| PERFECTING YOUR PRICE PROCEDURES |
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| Many pool and spa professionals operate under the false impression that clients view price as the most important factor in their purchasing decisions. In fact, firms can easily work themselves right out of jobs by continuing to cut the price of a project, degrading it to a point where the client has moved on to a more quality-focused competitor. If builders explain everything that will be going into a project from start to finish and ask the customer to give their own estimation of what the price would be if they were doing the job, the client will often come up with a number that dwarfs the pricing the builder calculates. When questioned on price, being blunt is sometimes the best approach. Tell them, flat out, “Given what’s involved, this is exactly what we need to be paid.” You may even want to add, “If you were in my shoes, doing this project the way we’re doing it, you’d charge at least this much!” Clients are very unlikely to balk at the cost when given that explanation. The following is an example of a formula a company can use to calculate a final price for a building project. The numbers and percentages presented in the example below are strictly for illustration purposes. Costs and margins are a matter of each owner’s preferences and circumstances.Example of price formulation In this example, the following formula is applied to arrive at a base selling price (BSP) for the project: BSP (X) = cost of goods sold (COGS) + overhead + desired profit For the sake of this illustration, the following figures are assumed: ● Overhead: 12 per cent If the overhead and profit comprise 12 per cent and 30 per cent of the final price, respectively, this means the COGS will end up being 58 per cent of the base selling price (BSP) (100 per cent – 12 per cent – 30 per cent = 58 per cent). Given these variables, to determine the BSP, the COGS should be divided by 0.58. $38,000 (COGS) ÷ 0.58 = $65,518 To arrive at a final selling price (i.e. the price ultimately billed to the client), sales commission must also be added, which can be done using the following formula: BSP + sales commission = final selling price Assuming a sales commission of five per cent, the commission figure can be calculated by multiplying the BSP by 0.05 and adding that total to the BSP. $65,518 x 0.05 = $3,276 $65,518 (BSP) + $3,276 (commission) = $68,794 (final selling price) Note: Since commission has been added to BSP, it must be deducted before calculating overhead and profit, because the commission is actually part of the COGS calculation. Therefore, this price yields 12 per cent of the BSP ($7,862) for overhead and 30 per cent ($19,655) for net profit. |
Approximating profits
Once the COGS figure and overhead percentage have been calculated, builders begin to enter the mysterious and wonderful world of profit, something every business is entitled and expected to generate.
Without profit, there is no reason to be in business. Those who continue without earning a profit are not only essentially working for a salary, but carry the additional burdens and responsibilities of operating a business with no margin for error.
Gross profit comprises the total receipts of a business, minus the initial COGS, but before deduction of operating expenses and taxes. Net profit comprises what is left after all expenses have been deducted from the gross profit amount.
Exactly what a company’s profit should be is a decision only the builder or business owner can make. There are many important questions one must consider when establishing a profit margin, such as:
- What has been invested in the business to date?
- How much could the business generate if all of its assets were liquidated and the proceeds invested in income-producing vehicles such as stocks, mutual funds or real estate?
- What value should be assigned to the risks the business owner or manager takes?
It is also critical to consider the nature of the pool and spa business itself when determining profit margins. Professionals in this business provide what is, for most people, the second- or third-largest purchase of their lifetimes. This is also a business that requires the knowledge and application of skills from a range of different trades, working in variable environments while tearing up clients’ property.
Business owners and managers are responsible for workers who drive large vehicles, operate heavy machinery, dig huge holes and pump tons of water. From technology and technique to blood, sweat and perhaps the occasional tears, pool and spa professionals create environments that will, if successful, provide clients with an ongoing source of pleasure and enjoyment.
Compare this, for example, to what furniture retailers do. They basically acquire a manufactured item from a factory and place it in a showroom or warehouse, where it sits awaiting a buyer. While still valuable, it is a much less complicated activity carrying much less risk. Still, items such as couches, chairs, tables and beds carry huge mark-ups. If furniture retailers are entitled to a significant profit margin, so too are pool and spa professionals. In fact, the latter is likely entitled to more.
Another key factor to consider is the size of the companies that comprise the pool and spa industry. In many cases, they are quite small, with the owner out in the field doing the work or supervising the project right along with the crews. In these cases, owners must calculate what they would have to pay someone as capable as themselves to do the same work.
Owners should not view themselves as people working for a wage, but they do need to ask what they would have to pay to replace themselves. How this is factored into the overall profit and/or overhead equation is a personal issue. The point is that the owner must consider his or her own value; by not doing so, they shortchange themselves.
