As sales designers, we’ve all been there. The day has arrived to close the sale. Everyone knows the purpose of the meeting, including the client, the management team and your co-workers. The stage is set. The proposal includes cabinetry, countertops, hardware, lighting, plumbing fixtures, appliances and labor. The proposal consists of the desired company goal of gross profit at a 42% margin.
All that remains is to review the final pricing, sign the contract and write the down payment. Oh happy day.
Then it happens. An itemized price for an item is questioned. The client reveals that in their research, the same product on your estimate is available online for substantially less. It gets more intriguing; the same product is open to anyone with online access for less than your cost.
It’s a dreaded moment, and the situation spirals out of control. The internal whisper in your head begins. “Will the client start questioning other prices on my estimate? Have I lost their confidence to deliver their project on time and on budget? Have I lost the sale because of this perceived pricing discrepancy?”
This situation is avoidable by implementing a shockproof pricing strategy in your sales process. This strategy is the armor to ward off pricing concerns and build on the bond, rapport and confidence you’ve established early in your relationship with the client.
A shockproof strategy’s foundation is knowing your organization’s correct pricing formula. And to determine the gross profit dollars and margin percentage, the business needs to (a) fund all overhead expenses, (b) pay market rate wages to stakeholders and (c) fund the desired net profit dollars for the year.
The easiest way to determine the gross profit required is to perform a proper annual budget. If done correctly, this exercise will provide a business with an accurate Gross Profit Margin needed for the company, essentially the road map to follow for pricing all products and services, transforming your business into an engine for wealth.
With a pricing formula established and the business knowing the gross profit dollars required to achieve its financial goals, it’s time to implement the shockproof methodology. Developing this strategy begins with understanding the psychology of consumers buying into numbers that make sense to them – and the art of weighting down cost areas they may know something about and weighting up areas that are less known, such as cabinetry and installation, the latter of which requires a high degree of skill for a beautifully appointed, long-lasting final result.
Most dealers sell to different markets or offer various products and services. So, other markups may be required based on the expected business mix. As an outgrowth of the budgeting process, this methodology of establishing different pricing strategies for various market categories is known as Pricing Segmentation.
With Pricing Segmentation, each category must contribute Gross Profit Dollars toward the overall need to finance a company’s burden, sales, administration expenses, other income/expenses and desired net profit as outlined in the budget. Using other management tools, owners can make sure that, indeed, the rate of necessary gross profit dollars per market category is collected monthly.
A hypothetical dealer needing a 45% gross profit margin to achieve their financial goals must theoretically achieve that margin on every project after allowing for minor slippage through human error. However, they would probably not realize that G.P.M. on all products or services without raising some consumers’ eyebrows.
Some products, such as appliances or plumbing fixtures, are more highly competitive. Today, internet access and a Google search will yield information to a consumer that limits or hampers the dealer’s ability to use the same pricing presentation strategy across the board.
A dealer needs to know their product mix and the percent of revenue each offering is generating.
The mix is sorted by actual products (i.e., cabinets, countertops, lighting, tile, plumbing labor, tile labor, carpentry labor) or broken down by market categories (i.e., kitchen remodels, bath remodels, other rooms, new construction, etc.).
Adjust Gross Profit Margins
Knowing the gross profit dollars required to meet company financial goals and the mix of products you sell with the typical revenue total generated in each category, you are now ready to adjust the margins in each grouping or classification.
In reality, consumers lean in and focus on numbers that make sense to them, which are those where there is more common knowledge. Understanding this psychology will help you with this next step of weighting up and down the gross margin per category to still achieve the overall goal of the G.P.M. required for your business per the Annual Budget.
There is far less shock to consumers when they see prices that make sense to them, or when they see prices that seem aligned with what they may be somewhat familiar with. If appliances in your area are typically sold at an 18% G.P.M., it doesn’t make sense to present a budget with appliances priced at a 45% margin. That will only raise red flags. Place a realistic margin on those products you sell that are more competitive or are easily shopped, and increase the margins beyond what the business needs on those areas that are less competitive that can bear the extra “weight.” Or, in those products and services, you can show added value, like cabinetry, tile and lighting.
Design Development Fee
Slippage – the difference between estimated costs and actual finished costs – often occurs after a project is complete and job costed. To protect against slippage, and as another shockproof pricing tool, consider implementing a design development or design management fee into your estimates. Unlike a project management fee, the design fee assigns a fee for services that you may have included for free in the past.
Do you provide services that include furnishing center lines for plumbing, electrical and HVAC sub-contractors? Or visit the job site during installation to ensure proper design execution? Are you present to answer questions from the fabricator when countertops are being measured to ensure a good fit and finish of the tops?
Introducing a design fee of 7–12% of an approximate sell price allows the freedom to adjust the markup of more price-sensitive items without sacrificing the overall desired GPM% that the organization requires on each project.
While some trial and error may require finding the right balance, implementing a shockproof pricing strategy puts the sales designer firmly in the driver’s seat. Consumers can still buy into numbers that make sense while protecting the margins the business needs to succeed. Shock-proof pricing can sell more jobs, protect against slippage, create happy clients and take the company to the bank. ▪