When Crap and Choices Collide
Last week I got a chance to put to use what I’ve learned from Dave and what Ira Glass shared with us in my last post.
In business you get to make choices every day that steer your ship. Some of them end up making you money and some of them have the potential to cost you money. It’s not always a very clear decision.
I’ve spent most of the last two years trying to fine tune my pricing. Most companies in my industry (service and manufacturing) aren’t real scientific with their pricing. Now, I’m talking about small manufacturing companies like all the cabinet/countertop companies in the area. If you are a Mary Kay salesperson or maybe own a small collectibles shop it’s not too tough to decide how to price your products. You know what you’ve paid for your products and you just have to decide what margin you want to make and you just tack that on. That doesn’t guarantee anyone will purchase your products but at least if your sales are low you can adjust your margin and see if your sales activity go up or down. You can keep doing this until you find the sweet spot.
Most business in my industry don’t price their work this way. It’s not very easy. You have to figure out ahead of time how long a job is going to take in labor and materials and add your margin on top of that. It’s taken me most of the last two years to to get my pricing as accurate as it is today. Whether it’s cabinet installing or countertops when I bid a job I figure out my labor hours and materials cost and multiply that by the margin I want to make on that particular job and that’s how I get my price. Before, I would just charge so much per part that we had to handle or so much per cabinet. This worked okay but it still wasn’t based on exactly how much expense I would have in that job. I’ve even been advised to just ‘add thirty percent to every job and ‘hope’ to make a profit at the end of the year’. I can’t believe someone told me to do that. That’s pricing your product by the ‘guess method’. That doesn’t sit very well with me at all. I’m done guessing. I’m ready to actually aim at something specific and try with all my ability to actually hit it.
How does this tie into the ‘Choice’ concept from Dave? Well, I’ve chosen my profit margin. I’m not willing to deviate from that number on purpose. Now, I may misfigure a job or run my expenses so tight that we could miss our margin target but at least I’m intentionally aiming at something. I’ve also chosen to believe all the experience I have in this industry and I can trust my judgment on how long something is going to take. Once you’ve picked your profit margin and decide to live by it you have to actually focus on the rest of your business. You have to focus on your effeciency. You have to focus on your customer service and customer satisfaction.
Now for the ‘Crap’ side that we learned from Ira in my last post. This is where I ran into trouble last week. I got the chance to bid a very large project. This project is worth thousands in revenue. The problem is that someone undercut my price. They didn’t just undercut me slightly either. You see, if I lose a job by ten to twenty percent then I can go back to my numbers and see if I can trim something or if maybe I overestimated how long the job may take. No, I got underbid by fifty percent! Well, for someone to underbid me by that much is a warning flag to me that this other operation has underestimated the complexity of a job. They aren’t very likely to make money on this work. The money that the do make will be short lived as they get their 1099 at the end of the year and have to pay an extra seven to ten percent in taxes. I probably won’t have to fight them next year that’s for sure. This project turned into crap that I had to kill. I made a decision that I wasn’t going to get into a bidding war with this operation. I knew what I was going to have to charge to make a fair profit on this job. Getting underbid by that much told me this whole situation was crap and it was okay to walk away from the fight.
That’s one thing I’ve learned to accept this year. I’m not going to be cheaper than everyone else on every job. Between my dad and I and all my installers we find ourselves with over sixty years of experience in this work. I’ll trust that experience over some other two-man operation whith obviously little to no experience. I labored over this decision for a week. I finally realized that all I can do is just give MY best price. I can’t control whether or not my competitors make smart decisions. I have to believe in the choices I’ve made for my company. Eventually you have to decide that there’s more to your company than just price. You are never going to win in the long run if you are going to spend all of your time trying to be the cheapest. That’s a battle that no one wins. It’s my belief that you win in the long run by building your reputation beyond price. How else will you be able to bring in new products and services if you haven’t proven that you can provide your current products and services above and beyond just a fair price? No, you have to be good at every area of your business if you are going to build a world class company.