The pricing strategy for your small contractor business will set the standard for your service in the market. However, many businesses often make the mistake of setting their price strategy to match the lowest-priced provider in the market.
How do you determine if you can afford to sell your service at a lower price without sacrificing profit? Pay close attention to past trends in competition and demand. You can create a sustainable pricing strategy by having a sound understanding of the market.
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Does your strategy need to focus on lower prices or premium service? Here are two approaches you can take:
Pricing for market penetration
It can be difficult to penetrate an already saturated contractor market. An effective way to get clients immediately is to offer your services at a lower price than your competitors.
A market penetration strategy requires a thorough understanding of the contractor market. You must know who your competitors are and how much they are pricing their services. You must also know if your competitors are offering similar products or services like yours. From this, you will get an idea of your advantages and disadvantages over them.
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There is no standard rate for contracting services, as states, cities and counties charge differently. Generally, however, the service can cost from $25.00 to $85 an hour.
As a small contractor business owner, you must know the difference between markup and profit. Markup is not profit. Markup is the term that covers both the overhead expenses and the profit. Businesses charge for a markup to stay afloat in the market. For example, a contractor has a 1.50 markup price, while the estimated cost for a job is $10,000. This amount will be multiplied to 1.50 to arrive at a $15,000 sales price.
Overhead expenses are deducted from the contractors’ revenue. These include advertising, sales commissions, job supervision, licenses, taxes, and employee expenses. Overhead expenses could range from 25 to 54 percent of their revenue. This means a $15,000 job could have overhead expenses between $3,750 and $8,100. Remember that overhead expenses are separate from the raw materials needed, like concrete accessories, plastic spacers and slab bolsters.
Every business will have to make a profit, or else it might go down. You must set a price that will not only cover the cost of the service. You must cover overhead expenses as well to make a reasonable profit.
Pricing at a premium
With premium pricing, you can set your prices higher than your competitors because you have a service that nobody can match.
This strategy will work only if you have a substantial competitive advantage, and if you know you can charge for a higher price without being undercut by a product with similar quality. Customers are always conscious of prices, so if you offer your service at a premium, you have to work hard to create a perception of value.
In a survey conducted at the Construction Owners Association of America (COAA) Leadership Conference in 2015, eighty-nine percent of owners and developers said they are willing to pay more money for quality. In the survey, it was found that:
- 36 percent of owners are willing to pay 1 to 4 percent more than the original price
- 36 percent of owners are willing to pay 5 percent more
- 18 percent of owners are willing to pay 10 percent or more
- Only 10 percent of owners will not pay more at all
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If you’re looking to sell your service at a premium, ensure reasonable care and skill. Make sure the service is done by experienced workers. Ensure also that the service is done within a reasonable time frame.
Remember that profit is important for a small contractor business to survive. Your brand’s strengths and weaknesses will determine what pricing strategy you’ll want to go with. You can use this guide on service pricing to help you more with how you should start your construction business.