.
And the only way you’re going to be overly successful is if you’re not only providing more value than others do, but you’re priced to cover that value. And you’ve got to be priced properly, because if you don’t price your business properly, you go out of business. And so, profit is not a bad word in your price book. In fact, your customers want and need you to be profitable, so that you can be there to service and maintain.
The things that you install that have the warranties, uh, as well that you’ve provided to these people, but you’re also making sure that everybody on the team has jobs for the future. I mean, that’s your, uh, your stakeholders as well as the shareholders, uh, you know, of the business are taking care for the risks that they have, as well as your ability to give back to the community and make an impact there.
At the end of the day, you want something that’s going to be um, beneficial to your price book. And that’s kind of what we’re talking about talking about here. And the way we do that is that we package. A solution, we then position that solution and we price it properly. And so that’s the three things that we’re going to talk about throughout this particular document.
So, we talk about packaging for profit in the first section, which says, put together a compelling scope of work that solves problems and goes beyond what others would even consider doing. to provide more value and solve more problems and, and does something unique and special for the customer. And so you can kind of read through that.
And we support all of this with the sales training that we’ve done already on the site, as well as in the upcoming classes that you’ll see at EGIA, as well as some upcoming content that you’ll also see on EGIA. So then we can position these solutions for profit, meaning make sure that they, they resonate in the market as being hopefully.
You know, premium or different or unique or solving something with a niche focus, if you will, so that you’re compelling again and that you stand out. And so realize that you’re not for everyone and that’s okay. And so there’s a little bit of a discussion on that and position yourself accordingly. And then understanding that you need a price for profit.
And so there are some mistakes that most contractors make, and I want to make sure I call those to your attention, so that you and your people don’t make those mistakes. But then we want to make sure that our pricing strategy does embrace covering all our cost of goods, direct goods, uh, cost of goods.
Think in terms of Costs of goods or, uh, direct costs to the job that if the job went away, the cost would go away. We then have our indirect costs, also known as overhead. Two thirds of that roughly is fixed. One third of it is variable based on, you know, the amount of business that you’re doing. And you can kind of see there’s a little bit of a discussion on what your overhead cost structure is.
And then making sure that you’re, uh, covering, you know, your profit objective as well. We gave you a fictitious company income statement so you can kind of see what it is that we’re talking about. Because we begin with the end in mind. We want to get the income statement right. So we take a look at our income statement, or our budget if you will, and we say, okay, what do we want that to be?
And then we basically reverse engineer, uh, that from our pricing, because when you think about it, at the end of a month, when you look at a departmental income statement such as this, um, it is a reflection of all the little jobs, whether they be income, uh, uh, install jobs or service jobs or maintenance jobs.
Every little job is its own little MIDI income statement that at the end of the month combines to yield the overall income statement. So if we understand that. And we understand what do we want our profit to be? What is our overhead structure? Okay. What is our cost that ultimately determines what the sale price is?
And so we begin with the end in mind by taking our budget, our income statement to kind of get to that objective. So, there is a discussion about improper pricing strategies, and we look at that discussion of improper pricing strategies, both from a high equipment and materials scope. of job, uh, versus a job that would be a low cost of equipment and materials, but a high direct labor job.
And so that’s what you see here in each of the following tables. We look at both of those scenarios and that’s why these jobs, uh, these scenarios, if you will, these pricing strategies are flawed. And so unfortunately they are the most prevalent in the industry, especially the markup strategy, which you’ll see discussed first and then the margin strategy.
And then there’s a handful of other strategies that are out there that you may come across through other. Trainers, coaches, and consultants, as well as some of the best practices groups. They have good intentions, they’re just not getting you the right result. It’s the execution that’s wrong, because they, uh, they’re flawed in the way that they address overhead.
Because overhead varies with direct labor, and so you’ll see that in the proper pricing strategy. Now, again, what I’m going to get, uh, share with you in here, like I said, is a discussion of several improper pricing strategies, ultimately to take you to get to the proper pricing strategy. And this is a proper pricing strategy.
It’s not the only one, but it’s the one I’m focused on. Hey, I’m Bob Larkin. Many of our contractors meet with us monthly, and you, chances are, have met with us monthly. We’ve found that members have deeper and greater needs. So we came up with Next Level Coaching, which is, we meet a lot more often, and there is accountability to deal with some of the issues of money, growth, finding employees, having an exit strategy to get off this roller coaster.
These are the issues that contractors want. Answers to, and we can provide those answers as next level coaching. When you join next level coaching, you’re going to find solutions that are easy to implement and logical. Most importantly, we hold you accountable to specifics. We’re going to meet twice a month.
