Before we get started, I want you to a ask yourself a question, and it’s just you listening, so give an honest answer, “When is the last time you wholesale adjusted your prices?”
A couple of years?
If the answer to any of those questions is ‘Yes,” then let’s take a look at your pricing structure.
I work with many contractors to implement our Field Nimble software, and when we get to the price book set up phase, the “When is the last time you wholesale adjusted your prices?” question comes up.
I’m constantly surprised by the responses I get. Bottom line, if you aren’t adjusting your prices on at least a yearly basis you are making less profit margin. Let’s review the major factors to maintaining profitable margins.
3 Factors to Proper and Profitable Margins:
Inflation can account for anything from 0 to 10% change in a year but usually sits in the 2-3% range - meaning a dollar is worth 2-3% less today than it was a year ago. So if you haven’t changed your prices in a year then you are losing 3% of your margin right there.
2. Rising Employee Health Insurance Premiums:
Assuming you have full time employees and offer some paid healthcare benefits, you understand the financial pain of health insurance premiums. For the last couple of years, healthcare premiums have been rising steadily. According to the Society for Human Resource Managment, the national average is a 6% rise in the cost of health insurance premiums. That will directly influence your labor costs which will cut into your profit margin.
3.) Rising Costs of Materials / Parts
If you have taken a look at a recent invoice from a supplier/manufacturer than you have seen this first hand. Cost of parts and materials have been increasing every year, albeit slower than health insurance premiums but it is still a noticeable difference. You will see the biggest rise is in the raw metals; the copper, the steel, and just about every form of metal piping. These rising costs have increased the cost of equipment and components, as they are made from these materials.
An easy way to analyze this, is to ask your supplier for the last 5 years in prices for a couple of popular SKUs. Once you get an idea of the supplier increases you are experiencing, you can look at how its affecting your profit margin.
So why adjust your pricebook?
These are just a couple of examples of what’s eating into your profit margin year after year. Rising costs such as increased wages, training, fluctuating fuel costs, trucks and industrial equipment can also eat into your profit. If you are not adjusting your prices each year for these increases, then you’re not as profitable as you should be.
As each year closes and you begin to set up for the next year, make it a regular part of the end of year cycle to revisit your prices and pricing strategy. If you have a pricing matrix you follow, break it down again and see how many of the factors that make up this matrix have increased and adjust accordingly. If you don't have the matrix or breakdown, look at your prices and think about how long it really takes you to complete the job and make any changes there.
Also, if you were interested in looking at purchasing a price book or working with a pricing strategy company there are many great options available. I always recommend The New Flat Rate as they offer a competitive price book and will work with you to maintain your prices on a regular basis.
Either way, the importance of updating your prices is paramount to keeping you profit margin healthy. I would make it a plan every year to revisit pricing strategy and make sure your operating at peak profitability.