Common Home Improvement Error: Improper Pricing Formulas

Revenue is up. Your marketing costs are down. Employee morale is at an all time high. Despite all this, your business is barely staying afloat. How is this possible?

Frequently, it has to do with a miscalculation in the pricing formula.

From our experience, many business owners set their prices based upon arbitrary formulas, what the competition is pricing, or frequently they simply arrive at a number in their head that they believe will yield a strong profit. None of these methods are effective, and frequently they can have a disastrous effect on your bottom line.

Over our 45+ years of industry experience, many things have changed about the way businesses should be run; however, one thing that remains the same is the pricing formula.

With the right system in place, specialty home improvement companies can earn 10-15 (and sometimes) 20% pre-tax net profit. Full-line home improvers (including design and build) can earn 5-8% pre-tax net.  It’s all in the formula and the control(s).

In most cases, direct costs are not clearly defined, and fully loaded marketing costs are not defined, allocated or managed. Because of this, a company’s profitability may appear to be in better shape than it actually is. The first step is to make sure you are classifying all of your costs properly; for example, even if you are the only individual who sells business in your company you still need to separate all of the costs that are attributed to the selling process.

Once this is accomplished there is a formula to assist you in calculating your selling price (all of the numbers are estimates based on an average home improvement company that sells replacement windows):

Sales Costs (fully loaded)                               13%
Marketing Costs (fully loaded)                        15%
G & A Operating Expenses (overhead)         20%
Anticipated Net Profit                                        10%
TOTAL                                                                  58%

As you can see, the goal is to achieve a 10% net profit. Once you have performed this calculation, the total percentage (in this case 58%) is subtracted from 100% to arrive at your direct cost calculation.

Direct (L&M) Costs    =  42%

The final step is to apply this percentage to the cost of your product/service (again all costs are estimates):

Cost of window (incl. shipping)                  $150.00
Trim and Miscellaneous                              $  15.00
Labor to install (incl. re-measure)             $  70.00
(Direct Cost) Total labor & material  =      $235.00 = (42%)

Next, divide 42% into $235 = $560.00

The $560 represents the minimum selling price of your product/service that is necessary to achieve a 10% anticipated net profit.

A couple things to keep in mind:

  • There are always unanticipated factors that come into play that will affect your bottom line (we call them G.O.K. – God Only Knows).
  • Depending upon what business/market you are in there may be a slight variation that is necessary; however, the basic calculation will remain the same

By using this formula to arrive at a selling price you are taking all of the guess work out of the equation and assuring that high revenue will equal high profitability in your business.

We developed a package that delves into this formula further along with all of the other elements you need to know to run a profitable business. As you may guess, the package is called: How to Run a More Profitable Business. If you have any questions about how to implement this in your organization, call me directly at (703) 591-2490 or e-mail me at dave@daveyoho.com.

One of the primary takeaways from your most recent visit to our company was that the words, promises, and tone of our call center reps need to speak directly to the prospect’s needs, followed by a professional, systematic sales presentation which builds immediate rapport and trust.

Dave Cerrone, President
Fitch Construction

Dave Yoho Associates provided guidance, advice, best practices, and support to our entire staff. Our company has improved across every level after working with them.

Cris Keeter, Owner
All-States Exteriors

Dave Yoho Associates produced amazing results for us! Every percentage point of improvement in our lead issue rate translated to an additional $500,000 in business.

Brian Leader, Founder
Improveit! Home Remodeling

Dave Yoho Associates’ consultants are the sharpest in the industry, and are incredible communicators, very engaging, and always inspiring. Their industry insight is unmatched, as is their creativity.

Todd Miller, President
Isaiah Industries

Your consultant introduced many thought-provoking, exciting concepts that were implemented and drove our net profit. We look forward to a long and prosperous relationship with Dave Yoho Associates!

Mark Watson, Owner
Exterior Medics

We found Dave Yoho Associates extremely professional and knowledgeable in evaluating our current business model and recommending specific solutions that will improve our efficiency and profit.

Wasyl Bodnar, President
Ventana Design, Sales, and Manufacturing

We’ve used the consulting services of Dave Yoho Associates for several years now. Much of our success can be attributed to following their systematic teachings and practices.

Michael Hoy, President
Great Day Improvements

We are grateful to have Dave Yoho Associates work with our entire team. I firmly believe the improved performance of our event marketing team is directly tied to your coaching over the last couple of years.

Scott Barr, Steward
Southwest Exteriors

I learned an abundance from your canvassing training. Thank you so much for helping us revise our methodology!

Lynann Everett, Interactive Marketing Manager
RbA of Northeast PA

I want to thank the entire team at Dave Yoho Associates for meeting with our Canvassing Managers last week. The knowledge we learned in only one day was invaluable.

Jason Hollister, Proximity Marketing Manager
RbA Southard Corporation

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