A Common Misconception About Prices and Cost

[Allan Edwards]

I know a hardwood floor contractor here who is one of the best if not the best. Runs a very professional company, his quality, reputation, and operation is solid as a rock. I saw him at a builder/sub social last week and we talked. I feel bad going to these year after year and never using the guy, but he has plenty of work, since he does mostly retail (homeowners) and a few builders. I think very few builders, primarily because of his prices.

But he knows me and my reputation so we talked. I currently have a job ready and was about to award to my regular guy, who is very good, probably an A-, but this other guy is A++. So I told him to measure and bid the job I had, I would be happy to present his bid to the client and point out his quality. I just know if I used this company that my potential headache goes down to zero.

[TSJHD1]

Scott, lemme ask a basic question. Your answer might help me understand what you are saying.

Comparing your company to another...both do a grade-A quality paint job, but the other company cannot offer faux. You said in #9, that was one reason that made you more expensive than others.

If we can for a moment, for simplicity-sake even though I realize this is not how it really is...but let's just say for the sake of argument...

You charge more for your services than other guy, because you also offer faux finishing. But in all other areas, you're the same.

So that means on a painting-only contract, you'd lose to the other guy.

So why not..., or can you, might be the better question..., only charge more when you have to charge more? It would require you to isolate costs...you'd have to keep Nate earning his keep by keeping him busy on stuff that requires his talents. If you can't, then you gotta eat some of that extra costs from your profit, if you want to also get the other jobs.

Or maybe you just take on less of the "mundane."



In framing, it is like this:

I cannot allow myself to do certain tasks. They always have to be delegated if I'm to remain competitive, and want to keep making the same $$ I'm used to. If I want that simple 2-story with trusses, I can't have expensive guys on the crew. Because a guy who I'm paying top-dollar becasue he's good at copmplex framing, isn't going to be worth paying that high rate to do more basic stuff, because he's still the same speed at doing those types of tasks as lesser-paid guys. There's a ceiling to productivity.

So, I either just stay away from those jobs, or I put the lower-paid guys it. I can't compete in the first place if I choose to amortize my higher labor costs across the board. But, otoh, if I isolate those higher costs, iow, keep the higher-paid guys earning their worth on only jobs that require their particular set of skills, then I won't necessarily be thought of as "the most expensive", and I can get both types of jobs.

I just have to use the different priced help on only the jobs they're right for.

I'm saying to me, it seems like, if you keep Nate earning his keep only on jobs that require his skills, and in the process keep enough of that work coming in, then you don't have to charge as much on other jobs. Which would then translate to your being a high-end company, that can still be competitive on more "production-type" jobs.

Tom

[TSJHD1]

Originally Posted by Allan Edwards

but this other guy is A++. So I told him to measure and bid the job I had, I would be happy to present his bid to the client and point out his quality. I just know if I used this company that my potential headache goes down to zero.

So Allen, how do you charge for "the headache"? Truly. Is this headache simply just additional time on your part? How do you charge for managing the job?

Does his difference in price match the difference in quality? In other words, is the difference in his price justified by how much better a job he does? If so, the reduced the effort you have to put forth is a bonus. And then if that results in less cost to the owners, because you charge for your time, then it sounds like you could very well end up paying more, but getting a lot more in return, more than you paid for in fact.

I don't know if that's the case, but I do know it's entirely possible. The questions is, is the extra cost worth it to someone? Can what you get for the extra money have a value placed on it that is something that somebody wants to pay for?

Tom

[Wngsprnt50]

First, thanks for starting this thread....it is a very interesting read. I have been talking for quite a few years with various contractors that I use about their price points and "knowing" their bids. Our company, when we sub work, is stuck ion the infamous "low bidder" philosophy. It is really tough from my perspective to have to deal with subs who I know damn well are not going to give me the quality that I demand. So I have resorted to talking with my "higher price" subs about really examining their price points and seeing if they are accurate for the type of work. One in particular, we sat down and looked at some of his labor costs per employee and was able to "isolate" certain employees out of some of the more mundane jobs thereby reducing his need for the higher labor rate. Another thing that has helped to return better quality subs to the fold for me has been removing material from the bids. I know this would not be a consideration for 99% of your jobs as the h.o.'s and such that are wanting the work will not have clue #1 about what u need. But in my case, not having my subs take time to chase down material frees them up to spend their time on the job.
I think that the point of being able to be full service when needed but not having to be all the time is a very valid point. For example, my vehicle mechanic is incredibly bright and can diagnose and fix any problem. But, I don't pay for HIM to change my oil at his shop. If his price points were all set up based on his overall labor overhead, his prices on basic services would be crazy nuts.

[topcoatfinishes]

Tom

You may have misread (not hard to do with my posts), I actually dont build faux into our standard labor rates, but I DO charge a different rate for it. The fact that we do have it inhouse is part of the value of the standard rate package.

There are things that are built into the rate structure because there is overhead associated with them: shop facility, specialty equipment like hot water pressure washing and secondary containment, mechanical prep concrete equipment, deck buffing, cabinet grade air assisted and hvlp spraying equipment...these are assets that the competition in most cases will not have as standard pieces, so when they need them there is a slowdown for them to locate and rent the equipment (if they even have accounts and credit, which we do), dial it in, use it for the first time and hope for the best. There is a real loss there that gets (or tries to get) passed on, which is a waste of everyones time and money. These jobs are not earn while you learn.

Faux in and of itself is not a justifiable overhead piece. There is little in terms of physical assets to point to with it, even though there is alot of inventory of product, specialty handtools and occasional education that goes into building the service to a high level. Thats taken care of in the rate that is charged specifically for that service, when its needed. All the others noted above are commonly requested. So, where possible, we only charge more for certain things when we have to charge more. A guy spraying cabinets is charged more than a guy pole sanding walls. But my belief is that the equipment cost and depreciation have to be recovered gradually and consistently as overhead in your daily rates, not just when that equipment is in use.

