Those words, while not spoken aloud by most business owners I’ve met and talked with in recent years, have certainly been thought about. (For the record, the person saying this was in the steel pipe business, proving that pricing pressure affects all kinds of things.)
Pressure on pricing has been relentless for most companies as competitors bid below the cost of materials in some cases, just to get work. And the situation has gotten worse during the recent recession.
A startup company we interviewed recently had to throw away all rules of thumb when encountering this “scary pricing” that pushed pricing through the floor. The key was in knowing their own costs and the market, before bidding.
And in this issue, we talked with a millwork company how the competing bids are so low that it’s just a matter of time before the low bidders go out of business. That’s a familiar scenario that’s often mentioned by others. We’ve heard of these low-bid companies going out of business, but the low bids keep on coming from people formerly employed by these companies who think they can survive by making the same low bids.
There isn’t much you can do about those low-bid competitors, but the current situation makes knowing your costs and when you should and shouldn’t bid more important than ever. For the smaller shop, bidding wrong could lead to disaster. A medium or larger shop has several alternatives.
Fighting back
There are two schools of thought. One is to bid anything for the job to get the work – even if the company loses money on the deal. Another is to reject any work in which a profit cannot be made. The second strategy is admirable, but few companies have been able to follow this to the letter, especially in the last five years or so.
Most companies doing good quality work and trying to set their prices accordingly have to compete with companies that are undercutting prices, often way below what a reasonable company would do –just to stay in business.
But what if the prices you are charging are making your own survival impossible? Does getting work make it less likely that a stronger company will survive?
Is there a third way? For some companies that we’ve spoken with recently that means tearing up the traditional pricing structure and looking at all aspects of their own business to reduce costs. That’s the key for these companies: knowing your own costs and cutting them wherever possible. In some cases they are able to compete with the low bidders.
Looking at the Pricing Survey in this issue, you can see wide variations in bids on the same project. There’s a lot of room for error, or is there?
Whether strategic or not, pricing has to be top-of-mind and a high priority. Making a mistake in pricing and bidding is difficult to overcome farther down the line.