Tips for Territory Managers – Are Your Dealers Pricing their Projects Correctly?
Territory Managers are consistently faced with ongoing objections to price increases due to skyrocketing inflation. With new SEER2 regulations staring at us in 2023, overcoming those objections will continue to get even more challenging.
A key component for a territory manager is understanding how your dealer prices jobs, particularly in the area of residential replacement. For example, most dealers price jobs on what we call the divisor method. In this system, the dealer takes all the direct costs associated with the job and uses a formula of the job cost divided by 1- (desired gross profit). For example, if job costs are $8000, with a desired GP of 40%, the formula would be ($8000/.60) which would produce a sale price of $13,333.
There are two issues with this type of pricing system:
1. It does not account for jobs that take more than one day because it does not consider the total company overhead that must be covered on the second day of the job.
2. As direct costs to the dealers continue to rise, or the job is sold with high-efficiency equipment, which carries an even higher cost, it is quite possible that the dealer has priced himself out of the job.
An alternate method that is taught by our trainers at Contractor University is gross profit per crew day. In this system, the dealer calculates what the overhead per day is and then sets a desired gross profit for the job. This allows the dealer to cover company overhead on multi-day jobs as well as keep the sale price more competitive.
Let’s use the same example as above with an $8000 direct job cost for a comparison, with a sale price of $13,333. If we assign an arbitrary number of $1500 per day as overhead, our net profit would be calculated as follows:
Sale Price: $13,333
Direct costs: ($8,000)
Gross Profit $5,333
Overhead ($1500)
Net Profit $3,833
At first glance, this job looks good, bringing in 28.7% net profit. However, the question arises, “can I actually sell this for $13,333?”
In addition, if this were a 2-day job, we would have to add an additional labor cost (part of direct cost) for the second day – say $500 crew labor – as well as the overhead for the second day ($1500). So that is $2000 that is deducted from the net profit which would then make the net profit $1833. If company overhead were higher than the arbitrary $1500, the net profit would shrink even more.
Conversely, under the GP dollar per crew day method, the sale price is determined by what we have to charge based on covering costs and not by a multiplier.
For example, if the dealer determines that the overhead per day is actually $1500, the dealer can then back into a competitive sales price by setting the GP$ per crew day. Let’s just set the GP$ per crew day at $3250 for a comparative example. Here’s how this job would look:
Sale Price: $ ?
Direct costs: ($8,000)
Gross Profit $3250 (pre-set crew day)
Overhead ($1500)
Net Profit $1750 (pre-set)
Then we simply add the GP of $3250 and the direct costs of $8000 for a sale price of $11,250.
The beauty of this system is it takes the guesswork out of whether or not the dealer is profitable on every job as well as being more competitive. If this were a 2-day job, we simply add the second crew day of $3250 and any additional labor to the price to cover the second day. This allows the dealer to be confident in pricing multi-day jobs.
The takeaway for a territory manager is to expose your dealers to another method that will help them be more competitive in selling high-efficiency and multi-day jobs and still maintain profitability.
For more information on this topic, refer to the videos and documents located in section 5.1 of the Resource Library located at mycontractoruniversity.com mycontractoruniversity.com
