Twenty years ago, the price for a cup of coffee was about $1.50; now, in 2021, the same coffee will set you back around $4.50!
The general public readily accepts price increases if they are incremental and stretched over a period of time. Sharp, sudden price increases, like if your barista tomorrow was to tell you a regular coffee was now $7.50, will cause a shock to the system. Rather than accept the price increase, you’d likely walk out of the cafe empty-handed and stroll down to the next coffee shop laughing at the ridiculous request.
That’s where, in the trade industry, we come unstuck. We fear increasing our prices because we are concerned about our customers turning on their heels and picking somebody else. The critical element we lack is a foundational understanding of HOW to increase our prices gradually and proficiently so that it’s either unnoticed by customers or accepted as standard economic inflation.
I’ve owned and operated my plumbing business, Dr.DRiP, for over 20 years, and if I charged the same rates now as I did back when I first started my business, I’d be losing money on every job and going backwards in business.
I’ve had to learn how to steadily increase my pricing structure to keep pace with my target market and various socio-economic factors to keep my business thriving! It hasn’t always been easy, but through a great deal of trial and error, I believe I’ve cracked the formula for scaling your pricing without scaring off customers.
The first question I’m usually asked is: where do I start?
It can be a daunting task to look at every facet of your business and then find a correlating value for how much profit you need to make to keep yourself in business! We’re tradies, not mathematicians, so the first thing you need to do is understand your CURRENT numbers and seek a trusted bookkeeper/accountant to fully understand them.
What I mean by this is, either you or a professional service needs to be analysing the data from your business and then evaluating your current hourly rate, weighing it against your business overheads and ascertaining if you are currently turning over a consistent, decent profit.
Sadly, for most of us, the answer is no; we’re NOT charging enough, which is why we don’t progress and reach our business goals.
Formulating your hourly rate depends on so many factors, and there is no one-size-fits-all solution. From my experience, I’d estimate more than HALF of us base our hourly rate on what our old boss charged or what similar companies in our area charge. This is where we come undone because no two businesses are the same, and simply plucking this number from thin air will usually end in disaster.
To learn more about HOW to determine your hourly rate, scan the QR code below and listen to The Tradie Show — Together In Trade Business Podcast episode, “Pricing yourself out of the game.”
We chat in detail about how to accurately formulate your hourly rate via your Profit & Loss Statement and the importance of not cutting your profit short just to land a customer!
The second question is: How do I effectively implement my rate change?
Once you’ve figured out HOW much you need to charge to turn a profit, you, unfortunately, can’t just suddenly increase your pricing dramatically and expect customers to be OK with it.
You need to work smarter and look at your business as a whole, then find areas where price increases could be gradually implemented with very little resistance overall.
You can do this in three key ways;
- Squeeze expenses. Review your Profit and Loss statement with your accountant, then line-by-line eliminate unnecessary expenses or look to see if cheaper alternates are available. Doing so will reduce your overheads and, in doing so, reduce your projected hourly rate. In the end, you may find that you don’t actually NEED to increase your service charges and can instead get away with simply trimming the fat on your end!
- Increase your current hourly rate. To get a bit closer to your projected hourly rate, start increasing your prices incrementally until you hit your target. Start with $5-10, and monitor the impact it has on your business, then review again in a few months and potentially increase again if needed.
- Another implementation method is to not only update your pricing structure but also consider changing your pricing model. For instance, if you’re charging an hourly rate that generates your business a decent profit, but you’re finding that your customers are pushing back on the rate as it seems high for the market, consider updating your pricing model from an hourly charge to a quote per job system. This will help you charge more without having to break down your labour rate and your materials cost.
The third question is: How do I communicate price increases to long-term customers?
This can be a tough one. Gradual price increases, whilst usually accepted, do need communicating to long-term customers as you can’t suddenly charge them more without clear communication as to WHY.
Most people understand that you are in business to generate profit, but they need reassurance that this isn’t a price-hike because you’re keen on buying a new boat. You need to professionally explain to them the areas in which the minimal increases are being implemented and explain to them that an increase in price allows you to continue providing the high level of service that they depend on from you.
So long as your reasoning is professional, the increase is minimal or gradual, and it’s based on a true need, not just lining your pockets, then customers will appreciate your situation and accept the increase without a great deal of concern.
That’s the bottom line! When implementing pricing strategies, we need to lean on our ability to cultivate strong customer relationships and leverage our interpersonal skills. Utilise services like accountants and bookkeepers to learn your numbers, formulate your pricing strategies, and use your life skills and sharp tradie knowledge to upsell on-site and be upfront with your long-term customers.
If this all just feels overwhelming, and you feel like you might need some help…. Then let me give you a hand! Book a one-on-one strategy session with me, Andy, and together we can look at your business as a whole and determine the BEST way to revise your pricing strategies.
Head to our website and book today!
Written by Andy Smith
Andy Smith is a fellow trade business owner of Dr DRiP Plumbing and co-founder of Lifestyle Tradie, a membership and community for tradies in business.