Our repeat builders know the value that we bring and are able to ask other would be bidders early on if they have these things in place. The builders are sharp enough to know when someone is fudging and not entirely willing to take a chance on specialty items when they have a proven entity that has delivered them seamlessly in the past.

So, the competition may be able to deliver an A grade paint job on ceilings, walls and trim to the same level that we do, but its all the other "stuff" that make a job custom that they dont have in place. The reason for this, as near as I can tell, is that the competition may lack the business skills to capitalize their business however possible, run it profitably and reinvest in it to always be making it better. They are usually the types who consider profit to be owners salary, so equipment rarely gets purchased or upgraded, and they become outdated pretty quickly, soon enough they are far enough behind the curve that they cant catch up, so they have to compete on price. Of course, it is human nature to choose the lower priced of two similarly priced alternatives if they appear to be the same, so it is my job to make sure that it is clear that they are not the same. If anything, the competition starts to look bad if they are within 15% of me, which continues to force their hand lower and lower.

Fortunately, our projects are high visibility enough that word travels pretty quickly. When people see the cedar shake roof on the 10k sf house where the fire treating from batch to batch was drastically different and the roofers didnt take the time to sort and create visual randomness (said it would weather out) and it has to be chemically eradicated after the copper gutters are on, the exterior is finished and the landscaping is in...And the question is asked by the engineers, architects, landscape designer and everyone else who notices that it happened: Who would have had the containment equipment, Clean Water Act compliance knowledge, and the skill to go up and make that roof look perfect with absolutely no collateral damage? There should be only one answer. Because the only other option is about 6 hours away in upstate new york, is booked out for 4 months and charges a premium to do out of state work.

My feeling is if I am going to cater to "not your average builders" than I have to offer "not your average paint company." Anything that I see in terms of product, process or equipment that keeps pushing us in that direction is brought in immediately. The competition, in most cases, will not show this consistent diligence to get to the next level.

[betterdrywall]

Scott : the painter I talk with yesterday said the same , His customers could not find anyone that could do the type of wood finishes he was applying. I forget now what type of glazing or finish he was laying on, but he has become more specialized in order to survive right now. The standard rate is just not enough to keep going on.
I'm the same with my standard rate , but where I lose it is on the extra running ft price I require on my bullnose bead hand work high work.

[topcoatfinishes]

BDW

For painters, that is often the foot in the door that gets us the whole project. In other words, I dont want to prefinish the exterior trim package unless I am doing the field coats as well. And I dont want to do the exterior if I cant do the interior. Its great to have specialties as long as you dont become like a lunch menu where they start grabbing chips and soda and eating on the run instead of sitting down and having a sandwich in your store. I'd be curious to hear what the finish is...must be some sort of graining or overstaining. Good stuff.

[betterdrywall]

Sorry, Scott, I have the guys number,I call him up soon, he is willing to give me a 10% referal fee, I just been busy and tired not thinking clear right now , I do remember that he said only one other company could duplicate his finish and they charge for just a plain avrage kitchen around 35000 bucks.

[betterdrywall]

And that is so true , I feel like burger king most of the time. Had to tell one builder , a few drops is ok I can work with you , but I cant go and just give you 6 drops for free. He was ok with the extra charge after I talked with him and I was able to get some extra on the hanging part as well . Just tight right now is all.

[betterdrywall]

I have to say I did bid an exterior paint, small home 2 gable ends, some of the wood needed to be replaced , and it had just been scraped and painted over the last time around , So I included all the prep, washing sanding and wood replacement and filler prime coat anf paint. all materials . almost 5000 bucks , price was way too much for the HO'er. I asked the guys at the paint store that was mixing my paint if i was way outta line with my bid , They simply told me that in the past most painters would only price a job just like I did with all the proper prep included , or they just would not take on the job at all. Now with things the way they are there more willing to just scrape and paint get the job done.

[bkerley]

Originally Posted by TSJHD1

Some of my regular builders would lose jobs to one guy on a regular basis, because he would not cover the same scope.

That pretty much leaves me with the choices of becoming the other guy, increasing my sales skills, or going out of business.

[bkerley]

It sounds as though alot of you guys are using menu pricing methods and maybe trying to be all things to all people.

What I read into Allan's post was not that he would reduce his pricing for using this hardwood guy. Rather, I saw that he would be able to reduce his focus because he can trust the guy's reputation. You are paid for your reputation. There are always others around that can do the same quality work as you and are underpricing to break into your market.

Whenever you have a repeat customer, it is because you exceeded expectations. People don't rehire because you just did what was expected. This discussion has left me a little confused on the topic. Are we discussing why we have to underprice ourselves because of market demands or insufficient marketing? There is no such thing as overpriced if you are getting the work. You can be underpriced and that is called missed opportunity. Why would you ever want to leave money on the table?

Getting a foot in the door is for the inexperienced. If you have been properly positioning yourself you will receive an invitation to the "social". Look up some of Sonny's old posts on branding.

Prices -vs- Costs is a completely different discussion than the one being had here. This is value based marketing or a market conditions discussion rather than an accounting lesson.

Sorry for the rant. I just think we need to quit underselling each other and ourselves at the same time. The tide is about to rise. It is time to throw off the shore lines and prepare to set sail again.

My own personal forecast is that we will be moving into significantly stronger growth by next September. This has nothing to do with markets. It is pure psychology. The consumer is growing tired of conserving.

[ExportControlsTrainingUK]

Wow...That's great discussion. When compared to your knowledge I think, I know the least. I collected lot of information from your post. Thanks for sharing with us.