Richard W. Harshaw
It happens every once in a while. It has happened in Phoenix where I live. And it may be happening where you live too.
We are entering that in-between time of year—between the hustle and bustle of summer and the frantic calls for heat in the winter—we are entering Autumn. And many contractors at this point scramble to find enough work to tie them over to the greener pastures of winter.
So about three weeks ago, a large local contractor began advertising new 3-ton heat pumps on the radio. The ad describes how the homeowner can get a good system, a 3-ton heat pump, SEER 14, for only $97.90 a month for 180 months.
Wait a minute—that’s fifteen years! Most heat pumps out here don’t last that long! In fact, payments of $97.90 a month for 180 months means that this 3 ton “builder’s model” heat pump would set you back $17,622!
Well, not to be outdone, a rival contractor began advertising a 3-ton heat pump system by a well-known manufacturer with a 12-year parts and labor warranty for only $9,800.
Then the third mole popped his head out of his burrow and said that for a limited time, customers could get a 3-ton heat pump installed for $5,795, which is 25% off the normal price of $7,730.
I can’t wait until Bubba advertises next week that he will pay YOU to buy a 3-ton heat pump…
Now, let’s take all this nonsense and run it through that 2% Romp Spreadsheet I wrote about in my last column. (And if you just sat around all month and thought about requesting a free copy of that spreadsheet in either Excel or Numbers format but just did not “get around to it”—I have good news for you. Here is our Round Tuit.
Drop me an email requesting the 2% Romp and what format you want it in. Email me at Rharshaw2@cox.net. And thanks to the late Zig Ziglar for the Round Tuit idea.)
Ok, back to our movie.
I’ll be modeling a company that does $1.55 million in sales a year, with direct costs of $1 million, overhead of $480 thousand, and net profit of $62,000 (4%).
Let’s call this contractor Roscoe. Roscoe normally sells his 3 ton 14-SEER heat pumps for about $9,500. He has just presented just such a package to Mr. and Mrs. Pollywogger, whom he really likes—a pleasant elderly couple who gave him a freshly-baked chocolate chip cookie (his favorite) and cold milk midway through his presentation. The Pollywoggers smile and nod at each other, then Mr. Pollywogger frowns and turns to Roscoe and says, “Roscoe, we really like you. Of all the people who have come out and talked to us, we like you the most. But frankly, the other guys are under your price, and quite a bit. I’d like to give you the go-ahead on this job, but need to you come down to $8,800. That puts you in the ballpark with the other guys. You’d still be higher than most of their bids, but more in line with what we can afford. What do you say?”
Now Roscoe is not the brightest bulb in the chandelier. He has not been to Jim Hinshaw’s sales classes and so does not realize that if you change a quoted price, you need to change the quoted package. So he rubs his chin while thoughts race through his mind like top-fuel drag racers. He wrinkles his nose, cocks he left eyebrow, and then says, “Oh, what the heck! Sure, I can do it for that!”
And Mr. Pollywogger and Roscoe shake hands, then sign the contract.
Now, what just transpired? Roscoe blew his foot off! And his leg up to the knee too.
Here’s why. I’ll set up the 2% romp with the financial data for Roscoe’s firm, then scale it back to a $9,500 sale. Since $9,500 is about 0.6% of his total sales of $1.55 million, we’ll scale back the direct cost and overhead by that same 0.6% figure. So I will enter this data in the 2% Romp:
(Note that the “One Sale” column is not in the 2% Romp you’ll get from me. I have added it to this picture to save some time and space.)
I now go down to the worksheet area and make the following entries, using a sale price of $8,800 being a 7% discount:
Roscoe’s heart just cost him $223 in losses!
How many jobs would Roscoe need to sell at this lower price to break even? Roscoe can adjust the blue number for “Change” in the Volume column until he gets that -150.45% at the bottom of the Pricing column as close to 0 as he can get it—in other words, getting back to his original financial condition.
Ready for this? Read ‘em and weep:
Roscoe would have to sell 36% more jobs at this discounted price just to get back to his original profit position.
Now I am not saying you should never negotiate on your price. I was a contractor once myself and understand the psychological pressure this business can create sometimes. There may be times when offering a customer a discount to lock him or her in makes sense, because it takes money to gain a new customer through advertising (up to $300 per lead and as much as $1,000 per sale!).
Of course, referrals don’t cost you anything—but you have to be impressive enough for your existing customers to brag to their friends about you.
What about giving customers a discount (say, 10%) on parts and labor for service agreements? I am not opposed to that, because it can be costly to land a service customer through advertising, but just remember—by giving back 10% on parts and labor sales on service agreements, you are probably giving up most of your profit on that service agreement too.
Final word? If you have to drop a price to win a job, that’s your call. Just know what it will cost you in the long run before you ram your head into that brick wall.