Survival Strategy: Raise Your Prices!

      Believe it or not, some woodworkers are successfully adapting to the downturn by increasing their prices. June 22, 2010

Question
In this cutthroat economy of bidding wars and competitive pricing, I have recently raised my prices - and reaped the benefits. Many will respond that to raise prices is simply impossible, and I was just as doubtful. Here's my thinking.

Business this year is down about 35% from last year's figures. Because of this, I laid off 2 of my 6 employees. The only factor that has not changed is my fixed overhead. So in a nutshell... Less business + fewer employees + same fixed overhead = Less billable hours per fixed overhead.

This is the same scenario used when things are busy, in order to slow down - raise prices. The only difference is that we didn't choose to slow down - so we should *all* change our pricing accordingly. Let's face it - this is a hard working, highly skilled industry and we should be compensated as such. We should all act as a united front to bring the pay scale and respect back to this industry rather than cut each other down with lowball bids. The shops that are using these tactics should be cut out of the mix by the rest of us professional businesses.

This tactic has worked for me, and has defined my target clients. I urge us all to raise the bar and take our industry back from the unprofessional, under qualified, illegal throat-cutters that further plague this already horrible market.

Forum Responses
(Business and Management Forum)
From contributor E:
That's always worked for me. First thing I always do in a competitive economy is raise my prices. Kind of like bringing a knife to a gun fight, don't ya think?



From contributor M:
Sure. You, too, in some alternate world, can repeal the law of supply and demand, unilaterally. Just do it. Never mind the many thousands who wound up in bankruptcy because they couldn't cut costs and prices fast enough to avoid it. They were all wrong; they should have raised their prices. Commit suicide because you fear death. That's the ticket.


From contributor D:
Oddly enough, after trying to provide quality at what I saw as a fair price for the past two years, and not succeeding, I finally listened to one of my customers and raised my prices considerably across the board. To my surprise, sales are as much or better than before and now I make a better margin. I certainly wish I had taken this advice much earlier. It seems counterintuitive but the original poster's suggestion is worth considering.


From contributor N:
It's great that this strategy is working for you. Undoubtedly, it would work for some other shops as well, and it's good to toss some unconventional ideas into the ring. That said, the larger ideas you're espousing, that "we" deserve to be paid at a certain level because we work hard and are highly skilled, that we shouldn't undercut each other, that people who under price us are somehow illegal - these are extremely naive notions. This is about economics, not morality. Cartels with many members don't work.

"This tactic has... defined my target clients."

Now that's an idea worth kicking around. Many of the people we're accustomed to working for can no longer afford us, and may never be able to afford us again. Supply has to shrink to be in balance with demand. Some woodworkers have to lose their jobs or go out of business, period. You are fortunate to have access to a market that can support your resized enterprise. Please, count your blessings. Don't imagine that your strategy would work everywhere.



From contributor K:
Raising prices across the board by 10% requires about 25% less gross revenue to obtain the same profit. Conversely, lowering prices by 10% requires about 25% more gross revenue to achieve that same profit.

But in business, everything is intertwined. Being extreme in one area can have the opposite effect than was intended. Eventually, your market will dictate what (and how much) you have to do. If you raise your prices too much, you may lose too many sales to make up the difference. If you lower your price too much, no matter how many additional sales are created, there will be no (or insufficient) profit.

There continues to be a place for a Walmart-type business as well as high-end retailers. Each level has its own battles. Part of the trick of success is knowing where your business is on the low-end high-end curve.

Rather than discounting, a better approach may be to offer an add-on at reduced or no cost. The ideal add-on is something that has a high perceived value to the customer, but is low-cost to you. "Mr. Customer, I can't lower my price, but I can (add-on) absolutely free to you."

All of this has to be approached at the time of the sales effort. As a furniture restoration business, I have developed various add-ons and other strategies that I have used in order to not discount (or in some cases, not have to "raise" my prices).



From the original questioner:
I realize this tactic cannot work for everyone, but it is one many don't even entertain. When I noticed that I was being awarded less and less jobs, I realized the jobs I was getting took little effort on the sales front - these people weren't shopping around - they just wanted their project done with minimal interruption to their lives. So that is what I provided them with. Since it seemed that these jobs were the only ones sticking, I raised my pricing to produce a better profit margin on a lower volume of work. This sure seems better than fighting to win every bid while barely keeping the lights on.

"Kind of like bringing a knife to a gun fight, don't ya think?"

