by Mateusz Kuczera
Published February 20, 2023
Every once and a while at Zion plumbing, a customer calls with a complaint on an invoice that was sent to them. This time, Mark, the president of Zion, is called directly.
“Good morning, this is Mark,” he answers casually.
“Morning Mark, this is Shelly from Eclectic Construction. Wanted to discuss this invoice for the work your guys did last week.”
“Sure,” replies Mark, slightly puzzled. “How can I help?”
“So, there’s this toilet here, it’s a regular American Standard, and it’s priced over 600$. My hardware store sells it for less than 250$… Care to explain?”
“I see,” says Mark a little annoyed. “Let me look into it and call you back.”
“Please,” says Shelly impatiently before hanging up.
Mark put his phone in his pocket, opens the invoice to reduce the price and thinks “they do thousand-dollar projects and she dares to complain about a toilet bowl?! Unreal…”
This situation happens quite often within service and construction companies. When it does, owners are usually placed in a position where they need to reduce prices to accommodate customer perception. This in turn reduces margins, and irritates both the service business as well as the client. To prevent such situations as much as possible, pricing individual items reasonably is necessary.
The easiest and quickest method for pricing individual items is by applying a standard mark-up to all. Marking up simply means adding a fixed amount or percentage to the cost of a part. And while applying a fixed amount or percentage may work for some items, it will most certainly not be acceptable for all of them. Other considerations need to be taken into account, making the process more laborious but ultimately more rewarding. However, it is recommended to try and always price items above their costs, save possibly for rare exceptions.
It is strongly recommended to gather competitive intelligence on how other companies within the same trade are pricing their items. This will provide a good indication of whether the prices are reasonable or too high/low. The level of demand for the product or service will also influence pricing. If demand is high, a business may be able to charge higher prices, while if demand is low, they may need to lower prices to attract customers.
Another important element to consider when pricing items is how retail stores price theirs. As we’ve seen in the situation above, service companies tend to sell items accessible to regular consumers. This implies very accessible pricing. And while some business owners or consumers will understand why service company items are priced a little higher, others will not. And although it is recommended to take in consideration publicly available prices when pricing items, some clients and markets are less sensitive to this aspect allowing for higher mark-ups even for items accessible to regular consumers.
Clients and client relationship can be separated into two distinct categories; business to business (B2B) and business to consumer (B2C). These two categories can be combined to have better visibility on the complete client relationship. For instance, companies subcontracting to other companies providing a service to consumers can be seen as B2B2C, and so on.
B2C and B2B2C customers can be segregated into different segments while keeping in mind that what defines those segments is what individual consumers end up paying for. Consumers with lower income will of course be more sensitive to price, but not all higher income consumers will be liberal. In general, for B2C customers, care must be taken to price items reasonably. A similar logic should be applied to B2B2C customers.
B2B customers are usually apartment building management companies, as well as commercial and industrial companies. B2B customers will in general be more accepting of higher prices. A business expense is not treated the same way as a discretionary or personal expense. Businesses will get tax breaks and benefits from having operational expenses. Using a mark-up method for B2B customers is likely to yield acceptable results.
It goes without saying that price sensitivity will greatly influence clients’ acceptance of company prices. In general, B2C (including all B2B2C intermediate categories) will have a price sensitivity that is higher than B2B relationships. However, this is more of a generalization than a rule. Each client must be treated individually to better understand which prices will be accepted. Also, high mark-up on high-cost items will be more challenging for customers to accept than a high mark-up on low-cost items.
For components which are exclusive to the business, like special importations or exclusive relationships with specific providers, pricing comes with different challenges. On the one hand, there are no publicly available prices for customers to compare to. However, there may be competitive components to the exclusive product being offered. If such is the case, competitor prices must be considered before pricing. If the exclusive product has a significant competitive advantage (such as quality or esthetics), pricing can be made more liberally so long as the benefit is made clear to the buyer.
Read more in part 2!