Through working closely with fence contractors, general contractors and dealers over the years, I’ve seen one issue come up repeatedly for construction business owners: getting the balance between pricing and profitability right. You must remain competitive in the market while still offering prices accessible enough for your customer base. You need to pass rising costs onto your clientele to stay profitable, but you can’t afford to alienate those same folks. How does anyone successfully achieve this delicate balance?
Fortunately, there are ways. If you’ve felt the squeeze of increasing expenses, extended lead times and slow permitting, while fielding calls from customers who are disgruntled about your pricing changes, you’re not alone. Here are six proven ways to stay competitive while maintaining profitability — and keeping your customers happy.
1. Account for Eventual Price Increases Early & Often
One of the worst ways a contractor or dealer can operate in the construction industry is with blinders on. Sometimes, this looks like ill-founded optimism. You’re hoping the market will right itself, so you just keep going with the day-to-day, believing everything will sort itself out. Other times, this is simply in the form of ignorance. Maybe your specialty is fencing and shutters, but you’ve never run your own business before. You don’t know what it takes to achieve profitability. Neither option ever pans out well.
Instead of these scenarios, go into your projects with your eyes wide open. Recognize that you, as a business owner, are going to face your own price increases. The question is when, not if. Plan ahead for these bumps in expenses and set the expectation that you will also have to raise your own prices in order to maintain your margins. Accepting that this is the nature of the business goes a long way in keeping you aware and prepared.
Along the same lines, realize that a homeowner or business owner typically considers the price you include in a contract to be a fixed price. Sure, you can try to get around this by including a qualifying statement about the possibility of material price increases. But your customer will still likely believe the price you’ve quoted is the price they will pay. As such, it’s critical you think ahead and account for potential price increases in the quotes and contracts you send out. That way, your customer isn’t going to be surprised — and upset — by hikes later.
2. Lock in Material Costs at the Time of Contracting
Delays are another reality in the construction world that can make achieving profitability difficult. When you have long lead times and permitting processes, you can easily end up in a situation where your material cost has increased from the time of your contract to the time of installation.
In addition to factoring the potential increases into your original quote and contract, you should take further steps to mitigate this risk. The best way? Lock in your material cost at the time of contracting by purchasing and storing the material. Or, if you’re not able to do that, at least make a deposit to hold your pricing. Good cash flow management like this can help you lock in higher profits and avoid the problems that come when material costs spike dramatically because of delays and long permitting processes.
3. Keep an Eye on General Market Conditions
In a perfect world, you’d be able to access a magic formula that would help you forecast the future of the industry with precision. In the real world, there is no such thing. Even so, this doesn’t mean you should avoid forecasting altogether; it just means you need to approach it a different way.
First, pay attention to what’s going on in the economy at large. What’s happening with the cost of living in your area? In the nation? What’s going on in the housing market? How has the price of oil (e.g., the price of gas at the pump) changed recently, or is it expected to change? Any of these factors can be indicators of potential cost increases across the board.
Second, tap into trusted industry resources. For example, if steel is one of the materials you use the most in your projects, there are analysts and economic authorities that regularly project where steel costs may be heading in the near future. You can’t get guarantees this way, but it can offer a window into informed insights so you have a rough idea of what to expect.
4. Protect the Customer Relationship
One of the most critical parts of the pricing puzzle is ensuring you keep your relationships with your customers intact. Raise prices too significantly, and you’re bound to lose customers. Raise prices too often and your client base is going to get irritated, if not downright angry. Raise prices haphazardly, and your customers won’t trust you.
As mentioned previously, the best way to protect your relationships with your customers is by factoring in projected rising costs prior to signing a contract. This way, you reduce the odds you’ll have to raise prices after you’ve already agreed to terms.
Another way to help customers is by giving them a window of time to lock in orders before you increase prices. If you know increases are coming down the line and will affect your own expenditures within three months, for instance, then you can give your customers a heads up and offer them a chance to place an order at the existing price in the next month. This is a gesture of goodwill and can genuinely help your customers better manage their own finances.
5. Ask Your Vendors Outright
Some contractors don’t think about this, but it’s perfectly acceptable and encouraged to ask your vendors if they expect impending price hikes. Sometimes, they may not know. But oftentimes, they’ll have an idea of what’s coming down the road. If you just ask, you’ll have a much better shot of properly planning your own purchasing and pricing, rather than being unpleasantly surprised.
6. Buy in Bulk
Last, but not least, have you considered placing bulk orders? While cash flow doesn’t always allow for this, the cost of certain hardware items utilized for fence and/or shutter installations, as an example, can be reduced significantly by buying in case quantities rather than on a job-by-job basis. This approach requires good inventory and cash flow management but will add profit to every job. Given that small to midsize contractors do more than 100 jobs per year, this can add up to significant dollars.
Final Thoughts
No one in the construction industry has a crystal ball about material costs and other factors that impact how you have to set your pricing. But you don’t need to know the future in order to set fair prices that protect your customer relationships and keep you both profitable and competitive.
If you remember that price increases will happen, factor them in before contracts are signed, watch the market, put your customers first, ask for information and consider buying in bulk, you’ll be well on your way to mastering the balance between pricing, profitability and pleasing your customers.