No - I have removed myself from the fight. Good luck in there - keep on shooting each other.

"Sure. You, too, in some alternate world can repeal the law of supply and demand, unilaterally. Just do it."

Yes, just do it. Fear is what holds many back from success. Try something different if your business is stagnating. From your post, it seems that your business is being controlled by millions of strangers.

My "extremely naive notions" point out the garage shops who pose a great deal of frustration to other shops that have proper licenses, insurance, etc. I know lowballing a bid is not illegal, and sadly shops are using this method because they feel like every job might be their last. We should act as a united front to reset the perceived value of our services to our clients to promote healthy competition within our trade - unlike what is happening today.

I started this thread to bring a new perspective to pricing jobs in the current state. This past year, business for me has been horrible. However, I'm on the road to recovery and this has helped get me there. It is seeing your equation, and adjusting the variables to end up with a positive number as a result. While sometimes we cannot have full control of our volume, the one thing we can control is the profit margin on the jobs we bid on.
Can you see your equation?



From contributor N:
Don't get me wrong - the observation that some people aren't shopping around on price and that therefore you can charge some of your clients a higher price is very astute. My point is that you're doing well because you're no longer trying to work for people who fundamentally can't afford your services, and are instead choosing to work only for people who can easily afford you. That's really a good idea, and one more people should consider. It's the "united front" stuff that takes you off the rails. You aren't doing well because you're united with anybody.


From contributor A:
The questioner makes far more sense than one usually encounters in these opinion threads. The battlefront mentality that is foremost simply doesn't work. The fight will consume all your time and resources, and there will be nothing left with which to build a business - to win.

This recession is the clue to those shops to move on. There will be far fewer shops when this recession is over. (Over in the sense that the turmoil is settled and the market stable.) The survival of those that merely took advantage of a low entry threshold is limited. Some will survive, the bulk will not.

There will always be shoppers looking for the next cheapest shop, taking their wrinkled little drawings from rental unit to garage, combing the phone book, looking for the next guy to reel in. This is not ever really going to change. Let 'em shop.

The successful business (notice I did not say shop) will have already defined their target market and will have resources directed to accomplishing that goal. Their eye will be on the goal that they define, and they can leave all the mud and blood for the others.



From contributor G:
About a year and a half ago I changed what I made. In that time I had to learn a boatload of things. When I started I set a price that gave me a profit. In the last two months I have gotten the process down, with fast turnaround, better finish, more choices, etc.

Guess what? This month I raised my prices by 25% and the number of orders has gone up. My gross shop output per hour is now north of $100/hour. One man shop.



From contributor X:
If your business model requires significant market share, then price competition is essential, but it is a mathematical fact that you can lower prices too much, to the point below maximum profit. I believe many of us have crossed that line in an effort to stay busy, to avoid more layoffs, etc.

I too have raised prices in the past and seen an increase in business, along with a significant increase in profit. It just doesn't work if the next customer you are depending on acquiring is hammering you on price.



From contributor L:
This post intrigued me because, like many of us struggling in the business for the last while, I tried dropping my prices (cutting off my nose to spite my face), which practically backfired. Lowering my prices only gave my customers a reduced perception of the quality of my work (and in this biz perception is damned important).

I have since raised my prices (while also refusing to use any products below a high quality threshold) and seen an improvement in business. It's modest, but I see a positive result. Keep those prices up!



From contributor K:
I have counseled several service-oriented businesses with this particular truism:
* If you provide ordinary products or services, you must charge ordinary prices.
* If you provide premium products or services, you have to charge premium prices.

Very few businesses can deviate from this approach and succeed. The key is in convincing the customer that doing business with you provides the best value for him or her.



From contributor M:
Contributor K, you are right on. The questioner's point is well taken, especially in the situation he describes. It would help if we are prepared to show why we deserve the higher price. My closing rate has been about 20% and I work mostly with referrals from prior clients. It should be higher in this situation.

Early this year I was asking my friend and colleague, Bob Buckley, why he thought I did not have a better closing rate and he pointed to the fact that I did not have a showroom. The only objection has always been affordability, i.e., price.

I have since come to believe that the quality of one's showroom, or the lack thereof, will have a high degree of correlation between how many jobs one closes and getting the price we want for them.

I have seen the light and I am busily, between the paying gigs, building my version of a "blow their socks off" kind of showroom. I am just about done with my office and the response so far has been immediate. It takes time and effort but I am confident it will be a great success in getting me business at a profitable price point. I only wish we had done this long ago. It is not that we haven't had enough business, thank God, but I have had to succumb to the pressure of some builder clients to work at a minimum (barely) profit level.



