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Thursday, June 14, 2007

Pricing theory

Today, I had a fascinating conversation with a successful renovator. His company has won several awards for top quality work, and he leads the renovation committee of the local home builders association. He also observed that his business works on high-end jobs, and he has a solid network of trade suppliers who can meet the most demanding standards. Yet he has a problem -- he can't grow his business to the market's demand (he says he must turn away, refer, or defer work) because he can't find enough skilled people to help him do the work.

I looked him in the eye and said: "You should raise your prices."

He hemmed and hawed, said that wouldn't work, that clients in the market would not accept higher prices . . . and then described how some competing contractors charge the same prices as he does, for shoddy work. I looked him in the eyes, and repeated, "You should raise your prices."

I wish I could solve every business problem so quickly and easily, but sometimes things are obvious. "The best in any business or field of endeavour can charge more for their specialized skills," I said. "In your business, you have a choice. You can systematize your operations, find labour saving approaches, use mass production techniques, and then produce good quality work, at volume, at 'regular' prices and make a profit. But you are not in that market. You are doing quality work, customized, for the very best houses in the city. Do you not think that these clients should pay more for the reliability and assurance that the work will be done to their standards."

I can be like a broken record when I see something obvious. Fortunately, I saw the renovator again a few hours later at a social function, and, with his wife present, had the opportunity to repeat myself, yet again. He said he got the message.

Now, I would agree that if you are just starting out, or don't have a well-established local reputation for quality, you might not want to raise your prices, just yet. But ironically, even without producing top quality work, you can receive higher prices for the same task -- through effective marketing. By knowing your clients, and adapting your products and services for your 'best' potential customers, you can design your business around the market's requirements and (because the market will have confidence in you) earn more for the same actual work.

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