If you’re someone employed in a trade, the next few months are likely to be among the busiest of your year. With the added pressure of the pandemic’s effect on delaying site access and work progress, completing jobs is sure to be a high priority on your mind. For tradies to come out of the other side of the holiday season with a healthy profit margin, they will need to understand better their costs and how to choose a competitive pricing strategy.
In the business process of providing your services, you would have provided your clients with a timeline for work completion and a quote for the services rendered at the acceptance of the job.
Ongoing supply chain issues from the country’s global isolation (as an island with no land border neighbours) have led to material shortages and inflated prices. You will need to enter into renegotiating original quotes as overall costs have increased due to supply chain issues.
Five Keys To Tradies Competitive Pricing Work
There are five key figures you need to be familiar with before pricing your work:
- Sales revenue – the price you charge the customer for a job.
- Cost of sales – the direct costs associated with the job, typically covering labour and material costs.
- Gross profit – the amount of money you have left after subtracting the cost of sales from income.
- Overheads – your fixed expenses for each month like rent, insurance, loan repayments etc.
- Net profit – the final amount you’ll end up with after subtracting your overheads from gross profit.
You may already be familiar with these three common approaches to pricing work:
- Estimate – A rough estimate of the final price that is not legally binding and subject to change
- Quote – A legally binding agreement where the tradie offers a fixed price ahead of commencing work
- Do and charge – An agreement in advance on hourly rates, overhead charges and margins on time and materials. The agreement sets the framework as to how much the final invoice is
Quoting Problems
Quoting a price for a customer or client is a popular pricing method but can have several issues, including:
- Uncertainty of customers accepting the quote, which can lead to underpricing or overpricing the work to be completed for your customers
- If an unforeseen issue causes you to run over budget, you will need to make up the difference out of pocket.
Tradies make the common mistake when pricing work based on the cost of sales and not considering overhead expenses. Your business’s sales revenue needs to conder your overheads, the cost of your labour and materials to still have profit.
To determine what works best for your business, you may need to experiment with your pricing (particularly post-lockdowns). However, a general rule of thumb is that your overheads should constitute 25-50 per cent of your sales revenue. By keeping your overheads at this level you make sure there’s at least 10 per cent net profit left over.
Trying to work out what your business can afford to price? Looking for assistance with business planning? Come start a conversation with us. We are business experts who are more than happy to assist you with your queries.
