In military training, they teach you how to look for warning signs that could affect the mission. They call this situational awareness.
Potential threats might include the enemy’s position, the current environment, the shape they are in mentally/physically or position if things went wrong and what the next move would be.
It’s the same in the trades business – there are always warning signs when your business is headed for trouble.
Having personally coached hundreds of trades businesses over the past twelve years, there are nine warning signs I look for. Deal with these early, and chances of success improve dramatically. Left too long, they can cause major problems at best and failure at worst.
Early warning signs:
Are you finding yourself struggling to secure enough work for your team? Or maybe you’ve noticed that the amount of confirmed work booked ahead is shrinking? When work starts to dry up, it affects the bottom line. Do you start discounting to get the work or wait it out until things get better?
It’s a situation some tradies are facing right now, and it’s not easy. But before you start slashing prices, here are a few things to consider.
Disappearing profit?
Profits and margins can disappear alarmingly fast once you start cutting your prices, and here’s why.
Let’s say your gross profit margin is around 20%. If you reduce your prices on a job by 10%, the volume of work you need to complete just to maintain the same dollar profit increases significantly.
For example, if your break-even point is $100,000 per month at a gross profit margin of 20%, and you reduce your prices by 10%, you now need $200,000 of work to reach break-even. That’s twice the work, time, and effort, for the same result you were previously getting.
It’s a stark reminder that while reducing prices might seem like a viable strategy to attract more jobs, the impact on your bottom line can be significant. Not only does it increase your workload, but it also puts a strain on you and your team, sometimes compromising quality. Too many rushed jobs that go wrong can also affect your reputation.
So, before you consider cutting your rates, crunch the numbers and understand the real impact on your business’s profitability.
What’s your target Gross Margin?
Understanding your Target Gross Margin is crucial in determining which jobs are worth your effort.
Your Target Gross Margin is the percentage of profit you aim to make
on each job after all direct costs, including wages, are subtracted. This margin should be high enough to cover your business’s overheads plus a healthy profit.
Target Gross Margin could be anywhere between 20% – 60%, depending on the trade and your position in the market – high or low end. I don’t like to see anything under 20% minimum in any trade; less than 20% is too difficult to make a profit. If you want some help to work out your target gross margin and where you should be for your business, then check out the “Pricing Strategy Session” at the end of this article.
Having a clear Target Gross Margin is like having a compass in the wilderness. Once you know where you want to head you can see clearly if you are going in the right direction and adjust. No more wasted money, time, and energy taking jobs that lose you money.
Sticking to your guns
Your large client wants a better price, what now? Don’t just take this at face value. Test, question, negotiate. Why do they think the price is too dear? What are they comparing their quote to: apples with apples or apples with bananas? Is there more in their budget, or can you adjust the brief to fit?
Show them that your price is good value and see what happens next. Some will
get it, and some won’t, that’s ok. The ones that don’t, fine, just move on to the next opportunity.
Eddie, a mentor of mine, would tell me, “15% of customers will always go for the cheapest option no matter what”. If another option is one dollar cheaper, they will take it even if the job is half as good. The clients you want are the other 85% who care about getting a quality job done right, hassle-free and are prepared to pay for it.
Remember, pricing isn’t just about numbers; it’s a mind game. The right way you present your pricing and value can make all the difference in attracting the right kind of clients and getting the work.
When my clients start telling me they are sticking to their rates, margins are increasing, and they now have plenty of good work lined up, that they don’t need every job that comes their way – I know they are on track.
Are you fishing in the right river?
Fishing is about being in the right place at the right time. The right bait at high tide will catch way more fish than at low tide when the fish aren’t around.
It’s the same with your business, are you marketing in the right places? Are you seen as the specialist or a generalist who does a bit of everything? The specialist attracts better clients and can charge more. That’s less work and more profit for you.
Being the cheapest is dangerous
If your business is based on being the cheapest, that’s a problem. Firstly, you won’t be getting the margins you need, and there will eventually be someone else out there who will do it even cheaper.
A builder client, Celeb of The Decking Guys, was in the same predicament. He was working 80 hours per week, making no money with one part-time worker and struggling to find work. His clients kept asking him for lower rates. I told him to put his rates up and start specialising.
Within 12 months, he had a team of 11 and plenty of work. Check out his story on our testimonial page at nextleveltradie.co.nz/real-results/
More options, better odds
If you are relying on getting one quote or you can’t pay the bills, you need the job, so the pressure is on you. You are in a weak position and are more likely to cave on price to get the work.
A much stronger position would be if you have five other quotes you are following up in the same week with 3-6 months of work already confirmed. Now you are calling the shots.
If a new client is relying on a small number of quotes and doesn’t have enough work, the first thing we do is help them get their pricing right and find better jobs. This takes the pressure off and puts them back in control of their business.
Don’t waste a good opportunity!
If things are on the quiet side and you’re still not getting the work you want, then this could be the opportunity to consolidate and scale back a little. Move any bad eggs on and rebuild stronger. Better to have a bit less work for a while, than working your tail off and going backwards.
If you still want to reduce your rates to get a job short term to pay the bills, then ok. But make sure that this is a short-term strategy and use it as motivation to position the business better so that you’re not caught out next time.
Sometimes, in a downturn, there will be less work for a while. The key here is to keep the business solid and profitable while looking for better opportunities, which long term is not cutting prices.
Article supplied by: Daniel Fitzpatrick, Next Level Tradie
Published in WIRED Issue 72 / MARCH 2024 by Fencing Contractors Association NZ
