How to Win the Bidding War
From the Emyth Blog
We’re often asked, “What’s the secret formula to pricing?” Our answer: pricing is not a science, it’s a craft. There is no single, foolproof formula that will tell you exactly what your pricing should be. But there are ways to make solid, informed pricing decisions. At E-Myth, we approach pricing as a “whole-business” activity. In other words, it’s not in a silo, but rather exists as part of the larger living organism that is your business. Many different areas of business impact pricing and all of those should be considered in your overall pricing strategy. In our Mastery [I]Impact![/I] coaching program we provide a tool we call the bottom-line pricing grid that provides a structured way to think about pricing, but for our purposes here, let’s talk strategy.
Your pricing strategy should be based on your knowledge of your customers, what they are willing to pay for your services and the amount of money your business needs to succeed. It’s a delicate balance that requires that you pay close attention to your customers, your prospects, the industry and your own finances.
To illustrate the point, let’s take a look at how this plays out in the construction industry (although these basic concepts can apply to any project-based business from graphic design firms to IT services to landscaping companies).
Smart Bidding
A contractor’s business can live or die on the success of the bidding process. Regardless of the current condition of your company — whether you need to turn things around or keep things moving in the right direction — your strategy for success should be centered on two essential considerations:
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[]Bid only on jobs where you’re sure you’ll be able to meet or exceed the customer’s expectations.
[]Bid only on jobs that you’re confident will generate profit for your business.
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Too often, contractors bid on jobs they are unprepared to complete in the two areas mentioned above. The results can be devastating: customer complaints, lawsuits, lack of referral business, lack of profit, increasing debt, layoffs, cutbacks and the list goes on!
Know Your Customer, Know Your Business
Every business has to make a point of knowing who their target customers are (and who they are not), and construction businesses are no exception. As a contractor, your “customers” can include anyone from a homeowner or property owner seeking to build, remodel or improve their property, to another contractor who is subcontracting work to you, to a public or government agency that is funding a construction project of some sort.
Whether your contracting business primary deals with one or all of these types of customers, you should do the necessary market research and formulate a strategy for how to appeal to their interests and differentiate your business from the competition. This kind of market research will inform your strategies for generating business, making sales and satisfying customers. It will also give you ideas about how to price your services given the markets that you serve and how you want them to perceive your business.
To some customers, the cost of your services is less important than the quality of work you provide. For others, the cost is the deciding factor (yet even those customers who care mainly about a low price will still expect some level of quality).
By doing the market research, you’ll know who your target market is. If your target customers are only interested in the lowest price, then your only strategy for differentiation is getting the job done for a lower price than anyone else. In a low-bid situation the utmost care should be taken to ensure that you can do the job for that low price while still producing satisfied customers as well as profit. To accomplish this, you’ll need to focus on creating effective systems for at least two areas of your business:
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[]Your financial management systems, to tell you how much money your business needs in order to generate a profit on any job.
[]Your operational systems, to dictate how the work on any job must be carried out — from start to finish — in order to meet your financial requirements while also meeting or exceeding the customer’s expectations.
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It’s About More than Just Price
When considering your target market, your first reaction might be to assume that all your customer’s care about is price. You might be tempted to be the low-priced bidder every time. But don’t make this assumption without doing your market research!
Let’s look at a real client as an example. John is the owner of an electrical contracting business that does all phases of electrical work for private, commercial or government jobs. Several years ago his mindset was to compete for any job that came his way (including low-bid jobs) but he realized that too often he was compromising his customer’s satisfaction and his business’ success just to get work:
[INDENT] I used to be happy just keeping myself and my employees busy with work, and many times I went out of my way to cut corners to get low bids. It took awhile, but when I realized that on several contracts we were not satisfying our customers because of all the complications that came up, and that I was struggling just to break even, I knew I needed a different strategy. I want to provide the best value to my customers, but it just doesn’t make sense to work for free, or worse, even take a loss on a job, and a company can’t last long under those conditions. I ended up deciding not to bid on jobs where the only deciding factor was the lowest bid. The jobs that really work for us and turn a profit come from customers who are interested in getting the best quality workmanship, even if that means paying a little more for it.
[/INDENT] The truly successful contracting businesses will have clearly-defined standards to adhere to; a project will either fall into your criteria or it won’t. If being a low-price leader is right for your business, then you’ll bid on the jobs that you can win, and pass on the ones that don’t meet your requirements. Conversely, if it’s superior quality and craftsmanship your selling, you’ll know to bid only on the jobs that call for such expertise. Keeping the needs of your customers and the needs of your business in mind will help you create the win-win relationships necessary for long term success.
