Mistake #1: Different salespeople price differently
“I got a cheaper price six months ago from Dave. When Steve gave me a proposal for the same thing it was $2,000 higher. What’s going on? I want Dave’s price.”
A customer service representative got this call. And no, the difference was not because of inflation. It was because Dave and Steve priced differently.
Upon investigation, this was typical. Dave always priced lower than everyone else in the company. Why? He wanted the commission and artificially lowered the price so that he would win the work.
In this case the customer forgot that Dave had given her a proposal six months prior. When she called to get a price, then Steve gave her a much higher one. She thought it was too high and found Dave’s original proposal.
Everyone has to price the same way. The best way is through a pricing book or pricing software. There are hundreds of software options. Choose one that fits your needs.
Then, everyone prices using the same process and arrives at the same price unless they are “playing games” with the software. You as a manager can review the discounts or changes in costs and take appropriate action.
If the prices change because of inflation, that is easily explained. However, if employees or salespeople price so that they get the project, then you may have unprofitable work.
Mistake #2 - Not Raising Prices When Costs Increase
“I got a quote a year ago. Can I get the project done for the same price?”
This was a question that a potential customer asked the sales person who gave him the quote.”
The salesperson checked the proposal and realized that prices had increased 30%.
He called the customer back and said, “Unfortunately our prices have increased 37% (including raises to their employees). The new price is $X.
The customer was shocked but needed the project done. He agreed to the increased price.
What would have happened if the salesperson said yes?
The company would have lost money on that project. The salesperson wanted his commission which was based on net profit, so he told the customer that prices have increased and gave him a new price. If he had kept the price the same, he would not have gotten a commission.
The company made the same bottom line dollars as the year before.
There have been huge price increases since COVID hit. You must increase your prices to stay even. The mistake in thinking is that you can maintain your sales prices. If you do, your bottom line suffers and you earn less for the same amount of work.
The spiral often continues until the costs increase so much that your company becomes unprofitable. Of course, in the beginning you get more sales because other companies have increased their prices to cover their increases in costs and customers flock to your door because your products are cheaper.
Then, you get more unprofitable sales until you grow yourself out of business.
If you get a price increase, you have to increase your prices to your customers. In addition, you may have to increase your prices because you gave raises to your employees to keep up with the rate of inflation. If you increase wages by 5% remember that you’ll be paying additional payroll taxes so prices must increase at least by 6.5% to cover the additional benefits costs.
Some companies add a surcharge for gasoline (Uber and Lyft have done it) cost increases. We pay them and don’t complain. If you have a vehicle fleet, you should consider putting a vehicle surcharge on proposals.
In addition, all proposals should have a “this proposal is good for 30 days” statement at the bottom of the proposals. This gives you an out if prices have increased.
I have a deep understanding of Profit and Loss Statements and Balance sheets - and I can explain them in simple, easy to understand language.