And have specific to do’s and with those specific to do’s, we’re going to discuss and dive into your financials in a very granular way. You’re going to have a clear budget. We’ll be able to establish pricing. We’re going to help you create leadership programs that build your people. We’re going to help you find people.
You may think of differing ways to engage employees that will keep them more involved by joining Next Level Coaching. So if you’re interested in making more money, growing your company. Finding good employees. And developing an exit strategy, give Deller an hour call. We’ll be happy to talk to you about next level coaching.
And we’re going to see you on the next level. So, in the EJI platform already is a discussion by Gary. Multiple videos, classes, content, resources. Gary’s boot camp, success week boot camp, and his pricing class, uh, which has its own price book. Discussions gross profit dollars per mandate or gross profit dollars per hour.
Okay, we’re per crew day or however you’re looking at it, right? But it’s based on, you know, achieving gross profit dollars, which is making sure that they, they cover overhead. That’s fine. Ruth King, she talks about net profit dollars per hour, uh, and that’s a great, uh, approach for your price book as well. Then there’s dual overhead as well. And then there’s the single overhead factor.
All of them, you know, kind of come in pretty close to one another to achieve the objectives and making sure that you’re addressing overhead and, and how it varies with labor. And so that’s the key. And so I’ve had, you know, Ruth King, Dick Harshall, uh, Tom Grandy. Ron Smith, Gary Elekes, and a handful of other trainers, coaches, and consultants over my career, uh, as well as service experts.
When I worked for that, the flagship company, Roland J. Down, in Schenectady, Scotia, New York, excuse me. Uh, this was the, you know, the, the process that they followed, as well as, uh, our ACCA mixed group back at Cameron Sons days, all the way through the utility and service experts days, you know, as well for their price book. And that’s how we work with our clients today for our price book.
So this is a discussion about that strategy. And I get into showing you again the high labor and low labor job. And then I give you a discussion about the findings of all of the strategies. And then we get into a discussion of, let’s go ahead and take a look at an actual example of a job. And we look at an AC and a coil.
By itself, as in a furnace by itself, and we kind of break that all down so you can kind of see how we get to a price, a price down there that when you add the price for the AC in a coil to the price of the furnace, it’s going to be close to 12, 000 to the customer, even though this cost structure is a little dated, uh, the pricing structure is a little dated as far as the actual numbers of the equipment for the equipment.
Uh, you’re going to get the idea and the concept. But the gas furnace and AC put together creates an economy of scale and savings that we then pass along to the customer. As you can see here, we save the customer about 2, 000. It’s no different than being on a service call, right? First task is one price.
All other additional tasks are a reduced price because you kind of covered the overhead nut, you know, once you got there. You know, basically pass those savings along to a customer. The more work we do while we’re here, the more we save you. And that’s the idea behind selling components versus complete systems.
Customer saves money, beats inflation, gets a better result, matched technology, matching warranties and guarantees as well. And so that kind of discussion is talked about there in those tables and charts, as well as through the documentation there. And then the findings are kind of discussed here at the very end.
And, uh, we then kind of talk about Uh, our discussion, our belief, and our philosophy in that we don’t discount and why we don’t discount. Now, you’ve heard me talk about that in many other sessions, so you can read through the material. Hold the line on the pricing unless you have promotions out into the market.
You can certainly enhance the value, but never discount the price to meet somebody else’s, uh, you know, price, uh, because then you look foolish and arbitrary. And again, even you don’t think you’re worth what you’re charging. So there’s some discussion on that. And there’s some, uh, you know, pulling it all together.
Uh, so it kind of talks about how we pull everything together. And that kind of takes you over into more of a conversation about sales. Uh, there. And then we get into a discussion about, um, a complete solution and utilization of the tool and how it kind of all comes, culminates in the utilization of a tool.
And again, you’re going to get the tool in this arsenal of resources that we’re talking about. There’s a discussion of, uh, expensive versus cheap, you know, as well. You know, and, and when you think about premium products, they’re premium for a reason. And they tend not to drop prices at all. I mean, I don’t know any of these players that drop prices.
You know, I don’t know. What Walmart is, again, the low price leader in the market. Zenith became the low price leader in the market and went out of business, right? Because they kind of, you know, were the premium television at first. They were actually the television at first. Now, Samsung kind of owns the market there, right?
And then you have these guys who are kind of posing as a premium product, if you will, but they are a premium product of a Economy product. They’re just not as luxurious as a true luxury automobile, uh, line would be. And that’s kind of the discussion there. And Cadillac used to be considered a premium product.
