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Competitive Pricing Of Tradies Can Drive Customer Retention – But Are Your Prices Too Cheap?

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.

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 global isolation of the country (as an island with no land border neighbours) have led to material shortages and inflated prices. This means that renegotiations need to be entered into regarding original quotes, as overall costs may have increased threefold.

In order for tradespeople to come out of the other side of the holiday season with a healthy profit margin, they will need to have a better understanding of their costs and how to choose a pricing strategy.

There are 5 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 – Hourly rates, overhead charges and margins on time and materials are agreed in advance, and final invoices are based on the costs actually incurred on the job

Quoting a price for a customer or client is a popular pricing method, but can have a number of issues, including:

  • Uncertainty of customers accepting the quote, which can lead to underpricing or overpricing the work to be completed for your customers
  • If there is an unforeseen issue that causes you to run over budget, you will need to make up the difference out of pocket.

A common mistake that is made in the profession is when the work is priced based on the cost of the sales without considering overhead costs. Your business’s sales revenue needs to conder your overheads, the cost of your labour and materials and still have enough left over for a profit.

You may need to experiment with your pricing (particularly post-lockdowns) to determine what works best for your business. However, a general rule of thumb is that your overheads should constitute 25-50 per cent of your sales revenue to 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.

If you’re someone who often finds it difficult to make large lump sum payments for goods or services, you may want to consider looking into “Buy Now Pay Later” services.

Buy now pay later essentially means that, rather than paying in a full lump sum payment for a product or services rendered, there may be an option to pay through instalments of a certain amount over a set period to make the sum of the full amount in total. This method should allow you to pay in full for the product or service without overly straining your finances – you pay back what you can, as agreed upon when you begin the buy now pay later service.

Some popular buy now pay later services include Afterpay, Zip Pay, Brightepay, and some credit card networks such as  Mastercard and Visa, can offer buy now pay later arrangements.

Though it can be a convenient, immediate solution, it may be challenging to juggle the necessary repayments with other financial commitments. It’s not always the most appropriate method for people, and you should bear in mind your situation and ability in paying back the amounts. 

Before you sign up, keep in mind: 

  • It becomes easier to overspend with buy now pay later services, so know your limits on what you can and can’t afford.
  • You will be charged fees and costs to use the service, which can add up to a princely sum in and of itself.
  • Keeping track of your payments can be tricky if you’ve signed up for multiple services.
  • It could affect your loan applications for a car or mortgage as lenders consider buy now pay later spending just as much as your credit score.
  • Late repayments can appear on your credit report, which affects your ability to borrow money in the future.
  • Layby can be a cheaper alternative to buy now pay later, with no account-keeping or late fees to consider

If you are someone who could make use of BNPL services, you may wish to:

  • Ensure that when using the BNPL service, you stick to a set limit on what you spend so that you can comfortably pay it back later. 
  • Aim only to have one BNPL account at a time to manage payments through, rather than confuse yourself with multiple payments across different providers.
  • Always budget for bills, loan payments and BNPL payments, and 
  • Rather than use your credit card for payments to your BNPL account, consider linking to your debit account instead.

If you would like assistance in planning your financial future, help in managing your budget or some friendly advice, see us for a chat about what we can do for you.

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