I was asked recently, “Is it time for a price increase?” All business owners ponder that question when profits start slipping and the bank account starts dropping. Well, it depends.
Price changes should be based solely on the data and market trends. The first thing I review is your field labor and material expenses to see if they are in line. If both are not in line, it is time for an increase. How much of an overall increase? There are formulas to accurately know what the increase should be.
If labor is too high, have you reviewed the tech productivity? It could be a productivity issue that needs correcting. If their productivity is good, it may be time to adjust your labor. How are the materials? If they are too high, you need to verify your costs and adjust your material markup. In either case, yes, an increase is warranted.
If labor and materials are both good, then look at your overhead. Do you have too many people in the office to support the field? Have you reviewed your insurance costs lately? You have to determine where you are spending money that can be reduced or eliminated. Almost all overhead accounts have some fluff you can eliminate.
When the financial review is completed, look at your technician stats. Primarily the close rate is the determining factor. Look at the standards. Your group of technicians should be closing jobs a minimum of 80% of the time. If your group is less than that, it could be you are already too high for the service delivered. Remember, the customer is looking for the overall value they feel to determine if your price is too high.
Then, review each technician and look at the jobs he has lost. Are you sending the wrong tech to certain jobs? Do you have some techs that will only sell the big jobs and blow off the little ones? Do they need additional training in process and salesmanship? Once you have determined that issue, take action to make improvements and monitor those numbers more closely on a weekly basis. If you cannot sell work 80% of the time, a price increase will only make matters worse.
On the other hand, if your group has a 93% close rate or better over a couple of months, that means the push back from the customer is small, the demand is high and a price increase is warranted.
Maybe a small increase at first; say, 5%. (Take your current pricing and divide by .95 for a true 5% margin increase.) Keep monitoring and increasing until your close rate falls below 88%. Market demand drives prices in every market, not just plumbing. As the business starts making more profit, set it aside for the next market change. Remember, cash in the bank is still king.
Would you like to learn more about operating your plumbing or electrical service business? This is what I do, all day, every day. Call me, Keith Glass at 727-451-9160.
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