Pricing For Profit and Growth

Doug Dwyer Contributing Editor

The typical entrepreneur, whether starting a remodeling company or some other small business, has a general idea of what he or she wants to do: Build a company with a great reputation. Be known for quality work. Be his or her own boss. Provide a good life for his or her family. Most of us want these things from our remodeling companies.

The problem is that most business owners start by just selling work at the best price they can get, or try to win jobs by offering the lowest price. And while you can have a good reputation, good work and be your own boss this way, you cannot necessarily provide your family the time or money you'd like to give them.

Building a larger, more successful company that can provide you strong margins and a quality life takes planning. According to business consultant Michael Gerber, author of The E-Myth, "large companies were small companies that thought large from the beginning."

That statement says much more than meets the eye at first glance. My company works with many remodelers who, when we first meet them, say they have the reputation of being the most expensive remodeler in town. Their service areas range from a population of 80,000 to more than 1 million. As we work with these contractors, they often find out that they aren't the highest-priced firm in town — in fact, the gap between their prices and those of the truly high priced is quite large.

Why would someone think he owns one of the highest-priced companies in town if it isn't the truth? For one thing, most remodelers grossly under price their work. They are good people, and if they charge more than most everyone else, they feel like they're taking advantage of the customer.

So what's the cure? Research shows that the real issue for consumers is not price but rather value for the money. Consumers are willing to pay more if they are confident they will get what they really want. Just because your prices are higher than most doesn't mean that your prices are high.

First, decide what kind of end product and experience you want to provide your customer. For example, if your company were selling men's dress pants, you could model it after a low-priced chain such as Wal-Mart, a mid-range department store such as Dillard's or a high-end retailer such as Nordstrom's. All three sectors successfully sell dress pants, yet each provides a very different level of quality and experience.

Did you consciously decide what the market position of your company would be, or did it just kind of happen? Either way, you need to create a budget that supports the market position you decide to fill. Some things to consider: What kind of staff, image, equipment, product quality, facility, marketing, salary and net profit will you need to deliver on that market position and achieve your income goal? Once you have established this, you can determine the gross profit margin you will need and thus the markup at which to sell your services.

All of the top remodeling consultants will tell you that, at minimum, you need a 50 to 60 percent markup to make money. In the last five years, many are even talking 100 percent or greater markups! This is good news. The bar of professionalism and sophistication is being raised in the remodeling industry. All those that are serious about moving the industry to a whole new level will benefit from this.

My belief is if you show up on time, communicate effectively with the customer and do quality work, you deserve a 33 to 40 percent gross profit margin as a minimum standard. Based on your market position and budget, you can earn even higher margins and a solid net profit. Pricing for profit and growing sales to the next level is the only way to have true freedom in remodeling. Be the company that thought large from the beginning.

Most remodelers grossly under price their work