The Perils of Comparative Pricing
Far too often I encounter landscape contractors who base their pricing on what the "going rate" is. This usually sounds like, "Hey, how much are you charging per square foot for pavers?". Or maybe, "How much should I charge per zone for an irrigation system?". This is what I call 'Comparative Pricing'. This is pricing your work based upon what others are charging. And it tells me a very important fact about that operator's business. It tells me that no matter how skilled they are at building things, they have no idea how to run a business!
No matter how good you are at what you do, if you want to become successful you must understand and master your business.
Think of your business as a machine or a vehicle. You provide it fuel in the form of sales revenue, steer it in the direction that you want to go and, so long as everything works well, you arrive at your destination; payday! Sounds simple, right!?!
But all of your competitors are also bidding on that same work or job (sale, client...revenue). And each one has a different vehicle (Business model). Some are highly efficient, some are broke down jalopies. If you are basing your price for the job on what others are charging then you might be forgetting what you are driving.
For example: If you have a decent truck that gets 10 mpg and you need to go 200 miles and gas costs $5.00/gal, it will require 20 gallons of gas to get to your destination. At $5.00/gal that is a cost to you of $100! or .50 cents a mile. Now if your competitor has a more efficient truck (business operation) that gets 15 mpg it will require them to expend 13.3 gallons of gas to get to the same place an at $5.00/gal that works out to $66.67 or .34 cents a mile! So your competitor's total cost is about $33.00 less than yours!
If that competitor charges $0.39 per mile he is making $78.00 dollars and his costs are $68.00 and his profit is $10; that's a 15% profit! Now if you base your pricing on his business model and charge $0.39 per mile you will make the same $78.00! But, your costs (due to your inefficient business model) will be .50 cents per mile x 200 miles or $100! And you have charged $78.00!!! You just lost $22.00!
See how this works?
Every company is different. You MUST understand your own company's particular costs of doing business. If it is not competitive then you will have to find a way to make your company more efficient. But, if you base your pricing on what others are doing with no knowledge of your own business costs, you a just rolling the dice and hoping for the best.
I hope that you do not end up the broken down truck! Spend some time to wrap your head around the machine that is your business and make it the highly efficient vehicle that will take you to success. If you need some help, let me know.