Different job pricing strategies
When it comes to pricing up jobs, there are three common approaches:
- Estimate: An educated guess based on previous jobs, given either verbally or in writing.
- Quote: A legally binding agreement where a tradesperson offers to do the job for a fixed price.
- Do and charge (charge up): The tradesperson bills the client after the job is done. Both parties will usually agree on the hourly rate, overhead charges, and the margin on materials and staff ahead of time.
Most tradespeople go with one of two options: a quote or a charge up. Like with anything, each of these has its benefits and drawbacks, which we’ll dive into below.
Quoting: the pros and cons
Quoting for a job comes with plenty of upsides:
- Makes it easier to lock in big jobs. Most companies want a fixed cost up front to help them plan their projects. It’s also common practice for government organisations or big companies to get multiple quotes from different tradespeople before committing to one. If you don’t quote, you won’t have a horse in the race.
- Payment disputes go away: Issuing quotes take payment disputes off the table entirely. You’ve both agreed on a fixed amount up front, so there shouldn’t be any issues with the cost once the job has been done and the invoice has been sent.
- Clear roadmap of work. You’ll know what’s coming up and when, which makes it easier to plan ahead.
- Good cash flow. With quoting, you have a clear picture of how much money you’re bringing in. This helps when it comes to managing salaries or staying on top of bills.
- Less stress. Your customer already knows how much the job is going to cost. They’ll be less likely to watch the clock or rush you to finish work within a set timeframe.
But the biggest con?
You can lose a lot of money.
One of the most common reasons is the job runs over or you end up spending more on labour and materials than you anticipated. Because you and your customer have agreed to a fixed quote, it becomes very difficult to on cost these additional charges back to them.
The other thing to consider is this: if a home owner or project manager is collecting three quotes from different tradespeople, how often will they go for the highest one? Almost never.
They’ll most likely pick the middle option because they see it as the best combination of quality and value. This means you’re almost always quoting to come out in the middle — and more often than not, that can mean compromising on your profit margin to win work.
Beer with us: the psychology of pricing
Professor William Poundstone conducted a pricing study with a selection of beer. In the first test, there were two beers: a regular and a premium beer, both of which were priced differently. He found that 80% of people chose the premium option and 20% picked the cheap one.
When he introduced a third beer that was more expensive, every single customer ignored the cheapest option. The majority (80%) picked the middle option, and 20% picked the most expensive beer.
Moral of the story? When you’re going head to head with other tradespeople for a job, the quote that sits in the middle will most likely be the one that wins.
Call outs: pros and cons
Call outs are fairly straightforward. You finish a job, then you charge after it’s done. This pricing model comes with its upsides, but you’ll have to be comfortable trading off certainty for more money.
- You can make a good profit. With every job, you can factor in your gross profit margin as you go. This way, you know you’re making money on every single job.
- Easier to manage. You don’t have to worry about the cost of labour or materials upfront. There’s less need to get organised ahead of time, as you’ll be doing everything first then charging at the end.
The biggest challenge with call outs comes when it’s time to get paid. If you don’t manage your customer’s expectations well, you may end up having to discount to keep them happy — or risk losing them altogether.
- Grumpy customers and cost overruns. If a client expects to pay a certain amount for a job and the costs end up running way over, you’ll most likely end up with a very unhappy client. In the age of online reviews and repeat business, this can lead to poor reviews or your customers going to the competition.
- Steep discounting. A lot of tradespeople end up shortchanging themselves to keep customers happy. While this makes clients feel like they got a good deal, this practice hurts your business in the long run.
- Poor cash flow: When you do call outs, you don’t have as much visibility on the health of your business. If you get slammed with bills and you’re still waiting on a customer to pay, you’ll have to dig into your own pocket. Make no mistake, this can have a massive impact: poor cash flow is the reason behind many small and medium-sized business failures.
What your win rate tells you about your pricing
If you want to understand how your pricing stacks up, take a look at your win rate. This is the number of jobs you’re winning as a total percentage of the quotes you issue or the customers who contact you about a job.
Aim to win around 50% of your quotes. If your win rate is above this, you’re probably undercharging and losing out on money (or really, really, really good at your job). Any lower, and you’re probably overcharging compared to the market.