If Your Prices Stay Static, Your Profits Will Drop
|Graphic © iStockphoto/Felix Möckel|
The annual inflation rate has stayed between 2 and 4 percent for nearly two decades, far below the 6 to 10 percent rates of the 1970s. Sounds low, doesn’t it? Yet even a 3 percent inflation rate can relentlessly eat away the value of a dollar when compounded year after year. For example, if you charged $80 for a certain type of pest control service in 2000, you should be charging over $96 today just to keep pace with the buying power of those dollars. If you required $75 per hour of production from a technician in 2000, you need to get $90 today. In other words, your prices today should be 20 percent higher than they were in 2000, all other factors being equal.
Has your pricing kept up with the erosion of the greenback’s value? Your costs most assuredly have.
Why You Must Raise Prices Regularly
Pest control is a competitive business. Your competitors’ salesmen are chasing your customers, ready to undercut you by a few dollars to steal your business. Most customers are price sensitive, thus the pressure to keep prices low. Not to mention that our industry typically undervalues its service anyway. In this market environment, pest control companies tend to avoid price increases altogether. Yet most expenses for a pest control business go up each year: wages, insurance, chemicals, fees, gasoline (in 2000, the average price for regular was $1.52, today it is $2.38, a 57% increase!), etc.
If you don’t raise your prices regularly to reflect both the erosion of the dollar’s value and your ever-increasing costs, your profit margins will drop year after year. You could find yourself in financial trouble, forced into drastic cost-cutting measures and an immediate 20 or 30 percent price hike. Steadily reducing profit margins also undermine the value of your company. When you go to sell it, or borrow on its value, you may find it’s now worth far less than you think.
The bottom line is the bottom line. Offering a low price can put you out of business. Companies need to regularly evaluate their pricing schedule to make sure it still generates a solid and reasonable profit margin.
How To Raise Prices
Your customers believe that inflation is dead, and prices shouldn’t go up at all. If you are forced by your finances into a sudden and unexpected 25 or 30 percent price increase, your customers will feel angry and cheated. They may look somewhere else for pest control.
So how do you raise prices without alienating your existing customers? Here are some suggestions:
Program regular, small increases.
- Be fair. Three to five percent each year is usually acceptable to most customers. A 25 percent jump will be a tough sell.
- Announce price increases ahead of time to allow customers to get used to it, and to soften the blow.
Give good reasons.
- People hate the thought that someone is gouging them. Tell them why you must raise your prices. Describe your cost increases: insurance, regulatory compliance, chemicals, etc.
Re-sell the value of your service.
- Remind customers of the benefits they receive from your service: pest elimination, 24-hour service, peace of mind...reiterate your best selling points. For your larger accounts, send a personalized letter. A sample is provided here. In pest control, as in all service business, profit is the name of the game. Your prices should insure that your profits are fair and substantial. Review pricing and profit margins each year, and be sure to raise your prices to reflect business conditions.