At the beginning of this year, Tom Higgins was reluctant to raise prices at his Littleton, Colo., company, Superior Products Home Improvements, but he did it anyway. The reason: He had to maintain margins against cost increases in both labor and materials. Costs on window, siding, and deck projects by Superior Products rose between 3% and 5%, depending on the project.
With the price increases, Higgins’s two main concerns were salespeople and referral customers. “You have to be careful in neighborhoods where you’ve worked a lot because neighbors talk,” he says. “If your prices are suddenly substantially different, that raises questions.”
And salespeople will always say, “It’s hard enough to compete. They clearly believe that [price increases are] going to hurt them.”
Who Sets the Pricing Standard?
Most homeowners have little or no understanding of how home improvement contractors arrive at a job price. What tends to happen in any market, then, is that low-price operators define the pricing standard. Others “set the selling price based on what they think the prevailing rate is in the market,” says Charles Gindele, president of Renewal by Andersen of Orange County, who has conducted many seminars on managing finances for contractor peer group Certified Contractors Network. “They think: ‘We’re selling as many jobs as we can at the best price we think we can get.’ But you can’t measure ‘Doing the best we can’ because it’s completely subjective.”
Pricing, and particularly any large price increase—say 10% or more—Gindele says, should be based on at least three factors, all measurable: overhead expenses, lead-generation capabilities, and close rate on sales. Tracking those three data points will tell a contractor how much gross margin he needs to get on the jobs he is installing and how many more jobs he needs to sell and install to hit revenue and profit targets.
Let the Numbers Decide
That’s a philosophy with which Ryan Parsons, co-owner of The Brothers That Just Do Gutters, in Poughkeepsie, N.Y., adamantly agrees. He and his brother, Ken, considered raising their prices in 2010, on the advice of a business consultant they hired. But the idea of a 20% jump was “a big mental mess” Parsons says. What he learned is that “you have to let the numbers decide.” In other words, ask yourself what kind of money you need to make and what kind of company you’re striving to create.
When the consultant suggested that the company could easily accommodate a leap from $4 per installed foot—already a bit more than the competition—to $5 per installed foot for the company’s gutter products, “we didn’t really believe them,” Parsons says.
What the Brothers found out was that the investment in admin and management systems they’d been making had given their company a level of customer communication unknown to competitors. A price increase of considerable size is fairly easy for homeowners to swallow—provided you “outclass the competition” and make all the ways you do that known in your marketing and in the sales presentation, Parsons says.
Not Just Pricing but Everything
For Energy Swing Windows, in Pittsburgh, outclassing the competition means explaining that the window, siding, or roofing job the company proposes to install is “not the same job” as that proposed by competitors. “You can’t just raise prices if customers don’t understand how you’re different,” owner Steve Rennekamp says. “And if you don’t convey those differences, why should homeowners pay you more money?”
Rennekamp points out that contractors typically believe that they’re pricing against the competition, when in reality “you’re dealing with the homeowners’ perception of what they’re getting for what they spend.” For instance, Energy Swing makes its employee installation crews a key point in selling. In addition, Rennekamp says, “we put on 6 feet of ice-and-water shield. Most companies put on 3 feet. You can put ridge vent on a roof without a baffle on it, but it’s not as efficient. The baffle is important, and it costs more money to do that. Those,” he says, “are the sorts of things that create value without adding a whole lot to your cost, but they allow you to sell at a higher price.”
For Brothers, with OSHA 10-certified employee installers, endless communication, quotes with photos and more, there came the realization that “it’s not about products, it’s about the experience,” Ryan Parsons says. “You can forget what you think you know about your industry and pricing if you provide the experience.”
Are We Worth It?
Any sales increase is bound to be viewed with less than enthusiasm by a salesforce that’s already up against competitors—especially one-truck operators selling purely on price. Parsons says he had to confront that when in 2012 The Brothers That Just Do Gutters raised its prices yet again, to $10 per linear foot for gutters, literally tripling its price in a five-year time frame. In doing that, he says, he had to manage the salesperson who doesn’t believe in the company, “and if they can’t sell at the lowest price, they can’t sell because your service stinks.”
On those occasions when customers holding multiple bids have called his attention to the pricing discrepancy, Parsons says “my go-to answer is: If mine was the same price as his, would you hire me? And then, when the homeowner says yes, I ask why, and just let them tell me.”
Those clients have changed somewhat since the company re-priced. “They cite the fact that we get the best reviews in the market,” Parsons says. “They weren’t searching online for ‘lowest price gutter company’; they were searching under ‘best gutter company.’"