Fatal Mistakes of Cutting Your Price

Everyone has had the experience of wanted a job so badly that they make the most elementary of mistakes. This is, in part, what keeps management consultants in business. I just experienced this first-hand and it moved me to write this post. (I won’t disclose the contractor). They had sent out a bid for some home plumbing work. The bid was over $750 which was significantly more than I had expected. When they followed up I told them that their bid seemed out of my price range. Then came their error–they quickly responded, “What if I can get it down below $600? I am playing with the numbers and I can shave off some of the time. I always figure extra time in for the “uh-oh” type moments.” Really–that is what they replied. So I guess they just were going to screw me with the original bid! I will NEVER use them again for anything.

So what do you do when you want a job and price seems the issue? Rule #1: NEVER LOWER YOUR PRICE WITHOUT TAKING SOMETHING OFF THE TABLE! Doing so simply makes you a whore. His mistake came up front–his bid should have clearly stated the scope of work. Then he could have lowered his price by “taking something off the table.” For example: the bid includes a 5-year warranty of the parts and labor. He could justify lowering the price by telling me that if he took the warranty down to 90-days the price would be less. That maintains the integrity of his first bid (and of his company!) Rule #2: See Rule #1. You cannot just dicker price with a client and maintain your integrity. If one time McDonalds allowed you to get a Big Mac for 50 cents all you would feel is ripped off for every other Big Mac you have ever (or will ever) bought.

In this case, if he really wanted (needed) the job and since he didn’t have a “fall back” he should have said, “I don’t know if we bid your job properly–let me take another look at different ways we could do it and see if there is a less expensive option.”

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Pricing

FAILURE TO INCORPORATE BREAK EVEN

No Sales and Marketing plan can be effective without incorporating pricing schemes. Every job incorporates three components—the cost of the job, the job’s contribution to profit and the job’s contribution to overhead. Since the company’s overhead is fixed, sales above the break even do not require a contribution to overhead. With effective sales projections and control of the break even, the company can know how much and how often it can “sharpen the pencil.” Market penetration can be generating while maintaining pre-determined profit levels. There must be a pricing plan designed to “win” the game.

BIDDING/ESTIMATING/PRICING

Estimating is a sales function. Sales and Marketing brings to estimating a pre-determined amount of appropriate bid opportunities.[1] The responsibility of estimating is to accurately determine what the companies direct cost will be of each potential project (take-off). It is not the job of an estimator to determine the Price. Pricing is done according to the Sales Plan and incorporates the break even of the company and other company objectives. The estimator is held accountable for the accuracy of the bid—which creates the budget for the field. The job budget is what the field must focus upon—not the price. All incentives have to be based upon the budget.

Although the market and your competitors control pricing, the market or your competitors cannot control your pricing strategy. Pricing must incorporate your real costs and pricing strategies based upon break even and company objectives. Pricing is an entirely separate function from the take off which is easily delegated.


[1] This is how you hold Sales and Marketing accountable. The company plan sets the standards as to what an appropriate bid opportunity is and how many opportunities per week/month/quarter or whatever they should generate. This of course is based upon the bid to award ratio.