From contributor R:
What's all this talk about shutting down woodworkers who build out of their garages? I don't doubt for a second that a majority of the people that post on this website started their businesses in their garages. I'd even say that products that come from these types of shops are often superior in quality. (Those that are built by people with an education in woodworking and experience of course.) Quality seems to be pushed aside when a business owner chooses to expand.

I may not have an opinion on the matter, as I currently do not own a woodworking shop, or even a garage. However, quality must be the central focus of any woodworking business. If everyone was to raise their prices, obviously other businessmen would have to lower their bids in order to win a job. In addition, I would imagine more customers will be running off to the local big box store to pick up some cheap pieces of crap. I strongly believe that quality has a price but any price change should be done moderately.



From contributor A:
If you look at well-paid and respected professions, you see that there are some high barriers to the field. Education, finance, experience, and more usually figure into the mix, but are responsible for the rates charged for whatever field you select. The low/no barrier for a woodshop (garage), while being an attractive example of free enterprise, is what keeps this profession perpetually on the brink. Believe me, if the work was not as satisfying, the field would be much less crowded.

The nature of the work and the business side is that so many things are unknown that the pricing reflects the naiveté of the shop owner. How many threads here have started with the idea of someone trying to figure out what something costs/sells for? This is totally backwards, of course, but the proof of this reality is in the questions these less than prepared startups propose.

In fact, most of these types of shops would read the questioner's statement with complete incredulity, then dismiss it 100%, since their strategy is to cut prices in a furtive effort to drag work in the door.

Of course, good work can be done in a garage. But by far, the long term successful professional will move from this model as soon as possible since it is so limiting, for any number of reasons. Working in a garage should not be a goal.



From contributor J:
I've been trying to keep my prices up. I get handshake deals (contract comes with the first deposit), customers tell me they're going to use us, and that they will get back to us after the drywall is painted, etc. Each and every time they find some guy who needs the work also, and he will do it for giveaway prices. The work I get always comes with a better price for the customer. If I was bidding several jobs a week I would work the sale more, and keep my prices up. I think it comes down to who you're selling to, and how bad the economy is in your area. Prices have always been all over the place. If you can get higher prices and stay busy, go for it! Around here the people who have money are taking advantage of the construction trade, cabinetmakers, painter, GCs, everyone. Once this recession is over I'm raising my prices for good! No slack for anyone (free stuff for the kids, though).


From contributor B:
I agree with the questioner, contributor K and contributor M. While not being a cabinet shop, but an installer and remodeler, I have seen that the customers that are paying for the good high end jobs aren't as concerned with price as they are quality and service. If you are charging a higher price, their perception is that you are a pro and they will be getting what they pay for. I know this is a simplified answer but it has been working for me. The more I charge, the better the client; the better the client, the more I charge.

Markup has to be capacity based. If you're doing less work you have to charge more to pay the bills.



From contributor J:
Case in point. Customer #1 wants 2 doors, a wine rack, a shelf, all color matched and installed for a cabinet I did for him 7 years ago. I give him a fair price with a fair amount for my time. He's wealthy, but a typical local cheapskate. I really didn't want to do the work for him as he cheats everyone he does business with. He was floored with the cabinet job, then in anger he says, "Well, just how much for the doors and hinges, and the shelf? I will get them finished myself!" So I give him a price for this, he goes to Paris with his wife and comes back telling me that lunch in Paris is now $100 and it ticked him off so much he came back early. (He thinks boycotting the French is going to amount to something; more than likely they're happy to see him get on a plane). He gets back, doesn't come out to pick up the 3 parts he wants, makes me drive 35 miles to his place, then complains, "Hey, where is my wine rack?" I told him that he didn't order it. Then he says, "I'm sure I ordered it. Well, I can live with this." Then he goes to my finisher, beats up on him, making my friend very angry.

So the rich do indeed pay for what they want, in your area, but not in this town. I have plenty of stories that match up to this one. Then of course there are cabinetmakers who seem to know the right people and get what they ask for. So who knows. Write a book and tell us your secrets on how to get the rich to pay us for work done, and I will buy it.



From contributor C:
Contributor J, obviously it is easy for one of us to play Monday morning quarterback. However, before I started my shop, I read lots of material here on WOODWEB. I learned a lot from other folks' mistakes. I learned what to do, and what not to do. So, in the spirit of sharing what I have learned, I submit the following.

