Construction Pricing Strategy for Your Business
Developing a profitable construction pricing strategy involves more than calculating the costs and applying a markup to those costs. You need to understand how your customers think about your price in relation to not only the services you offer, but also what your customers may think about you competitors’ prices. As Alex Birkett states in his article “How to Increase Perceived Value (and Charge More),” studies have shown that you can increase your product’s perceived value without actually increasing its objective value (costs included in making it). You just have to change people’s perceptions. A similar study by Stanford and Caltech found that increasing the perceived price of a bottle of wine increased the actual and perceived enjoyment that the tasters derived from drinking the wine. That may be fine if you are selling wine, but you own or operate a construction business. Your business is vastly more complicated than selling fermented grape juice. In this article on FineHomebuilding.com, I show how you can perform fewer projects and make more money over a given period of time. But this construction pricing strategy will fail if you only raise your prices. You have to change the level of service that you provide to the clients who are willing and able to pay for your value pricing. You are going to have to implement some systems that deliver the value you are selling at every step. As the article states:
“…in order to sell your value instead of your price, you can’t just double your price. You have to be willing to make two operational changes.”
CONSTRUCTION PRICING STRATEGY OPERATIONAL CHANGE #1Here are some examples of the systems you will need:
- Client prescreening/qualifying process
- Communicative sales process or funnel
- Comprehensive planning and design process
- Accurate and timely proposal/quoting process
- Project scheduling procedures
- Contract execution and invoicing system
- Change order and document-control system
- Production/operations procedures
- Project marketing system
- Warranty program
CONSTRUCTION PRICING STRATEGY OPERATIONAL CHANGE #2Increasing your available time to deliver this level of service is the second and equally important operational change you need to implement. This should be simple to do. Notice that I didn’t say this would be easy. Change is never easy, but it can be simple. Now that you have created time in your schedule to focus on fewer, high-paying clients, you can spend less time running around trying to manage more jobs with lower margins. You can focus your attention on fewer jobs with higher margins, and you can afford to spend some capital (both financial and mental) on your clients. For example: (Financial capital) You can pay one of your employees to show up early to meet the plumber, or stay late to make sure everything is organized and locked up. (Mental capital) You spend some time in the early morning hours planning so that you and your team are clear on the objectives for the week. (Financial/mental capital) You can afford the time to stop by the florist and pick up a bouquet of flowers for the client along with a nice handwritten note expressing your gratitude for that client. (When was the last time you did this for your clients? Why not? Probably because you just didn’t think about it. Now you can think about this kind of stuff because you have more time.) Making these changes in your business is not completely self-serving. Your clients want to feel good about the purchase they made. When you deliver on the value that you sell by making the operational changes listed above, your clients will love you for it. Create this kind of experience for your clients by charging them more. You’ll both be happy that you did.
TESTING YOUR CONSTRUCTION PRICING STRATEGYDeveloping a pricing strategy that works for your company and your clients is an iterative process. You should test and evaluate as often as possible. You may want to gradually increase your pricing over time as you develop the systems listed above. Also, this concept may not directly apply to all your clients and for every type of project. But developing a strategy that sells value over pricing is a pricing strategy that will ensure your company’s focus remains on delivering the best customer experience.
Shawn Van Dyke is a construction industry consultant, business coach, and mentor to skilled trade business owners. He is a Brand Ambassador for Fine Homebuilding, travels across the US as a keynote speaker, seminar presenter, and the author of The Paperwork Punch List: 28 Days to Streamline Your Construction Business. Contact Shawn to have him speak at your event or invite him to train your team.