Price Risk
Price can be quite an issue and you can feel understandably pressured when someone else comes in much cheaper than you for the same job.
Now, when two people or two businesses quote for the same job and come in at very different prices in my experience, something gives, something’s not right. You guys mostly are charging similar rates. You’re honestly paying people similar hourly rates, insurances, and for your materials. So if there’s a big difference (I’m not talking a small difference – that’s price competition), but if there’s a big difference which is really what we’re talking about here, something usually gives.
I’m Zoltan and I’m a business adviser. I run CFO@CALL a business that helps with Cash Flow optimisation so you can scale and grow your business. I run the Business Navigator Program for tradie business owners, looking to grow and scale from small and informal to larger, sustainable, and structured. All this whilst making enough money on your jobs to sustain all this structure, people and the moving forward sensation. And enough people working in it so that everyone’s having a nice time, besides you need the margins to be able to do that.
Price vs Risk – Cheap Tradies or Expensive Tradies?
This blog is about one small piece of that puzzle and it’s about resisting price pressure which is one of my favourite themes. I’m a big believer that you must make enough profit in your jobs to build your sustainable business. However, part of that is resisting downward price pressure from your customers or indeed from your competition.
One part of that is understanding and acknowledging that pricing and risk are very closely entwined. Generally speaking, if the price goes down, the risk for the customer goes up. Now, this is specific to trade businesses. This is usual but if something is much cheaper, I’m thinking something gives.
Characteristics of the Expensive Tradie
You’ve all come across a larger business with more overheads paying for more stuff like:
- Safety
- Vehicles
- Premises
- Insurances
- Admin staff
Characteristics of the Cheaper Tradies
Obviously, the expensive tradies has to charge more than a one-man-band operating out of the back of his car. But that comes with the risk too. A Sole Tradie can be cheap but he or she’s more risky. More likely:
- They won’t still be there in six months or a year,
- Are under insured or not insured
- If he or she does a poor job and you need to come back to him, they will fold his business rather than pay
- They don’t have the resources to fix something up,
- He or She doesn’t have the resources to do a good job
Many other things could go wrong with the customer’s project that perhaps they can’t foresee. I want to explore those things.
Let me start with an assumption that your business is the first one. I mentioned a bit bigger or heading to a bit bigger where you’re starting to have or consider having:
- Admin people
- Premises
- Factory
- Proper insurance
- Proper safety systems to be in place
- Look after your people.
- Pay them properly and appropriately and to the law.
- Build your jobs properly and do work that you’re proud of and do a good job for your customers.
If you’re not those then, this is meaningless to you. But if you are those and your competition is those who sometimes don’t do it properly like you do, then that’s the conversation we’re having today.
3 major places that risk shows itself
1. Organisational risk
If you’re smaller or cheaper – competitor is a smaller cheaper organisation. They:
- Probably don’t have the right insurances
- Might not be around for so long
- Are possibly be taking shortcuts with safety
- Could be paying less money to cheaper labor than your expensive educated experienced professional trades people.
All of those are things that can be risky. All of those things that can lead to your customers, having a poorer experience with their job. So your customer is wearing the risk by going with the cheap tradies and that they have a shittier time.
2. The solution risk.
- Are these people going to do a good job?
- Are they cutting corners or making more mistakes?
Lots of mistakes and problems in the construction industry can be hidden. And they don’t surface till much later. If you build it and didn’t have longevity or your tradesmen didn’t have a longevity, there’s no comeback. That’s a risk that your customer takes.
3. Pricing and cost risk.
- Is the other quote for the same job that your quote is for?
- Are they doing it to the same standard?
- Did they forget something?
- Have you made a mistake and charge too much?
But mostly:
- Did they forgotten something?
- Are they missed out something crucial and important?
- Did they missed out or not included or chosen not to include something that compromises the quality of the job, even with the way a price quote is structured?
A proper honest fixed price quote has a lot of the risk with the builder or the trades person and an open-ended time and materials quote even with a great estimate puts all the risk onto the customer.
Your job is to educate customers
There are many ways that risk can lie with your customer when they’re comparing 2 or 3 or 4 quotes. And of course, it’s your job always to educate your customer as to what those risks are:
- How they’re mitigated if they work with you.
- How they don’t have those risks if they hire your company because you’ve:
- Got the appropriate insurances, and licenses certificates.
- Invested in your business
- Been around a long time
- Intend to be around a long time
- Invested in branding in signage, premises, admin people, uniforms, all those things that reassure people
They reassure people for a genuine reason because they genuinely point to a commitment to your business and not to just making some quick money.
Similar with the solution. If you explain how you’ve constructed your solution, how you’re building their house or their extension or their bathroom and the care you’re taking and the things you’ve included and you encourage them to compare that to the other quote, you’re helping them understand the risk they might bear.
The same with the price. You need to explain how your price is structured and whether it’s a fixed price quote. We’ll ask them to go and check properly whether the other one is.
You won’t win everybody. Some people will accept the reduced risk but many people won’t want the reduced risk. They won’t want the risk:
- Of suddenly not doing safety properly and somebody dying on their site
- If it’s going wrong and they have no one to come back to if it’s a builder who’s gone
- Of not really understanding how their quote works and having to pay more money later
I know we’ve all come across these things and we’ve all seen them happen but your job is to educate customers when it comes to choosing between cheap tradies and expensive tradies. It’s easier if you start early before they’ve got two different prices on the table. And of course, I’m a business adviser. In my Business Navigator Program, that’s what I’ll help you to do.
I’ll help you:
- Prepare those arguments,
- Articulate why you’re good, why are you all useful, what value you bring to the situation specific to your business in your industry, and
- Put it into your sales process and your documentation and most importantly into your marketing too.
Let’s start right at the beginning so your customer is educated from the beginning of their interaction with you as to what they get for their money because the job is not just a job. There are many things that can change and risk, I think, is the most important one.
So if you’d like me to help, click on the link and book yourself a time to chat with me. The way to get into business advisory services is to have a chat with me first and see if we like each other before we get into anything else.