Never, never take a client's comments or attitude personally. Instead, evaluate negative experiences, learn from them, then design and implement better business strategies to prevent such experiences in the future.

For Customer #1, simply double your prices (at least) and put everything in writing. Add a delivery charge, and include that in the price. And since this is such a small job, ask for a 100% deposit for this "special order, highly custom" project.

If a prospective client (they are not a client until they sign your contract and give you a monetary deposit) questions your terms, simply inform them that this is your company policy. Act professionally, and folks are more willing to treat you professionally. If the prospect doesn't want to agree to your terms, well, you said you really didn't want this guy's work anyway. Never alter your terms unless it is in your company's best interest.

Never, never lower your price to match the other guy. If the prospect wants a lower price, ask them what they want to remove from your proposal. And, you can also offer to help them with an apples-to-apples comparison with the lower prices from the other guy. Do they use the same quality materials? The same hardware? Do they offer the same warranty you do? Etc.

Then advise your finisher to consider doing the same.

Obviously it is too late for this project, but you might want to give it some consideration in the future. You do have a good, professional, written contract, don't you?

And, why wait for the recession to be over before you raise your prices? Are you independently wealthy enough that you don't need those extra bucks in your retirement account now to grow over the years?

Folks will judge you by your prices. If they are too low, they will assume that you produce low quality work. If your prices are high, but reasonable, they will assume that they will be getting good service and quality. If your prices are very high, and you have a backlog of work, they will assume that they will be getting great service and quality. Smart, affluent people know this. And many have the resources and are willing to pay for the great service and quality. You might need to work on your marketing strategy to better find these folks.

From what you have described, Customer #1 has issues in his life that you will not be able to resolve. And he appears to blame everyone else for these issues, including you, the French, and your finisher, to name three. For the future, either he abides by your company policies, or he can eliminate himself from your client pool. Then, you move on to better clients.



From contributor A:
Contributor C offers some good advice. Some time ago, the prevailing thought on this subject seemed to be to stand at the back of your truck with your hand out, waiting for final payment. If it didn't come, go back to the shop with a full truck.

With some customers, for some shops, that is the only way to do it. You have to know your clients, do due diligence and research. Know how they work, talk to the other (real) professionals on the job, and while you still need to state your terms, be flexible.

I once had a customer that made enough money in 3 hours (based on his income that year) to pay his tab with us - 125k. But he didn't pay the balance until he got back from Africa. Then he ordered more, paid in advance, while apologizing for being so slow on the final bill. And he repeats.

As for the difficult "rich people" - have your plan in hand. Don't you think the waiter in Paris had a special menu for his American guests? Don't make the mistake of thinking all people that afford your work are jerks - it should be a fair and even agreement that benefits both equally. If not, pull out the special menu.

In the interest of fairness, another wealthy repeat customer always paid well (through GC or designers), but today is led off in handcuffs for a Ponzi scheme, with houses, planes and Bugatti all seized by the FBI. As I say, he paid well (too well?), but I always had an eye on him, and kept up with the newspaper articles on him, hoping to avoid a loss. I did.



From contributor J:
My Customer #1 is typical of many of the customers I have dealt with here. It's not just me - I hear the same things from many different subs and builders. People who have money to spend are beating up on most of the subs.

I have been losing bids to customers (good ones who like my work) because they feel I'm priced too high. There are just way too many cabinetmakers around here that also do good work and will work for less, and buy the jobs they need. I do admit that there are a few good cabinetmakers that always seem to get their price (high) in each and every area. Could be that they're very, very good at sales and have the personality to pull off the better deal. I think all of us could use some improvement in being better salesman.

Contributor C has some very good ideas, but I would like to see him work this area. I know one of the best shops in town - they get top dollar, and won't take less than their asking price for work. They're 4 months behind in their bills from what I hear (from the horse's mouth) and standing around everyday with nothing to do, looking at the new trick CNC collecting dust and demanding monthly payments. Each and every area has its own economy. What works for some in their area won't work somewhere else. For many of us who are trying to hang in there, we have to play it smart. Once things start to pick up somewhat, there just could be a reversal of fortune. More customers than cabinet shops. At least at that point prices should and will go up.

I am getting very close to starting a new venture, one that has my prices for products posted online. I know what these products are selling for, and we will set a price and stick to it. If someone wants a deal or a lower price we are going to stick to our posted prices.



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