Pricing Strategies for Small Business. Andrew Gregson

so the pricing structure can get skewed. As a rule of thumb this method has its uses, but as a backup to any other method of estimating rather than the entire methodology. In other words, if your detailed method and the 1/3 method give the same answer, you can be reasonably certain that your pricing is near enough to the correct price to prevent any nasty surprises.

      The STICK method is the name given to the clumsy and time-consuming method of working out the cost of each and every nail, foot of strapping, two by four, pot of paint and labor to the nearest 15 minutes to arrive at a total cost. It is very intensive and does not produce a better sales response from customers. In fact, the delay in getting quotes back to customers can be the sole deciding issue in whether or not your company gets the job.

      The STICK method is, in fact, an adaptation of industrial manufacturing cost accounting methods to the businesses of service providers and custom builders. It can take place on paper, and I have also seen some very elaborate spreadsheets meant to cope with a vast amount of information. The advantage to having gone to the trouble of detailing every aspect of this “virtual build,” is that if and when the customer says “Okay,” you have a bill of materials for the purchasing department and a detailed plan for the carpenters.

      There are two principal disadvantages to the STICK method. First is the speed factor. If you are an estimator for a home renovator for example, you must make at least two visits to the site and perhaps several phone calls before you have an answer. And there is always the feeling among business owners and estimators I have talked with that some estimates are just a waste of time, but they must go through this drawn-out procedure just because they were asked for a quote.

      Second is that, having committed so much time and effort to the quote, the price is not easily altered to reflect customer expectations. In other words, if the quote is $7,000 and the customer’s budget does not extend beyond $5,000, you cannot easily and quickly find the savings to meet the price expectation. There is simply too much information to alter the quote simply and easily. The only line item that can easily be altered is the bottom line, and doing so may mean the job makes no money.

      Estimating Solutions

      Estimating software

      There are an increasing number of industry-related packages for estimators. Many of them utilize the power of computers and spreadsheets to manipulate large quantities of information without error. This is the STICK method on amphetamines.

      The best place to look for packages is in trade magazines and other publications. If you choose this approach to doing estimating systematically and correctly, it is always good practice to have a test run of the software: Entering data from an existing quote to see if the numbers work. Beware country-specific programs that do not allow for certain taxes.

      If the software is truly sophisticated, then it will also create a bill of materials for your purchaser, saving you hours of time.

      Estimating books — OEM and industry service providers

Significantly, there are companies that provide estimating in a more packaged form that gets the final number quickly. The one with which I have a working familiarity is focused specifically on the construction trades.^[3]

      They have created formulae into which you plug the square feet, height over normal, number of windows and/or doors, and utilise either economy, medium, or high value materials. In a few minutes, out pops a number which is then multiplied against a regional factor to arrive at a selling price. It keeps track of cost differentials through regional surveys which translate to a factoring number that you plug in to give a final price.

      Similarly, the auto-body industry gets books from the manufacturers detailing how long it will take for a fender to be straightened or a side panel to be hammered out. From this it is easy to determine what your costs are going to be and to apply a markup factor. Typically, the auto-body people use this information to apply standard rates and then encourage their technicians to improve upon those numbers. If they accomplish in 24 hours what the book says will take 32 hours, the price does not change but the costs do.

      If your industry has a guide like this, get your hands on it and use it as a guideline to keep your costs and pricing under control. When price and costs are under control, you can play with them to find higher profits, and teach these methods to business partners and employees. The value in the business increases through having these systems in place.

      DIY (Do it Yourself) Estimating

      You can do it yourself. If the industry you serve has no package to offer you, you can create an estimator package to standardize your costs as follows:

      • First list all of the steps in the information gathering stage. What are the types of material, size, finish, and availability? List all the extras. What does your customer expect?

      • Then list how you currently price jobs focusing on the steps that must be taken. Do you always strip the roof before installing new tile? Do you always begin with cutting the pipe into 12 foot lengths? Do the raw materials always have to be sandblasted first?

      • Apply costs to each step.

      • Apply your markup factor to get to a selling price.

      • And now the most important step — the virtual trial run. Review previous jobs that worked out well and where you made money. Punch in all those numbers.

      All these steps could be taken by a software developer and can be incorporated into a spreadsheet program or kept on paper.

      Now comes the hard part. As you use the paper system or the spreadsheet, you have to review and refine and update as you go. If you find that allowing 45 minutes for sandblasting is too little now that old Fred has retired and young Tom is doing it, then you have to change the value for the minutes or risk losing profit. As the price of material changes or new methods or equipment is used, the procedure will need to be renewed. This is, in effect, the SWAG method perfected, because you are reusing a body of knowledge and information, then you are building and adding new factors to it as you go.

      For an example of creating a DIY estimator for your business (first stage estimating guidelines for a roofing company), see Table 7.

       Table 7: DIY Estimator

      The Trap of Customer-Driven Pricing

      So, should the owner just ask the customer what he or she wants to pay for the product or service and then sell it at that price? No. It is wise to pay attention to customers but unwise to be swayed by anecdotal evidence, even if it is firsthand. Only numbers count and having the statistical evidence to back up customer comments is the only valid method I know.

      Suppose you invent a nifty new technological solution to a computer-networking problem that plagues most small companies. Should you decide to take this “magic widget” to the market and ask customers what they will pay for it, you will get a wide variety of answers from zero to hundreds. After all, the customer has never seen anything like it before. How do you price it using the concepts we’ve discussed?

      This example is laced with a key misconception. You are not selling the widget, you are selling the solution. And if the problem your widget promises to fix amounts to hundreds of dollars worth of frustration, downtime, and lost productivity every year, then the widget sells for a multiple of that number regardless of its production cost.

      Just asking what the customer would be willing pay for the item is not enough. As a wily business owner, you must know what problem the customer is buying your product or service to solve.

      Again,