The art of offering shockproof prices
As commercial designers, we’ve all been there. The day has come to close the sale. Everyone knows the purpose of the meeting, including the client, the management team and your colleagues. The stage is set. The proposal includes cabinets, counters, hardware, lighting, plumbing fixtures, appliances and labor. The proposition consists of the company’s desired goal of a gross profit with a margin of 42%.
All that remains is to review the final price, sign the contract and write the deposit. Oh Happy Day.
So it happens. A detailed price for an item is questioned. The customer reveals that in their research, the same product on your quote is available online for much less. It gets more intriguing; the same product is open to anyone with online access at less than your cost.
It is a dreaded moment and the situation spirals out of control. The internal murmur in your head begins. “Will the customer start questioning other prices on my quote? Have I lost their confidence to deliver their project on time and on budget? Did I lose the sale because of this perceived price discrepancy? »
This situation is avoidable by implementing an anti-shock pricing strategy in your sales process. This strategy is the armor to ward off pricing issues and build on the connection, rapport and trust you established at the start of your relationship with the customer.
The basis of a shock strategy is knowing your organization’s correct pricing formula. And to determine gross dollar profit and margin percentage, the business must (a) fund all overhead costs, (b) pay market salaries to stakeholders, and (c) fund the desired net dollar profit for the year.
The easiest way to determine the required gross profit is to establish an appropriate annual budget. If done correctly, this exercise will provide a business with an accurate gross profit margin necessary for the business, essentially the roadmap for pricing all products and services, turning your business into an engine of wealth.
With a pricing formula established and the company knowing the gross profit dollars needed to meet its financial goals, it’s time to implement the shockproof methodology. Developing this strategy begins with understanding the psychology of consumers buying numbers that make sense to them – and the art of weighting cost areas they may know something about and weighting areas that are less known, such as cabinetmaking and installation, the latter of them. which requires a high degree of skill for a beautifully laid out and long lasting end result.
Most dealerships sell to different markets or offer different products and services. Thus, other mark-ups may be necessary depending on the expected commercial composition. As a consequence of the budgeting process, this methodology of establishing different pricing strategies for various market categories is known as Price segmentation.
With price segmentation, each category must contribute gross profit dollars to the overall need to fund a business’s burden, sales, admin expenses, other income/expenses, and desired net profit, as shown in the budget. By using other management tools, owners can ensure that, indeed, the required gross profit rate per market category is collected monthly.
A hypothetical reseller needing a 45% gross profit margin to meet financial goals should theoretically achieve that margin on every project after allowing minor slippage due to human error. However, they probably wouldn’t realize that GPM on all products or services without raising some consumers’ eyebrows.
Some products, such as appliances or plumbing fixtures, are more competitive. Today, Internet access and a Google search will provide a consumer with information that limits or hinders a dealer’s ability to use the same pricing strategy across the board.
A dealer should know their product line and the percentage of revenue generated by each offering.
The mix is sorted by actual products (i.e., cabinets, countertops, lighting, tile, plumbing, tiling, millwork) or broken down by market categories (i.e., kitchen renovations, renovations bathroom, other rooms, new construction, etc.). ).
Adjust gross profit margins
Knowing the gross profit needed to meet the company’s financial goals and the combination of products you sell with the total typical revenue generated in each category, you are now ready to adjust the margins in each group or classification.
In reality, consumers lean in and focus on the numbers that make sense to them, i.e. those where there is the most common knowledge. Understanding this psychology will help you in this next step of weighting gross margin by category to always achieve the overall GPM target required for your business according to the annual budget.
Consumers are much less shocked when they see prices that make sense to them or when they see prices that seem to match what they may be somewhat familiar with. If devices in your area are typically sold at 18% GPM, it doesn’t make sense to present a budget with devices priced at 45%. This will only raise red flags. Place a realistic margin on products you sell that are more competitive or easier to buy, and increase margins beyond what the business needs in less competitive areas that can bear the extra “weight”. Or, in these products and services, you can show added value, such as cabinets, tiles and lighting.
Design development costs
Slippage – the difference between estimated costs and actual finished costs – often occurs after a project is completed and costed. To protect against slippage and as another shock pricing tool, consider incorporating a design development or design management fee into your estimates. Unlike project management fees, design fees assign fees for services that you may have included for free in the past.
Do you offer services that include providing centerlines for plumbing, electrical and HVAC contractors? Or visit the site during installation to ensure proper execution of the design? Are you there to answer manufacturer questions when countertops are measured to ensure proper fit and finish of tops?
Introducing a design fee of 7-12% of an approximate selling price allows the markup of more price-sensitive items to be freely adjusted without sacrificing the overall GPM percentage desired by the organization for each project.
While some trial and error may require finding the right balance, implementing a shockproof pricing strategy puts the sales designer firmly in the driver’s seat. Consumers can still buy numbers that make sense while protecting the margins the business needs to succeed. Shock-proof pricing can sell more jobs, protect against slippage, create happy customers, and get the business to the bank. ▪