In this episode, Randall & David talk about why you should consider raising your prices, the process to follow before you raise your prices, what to expect when you raise prices and give you an example of exactly what raising prices can do for your remodeling company.
In this week’s podcast episode:
00:21 Randall, fine as Frog hair
00:51 Why David is excited about this weeks episode
02:27 Episode Introduction
04:02 Why you need to charge at least a 50% markup
06:24 How you can begin charging more
08:30 Questions to ask yourself
09:09 How to track job costs
11:22 What’s your break even point? An example of overhead and how much has to be sold at different margins to break even
12:44 What happens when you raise your prices?
14:05 Will happens if you lose customers when raising prices? (Written examples can be seen in resources below)
16:20 What if you lose 25% of your customers? (example in resources)
18:47 Things that may be preventing you from raising prices
19:45 Do something different from the competition
20:50 We imagine our own limitations
21:45 Packaging for increased customer value
23:14 An example of a simple technique David uses to increase value
24:30 Giving customers value breeds confidence
25:52 This weeks Person’s of Interest (POI)
28:21 App of the week for iPhone and Android
31:30 Wrap up
32:18 Please leave a comment at the bottom of this web page
Episode Person of Interest (POI) is the Rossi Brothers of Tulsa, Oklahoma.
– Article about Walt Stoeppelwerth and his 5 key elements of a successful remodeling company. Click here.
How to establish a break-even point.
You can figure your break-even point by dividing your overhead by your margin, e.g., if your overhead is $100,000 and your profit margin is 33% (a 50% markup), then your break-even point is $100,000÷.33=$300,000, meaning you have to sell $300,000 of jobs before you can pay for your overhead. Anything more than that will be net profit. If you use a lower margin, say, for instance, 25%, you have to sell $400,000 of jobs before you can make any net profit. Quite a difference with only 8% margin difference.
What happens when you do raise your prices?
- You’re seen as more expensive, possibly more valuable
- You make more money per client
- You lose some customers
- You make more money to invest in your company and yourself
Let’s look at an example of this. You have 40 clients and each one has a job cost of $25,000. That’s total job costs of $1,000,000. In this example, you are marking up using a 30% markup or a multiplier of 1.3 (which yields a 23% margin) – that gives you an estimated $300,000 of gross profit
Now let’s mark it up 50% – same job costs – you’ll have an estimated $500,000 gross profit. Approximately $200,000 more for the same amount of work.
Now let’s say you lost 25% of your clients because of a price increase. Now you have 30 clients, each still worth an average $25,000 each, totaling $750,000 of total job cost. At a margin of 33%, which is the same as a 50% markup, the gross profit is $375,000. Which is 25% better than marking up 40 jobs using a 30% markup where you made $300,000. And you had to supervise 10 fewer projects, which lowers overhead and stress.
Hopefully, you won’t lose 25% of your clients. The goal is to get more and better-paying clients. If you didn’t lose any clients, you would have gained a 33% in gross profit, a $125,000 gain (for a total of $500,000) and do less work.