Profitable Pricing In A Down Economy
Setting a price for one's products and services is never easy, as the line between maintaining profitability and proposing rates that are relatively close to what the client is willing to pay is a fine one. With today's economy driving companies across the board to pay less for more, this task just got tougher.
Arguably the most crucial element in determining one's price is knowing how much it costs to do business. While many organizations are slicing margins, it's paramount to know your cut-off point. The temptation to undercut is a strong one, but if too drastic, it ultimately hurts companies and, in the long run, the entire industry.
"Now, people try to get jobs at low margins so that they can keep that person as a client, and keep employees on staff," said Nadim Sawaya, president of Enterprise Performance Consulting in Pittsburg, CA. "I see quite a few people taking jobs at low margins to break even, just to cover overhead." This can be a slippery slope, however, if companies aren't clear on what their overhead actually is.
This phenomenon also produces competitive obstacles for those organizations that are wary of losing money on projects just to keep the work flowing at any cost. "The main challenge that we are facing
is that right now, with the economy, companies that don't understand the cost of doing business," said Marc Forman, president of Alarm Electronics and Communications in Prescott, AZ. "They are trying to go out and get jobs for what they think it costs just to try to keep people working. This never amounts to a good solution." Nor, he added, does decreasing the value of what a systems integrator brings to a project. "The major national companies have gone out and devalued the work of an integrator because they have deep pockets. They will decrease the cost or give something away, and try to convince people to pay for things on a monthly basis."
For Forman, this requires his team to be steadfast in maintaining some control over the company's pricing structure. "We will say to residential clients, ‘Are you looking for the cheapest price, or are you looking for a company that's going to be here a year from now?'" he illustrated. In the commercial realm, the company's sales team will draw a parallel between their company's own expenses and those of the client's. "I will talk to a facilities manager or a property manager for a commercial business and say, ‘How much does it cost you to have the copier repairman come in? How much does it cost you to have a plumber come in and take care of the drain problem?' It's not hard to convince them, because when we show them the value that they are getting, and the fact that we've been around for a long time, they understand that there's a reason for us charging what we do."
At Verrex Corporation in Mountainside, NJ, the commoditization of flat panels requires a longer discussion on pricing. "We get a regular response from customers expressing confusion about pricing structures of commercial flat panels versus consumer flat panels," explained Bill Baretz, executive vice president. "That's a big challenge, because in many cases there are legitimate differences, but the customer says, ‘The commercial version of what I want is $8,000 and the consumer version is $4,000. I'll take my chances with the consumer version.'"
In these cases, Verrex personnel underline the value they bring to the integration of this technology, as well as the services they offer when there are problems. If the customer still decides to purchase a consumer product for a professional application, the company will handle the installation only. "We say, ‘Go ahead and buy it and take it to the job site, and we'll put it in for you. If there's a problem, you own the warranty and we don't," Baretz explained. "Seventy percent of the time, people realize that this approach is not worth it."
Baretz noted that one of the issues that is becoming more prevalent is associated with the chain of distribution. "There is a heavier level of desperation on the part of certain manufacturers who are marketing, and in many cases, selling, directly to the end user, or they are negotiating pricing structures with the end users," he said. "It's understood and expected that manufacturers will conduct a dialogue and promote their products to the actual end users. Beyond that, the end user will engage them in some type of pricing commitment. It forces the integrators to look to other manufacturers that won't do that."
Another area that has seen increased pricing competition is related to labor: those organizations that don't have certified installers on board are able to charge less. "That tends to drive the cost of the labor down because you don't have to pay that person the same rate as a qualified journeyman or a certified installer," Forman said. To overcome this, systems integrators need to draw on the strength of their customer relationships. "I believe that the good companies across the board know how to work through that, and how to build relationships with our clients so that they understand that when the serviceman comes out, he's actually going to fix it."
While economic pressures have required organizations in all industries to reduce purchases, the good news is that customers still need the products and services that systems integration companies provide. The difference today is that the systems they sign off on are more modest than they would have been a couple of years ago. "In many cases, they may have to scale back from a premium solution to a solid solution that doesn't have all of the bells and whistles," Baretz said. The demand is still there, but the level of spending has decreased. "They will still buy that system, but the product mix has to be looked at for value as opposed to the highest level of functionality."
Carolyn Heinze (carolynheinze.blogspot. com) is a freelance writer/editor.