Too Big a Backlog? Time to Raise Your Prices
A common refrain from fellow remodelers is that they “have more work than they can handle.” Or that they “have lined up work for the next year or two” or “can barely get the work they currently have completed because they have so much work to do in the future.”
Having all this work lined up is very encouraging, promising and flattering. But the question I often ask is — why do these contractors have so much work on the horizon?
Part of the answer, of course, is because they are good at what they do. But another equally important factor has to do with supply and demand, that economic fundamental that determines the price point of products and allows manufacturers to determine what quantity of product should be available at a certain price and what the corresponding demand for it would be.
How do you think the shareholders of Chrysler would feel if they found the new 300M sedan was so underpriced that Chrylser could not produce enough of them to meet demand? If I was a shareholder, I would be irritated because Chrysler is losing profits.
Now, what does supply and demand have to do with remodeling? Plenty if you are facing a two-year backlog.
What you really are facing is a market that is demanding that you produce say 40 projects a year at the price you charge for producing 30 projects. Having that big a backlog really is not as good for business as it appears. And in my book, your price is way too low.
What would happen in these circumstances, for instance, if you raised your prices and didn’t increase (or decrease) the number of projects you produce each year? Why, you’d be working less, charging more and making the same, if not more, money.
So, how do you know how high you to raise your prices without raising them too high? You easily can reach that happy medium ― if you allow the market, not your head, to set your price.
I am a big proponent of raising prices to meet market demand, but I am not a proponent of gouging customers. Gouging produces a backlash that could ruin your business.
Think about how the NFL keeps its Super Bowl ticket prices below market demand, and then think what a public relations nightmare it would be for the league if it started gouging fans and charged as much, if not more, than scalpers.
So in conclusion, there are two items you need to take into account when setting your prices ― market supply and demand and ethics.
Erik Anderson, CGB, GMB, CAPS, is vice president of Anderson-Moore Builders, Inc. in Winston-Salem, N.C. He also currently serves as vice president of the Home Builders Association of Winston-Salem. For more information, contact Anderson via e-mail.
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