I think to some extent still trying to price themselves that way, but I think they’re fighting for market share and it just doesn’t exist. So I think you have to kind of decide who you are. And I, I wrote an article years ago and there’s some video on it. You can search this on the EJI website. Are you a Neiman Marcus or Walmart contractor, you know, thinking in terms of department stores?
I don’t care where you are. The idea is, is the middle of that is going to be very crowded, right? With everybody else. Macy’s, Target, Kohl’s, all these other players that are out there. And then unfortunately, most of them kind of go out of business and struggle because they’re all fighting for the same market share.
But there’s very few premium providers and there’s very few, uh, you know, low, low cost providers. In fact, low cost providers who come up against Walmart all go out of business. Every department store has. It’s. It’s. It’s. And most of them will. And in the same holds true in the contracting world. And again, the idea is to stay in the business, uh, you know, just be able to serve your customers in the longterm.
So profit, like I said, not a bad word. It’s a good word. Just don’t try and make it all on one particular customer and don’t play games with prices and, and, and tell yourself stories to justify that. Right? So this is a conversation about that because the idea here through this pamphlet is that this supports the tool.
And I want you to understand the psychology and the philosophy behind the utilization of the tool. Again, we can all buy, you know, uh, tailor made golf clubs and Titleist balls and foot joy, uh, you know, clothing, but none of us are going to go out there and play around the golf like, you know, Tiger Woods, uh, Phil Mickeson.
Uh, or, uh, Roy, Roy McIlroy, right, because it’s about their ability to make the golf shot. So it’s not about having a price tool. It’s about how you use the price tool and understanding why the tool is what it is. Making sure that you’re a market leader, not a price lemming, because again, you don’t want to chase people to the bottom.
The race to the bottom is crowded. And again, there’s a lot of wreckage out there. So making sure that you understand the difference in the conversation between price, investment and value. As well as, you know, how low initial price, highest cost of ownership, highest initial price tends to be the lowest cost of ownership in the long run.
You get what you pay for is kind of really the discussion here. Now, lowering rates in your price book does not basically raise the benefits of the value in the customer’s mind. It actually does the exact opposite. You lower the price because you actually only believe you’re worth that too. Now the customer basically says, you know what, I won, but I’ll probably never do business with you again.
How do you basically change that? Okay, you hold the value, you increase the value by increasing benefits and reducing risk. That’s kind of the idea. People are not price sensitive as much as you would think, they are risk averse. And so this conversation here on this page talks about that. And so making sure that you’re kind of balancing that price benefit, if you will, really heavily on the benefits so that you outweigh your price, if you will.
Make that price right. And, uh, we get into a discussion about all of that with the idea being is I want to take what we offer and turn it in from a need to a want to a must have because that Frank Beck, uh, that’s the philosophy that Frank Becker had, uh, in his book from 1937, 1947, how I raised myself from failure to success and selling.
And he basically said, when you show a man, and I would say, when you show a person what they want, they will move heaven and earth to get it. And so kind of keep that mindset out there right now. All that being said, you have a little bit of information about me since I put together the packet, but you can have all my contact information about this pamphlet as well as all of the tools within this arsenal of resources I provide this to you because as a member, I always say you’re the mission and I want you to be able to get ahold of me if you have any questions about this content or any of the other content that I’ve put out there for EGIA as well as EGIA.
Particularly in this arsenal of resources, because it’s really important that you truly understand how to utilize these tools and resources as well as make sure that your people understand how to utilize these tools and resources is not buying the golf clubs and the golf balls and the clothing, right?
It’s about your ability to execute the golf shot. Right? It’s not about having the price book tool in the home. It’s about your ability to utilize it and communicate it and communicate your company’s value as why your prices are what they are. Here’s the thing. I’m never here to sell any customer anything that they don’t want, don’t need, can’t afford, doesn’t make sense.
Okay? We wouldn’t be in business and stay in business if we were overcharging people and ripping them off and not providing them unsurpassed value and as well as peace of mind protection. See, it’s my job to teach customers how to buy, where value comes from, and how to select a contractor. At the end of the day, that’s what the tool is designed to do.
Get yourself, get yourself out of your way and out of the customer’s way so that they choose to do business with you versus choosing not to do business with you. And so that’s the pricing for profit module, uh, pamphlet, if you will. And it gives you the overview of the psychology and philosophy behind all the other tools in this arsenal.
So make sure you dig through this, you read through this and understand it so that you understand why the tools are the way that they are and how we get to the end result of the investment guy and then how to utilize that in the home until next time.