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💰 Pricing Strategy

Pricing is one of the most critical decisions you make. Price too high and you don't win work. Price too low and you don't make money.

The Pricing Challenge​

Common Mistakes​

  • Pricing too low - Win work but lose money
  • Pricing too high - Don't win work
  • Not including all costs - Missing overhead, profit
  • Copying competitors - Don't know their costs
  • Guessing - No system or method

Pricing Methods​

1. Cost-Plus Pricing​

How it works:

  • Calculate all costs
  • Add markup (overhead + profit)
  • That's your price

Formula:

Price = Direct Costs + Overhead + Profit

Example:

  • Direct costs: $50,000
  • Overhead (15%): $7,500
  • Profit (10%): $5,750
  • Price: $63,250

Best for:

  • Time & materials work
  • Cost-plus contracts
  • When costs are uncertain

2. Competitive Pricing​

How it works:

  • Research competitor prices
  • Price similar to market
  • Adjust based on your advantages/disadvantages

Best for:

  • Commoditized work
  • When you're similar to competitors
  • Market-rate work

Risks:

  • Don't know competitor costs
  • May not cover your costs
  • Race to the bottom

3. Value-Based Pricing​

How it works:

  • Price based on value to customer
  • Not just cost + markup
  • Premium for unique value

Best for:

  • Unique capabilities
  • Premium quality
  • Specialized expertise
  • When you solve big problems

Example:

  • Competitor: $100,000
  • You solve problem worth $200,000 to customer
  • Price: $150,000 (premium but still saves customer money)

The Pricing Formula​

Step 1: Calculate Direct Costs​

Direct costs include:

  • Labor (including burden)
  • Materials
  • Subcontractors
  • Equipment (project-specific)
  • Other direct costs

Be thorough:

  • Include all labor (including supervision)
  • Include material waste (5-10%)
  • Include equipment costs
  • Include permits/fees
  • Include any other direct costs

Step 2: Calculate Overhead​

Overhead allocation:

  • Calculate your overhead rate
  • Apply to direct costs

Formula:

Overhead = Direct Costs × Overhead Rate

Example:

  • Direct costs: $50,000
  • Overhead rate: 15%
  • Overhead: $50,000 × 15% = $7,500

Step 3: Add Profit​

Profit margin:

  • Typical: 5-15% of total cost
  • Varies by risk, competition, market

Formula:

Profit = (Direct Costs + Overhead) × Profit Margin

Example:

  • Direct costs: $50,000
  • Overhead: $7,500
  • Total cost: $57,500
  • Profit margin: 10%
  • Profit: $57,500 × 10% = $5,750

Step 4: Calculate Final Price​

Formula:

Price = Direct Costs + Overhead + Profit

Example:

  • Direct costs: $50,000
  • Overhead: $7,500
  • Profit: $5,750
  • Price: $63,250

Markup vs. Margin​

Markup​

Markup is added to cost:

  • Cost: $100
  • Markup: 20%
  • Price: $100 + ($100 × 20%) = $120

Formula:

Price = Cost × (1 + Markup %)

Margin​

Margin is percentage of price:

  • Price: $120
  • Cost: $100
  • Margin: ($120 - $100) ÷ $120 = 16.7%

Formula:

Margin % = (Price - Cost) ÷ Price × 100

Converting Between Them​

Markup to margin:

Margin = Markup ÷ (1 + Markup)

Example:

  • Markup: 20%
  • Margin: 20% ÷ (1 + 20%) = 16.7%

Margin to markup:

Markup = Margin ÷ (1 - Margin)

Example:

  • Margin: 16.7%
  • Markup: 16.7% ÷ (1 - 16.7%) = 20%

Pricing Factors​

Internal Factors​

Your costs:

  • Direct costs
  • Overhead rate
  • Profit target
  • Cash flow needs

Your capabilities:

  • Experience level
  • Quality standards
  • Speed/efficiency
  • Unique capabilities

External Factors​

Market conditions:

  • Competition level
  • Market rates
  • Supply/demand
  • Economic conditions

Project factors:

  • Project size
  • Project complexity
  • Schedule urgency
  • Risk level
  • Payment terms

Pricing Strategies​

Strategy 1: Low Price Leader​

Approach:

  • Price below competitors
  • Win on price
  • High volume, low margin

Best for:

  • Commoditized work
  • High efficiency
  • Low overhead
  • Volume operations

Risks:

  • Thin margins
  • Price wars
  • Hard to raise prices

Strategy 2: Premium Quality​

Approach:

  • Price above competitors
  • Win on quality/service
  • Lower volume, higher margin

Best for:

  • Unique capabilities
  • Premium quality
  • Strong reputation
  • Specialized expertise

Risks:

  • May lose to lower prices
  • Need to justify premium
  • Smaller market

Strategy 3: Value Pricing​

Approach:

  • Price based on value delivered
  • Not just cost + markup
  • Premium for solving problems

Best for:

  • Problem-solving work
  • When you save customer money/time
  • Unique solutions

Risks:

  • Hard to quantify value
  • Customer may not see value
  • Requires sales skills

When to Adjust Price​

Lower Your Price​

When:

  • Slow period (need cash flow)
  • Strategic account (long-term value)
  • Learning opportunity (new market/type)
  • Competitor advantage (match or beat)

How much:

  • Don't go below cost
  • Maintain minimum margin
  • Consider opportunity cost

Raise Your Price​

When:

  • High demand (market conditions)
  • Unique value (premium capabilities)
  • Risk premium (risky project)
  • Better terms (faster payment)

How much:

  • Test the market
  • Increase gradually
  • Justify with value

Common Pricing Mistakes​

MistakeProblemSolution
Too lowLose moneyInclude all costs + profit
Too highDon't winResearch market, adjust
InconsistentConfusionUse pricing formula
No systemGuessingDevelop pricing process
Ignoring overheadNot covering costsInclude overhead in all bids

Pricing Checklist​

Before submitting bid:

  • All direct costs included - Labor, materials, subs, equipment
  • Overhead included - Applied to direct costs
  • Profit included - Minimum target margin
  • Risk considered - Adjust for project risk
  • Market checked - Competitive with market
  • Terms considered - Payment terms, schedule
  • Reviewed - Someone else reviews the bid
Know Your Costs

You can't price correctly if you don't know your costs. Track costs accurately, calculate overhead rate, and use a consistent pricing formula.