What's your recommendation rate with your customers?
Cost vs. value: The best sales approach for home buildersJuly 13th, 2021 by
Finding the ideal price for services is one of the toughest tasks for home builders. If you set your prices too high, you might miss out on business opportunities. Set them too low, and you’ll cut into your revenue.
The problem is, there’s a lot more to pricing than simply adding a markup to your costs. A good pricing strategy has to consider all the following factors:
- Revenue and profit goals
- Target customers
- The current and desired brand positioning
- The competition
- Marketing objectives
- Prevailing economic climate and market trends
The best price point should maximize your profit while maintaining a competitive brand position. In the end, the process behind a price is what really matters—not the number, itself.
As a home builder, you have two fundamental pricing strategies to choose from. You could either establish yourself as a value-based or cost-based business.
Either pricing model is distinct and only works for particular business models and markets. To help you figure out the better approach, here is a breakdown of cost vs value.
Cost-based, cost-plus or markup pricing is arguably the simplest pricing strategy of all. It focuses mainly on the cost of goods and profit margin.
In this scenario, the contractor first totals up the cost of completing a project. This typically includes the cost of materials, transportation and labor. Then you add a markup to the final cost figure. The difference is your profit.
Most home builders operate with a fixed profit margin—usually somewhere between 25% and 40%.
The pros of cost-based pricing
There are several reasons why a cost-based pricing model can be beneficial.
Cost-based pricing is simple
Most businesses use cost-plus pricing because it’s straightforward. Your costs are always covered, and it’s easy to calculate your profitability.
Cost-based pricing is safe and predictable
As long as you add up the numbers correctly and costs don’t shift, you’re guaranteed to make the target profit. Decide how much you want to make, and then build out your pricing to yield your preferred profit.
Cost-based pricing works with limited knowledge
You don’t need to extensively research the market and competitors to determine prices using a cost-based model. You also don’t have to be a CPA. Just add on a percentage.
The cons of cost-based pricing
There are, however, some drawbacks to this pricing model.
Cost-based pricing might miss critical pricing factors
Cost-plus pricing only looks at the final cost of goods and profit margin. It completely ignores other important pricing factors, such as demand trends and the value of a service or product.
Said another way, you could be leaving money on the table.
Cost-based pricing is evidence-based
Cost-plus pricing requires complete transparency between the service provider and the customer. You may have to break down and justify related costs for your customer.
If they feel the percentage you’ve add on is too much, you’ll need to be able to defend it.
Cost-based pricing isn’t always profitable
You may choose to forego minor cost oversights rather than haggle with the client over slight differences. This can result in lower profits for you.
What’s more, a change in supply costs (like the current volatility in the lumber market) can eat into your profitability.
Value-based pricing simply means setting a price that your customers are comfortable paying. This pricing model is derived from the idea of “willingness to pay.” You assign a price to your services depending on how much value the customer places on it.
You’ll need to consider your competitors’ price range and cost of goods. But you can get away with charging significantly more if you really know your customers and what they consider valuable.
A good example of value-based pricing is Supreme’s over-the-top pricing. You might know this story. Back in 2016, the lifestyle brand sold bricks for $30 apiece. A Reddit user worked out it’d take nearly $5 million worth of Supreme’s bricks to build a 2400 square-foot home.
Obviously, Supreme did not intend the bricks as building materials. That would be ridiculous. But given their brand’s position and target audience, the company knew the bricks would sell anyway.
Supreme’s crazy pricing is probably not the way to go for a building and construction business. But it proves the concept of “wiliness to buy.”
The pros of value-based pricing
Here are the upsides of value-based pricing for home builders.
Value-based pricing can increase your profits
If you have a solid reputation and your customers value your services, they’ll pay top dollar. Even if you cost more than your competition, you don’t need to drop your prices. Instead, you can maximize your earnings.
Value-based pricing breaks pricing constraints
You don’t have to restrict yourself to specific hourly rates or set profit margins. You can price projects based on their value—and the value of your time and effort.
Value-based pricing encourages personalization
Through value-based pricing, you get to understand your customers a lot better. That means you can develop custom solutions that will really delight your customers.
Value-based pricing increases your brand’s value
Your pricing can be a unique brand identifier. It can also drive the perception of brand superiority. Sometimes something costs more because it’s better. That could be how folks see your home building services.
The cons of value-based pricing
Value-based pricing won’t work for everyone. Here are some potential cons.
Value-based pricing requires research
You’ll need to determine the optimal price point through extensive market research. It also often involves a lot of trial and error.
During that time, you’ll miss out on some jobs you could have won because your pricing was simply off.
Value-based pricing is risky
Setting prices based on consumer perception is risky. If you pick up on the wrong impression, you’ll end up losing either money or customers.
If your prices are too high for too long, your reputation can even take a hit.
Value-based pricing isn’t entirely stable
Price sensitivity among consumers can vary for many different reasons. The ideal price range is hardly predictable. And it can change at any time.
You’ll need to continue research and stay on top of your pricing to ensure it’s always in the right range.
Cost vs. value: Take your pick
At the end of the day, you have to choose whether to be a value-based or cost-plus home builder. This is an important decision. It could very well determine your business’s success.
Your target audience and prevailing market trends can significantly influence your pricing structure. Some home builders actually combine both pricing models to cater to different market segments and types of projects.
Said another way, you’re not limited to just one pricing strategy. It’s a matter of what works best for your business.
Here are 4 things you can do to help you decide which pricing structure suits your brand best.
1. Research the market
Conduct thorough market research to find out what customers want and how much they’re willing to pay for it.
Surveys, focus groups and data-based analytical research can generate valuable market insights for setting price points.
2. Study your competition
Find out how your competitors price their products and services.
You’re not trying to copy them. You just want to understand what you’re up against. That will give you pointers for a competitive pricing strategy.
3. Understand your services
Besides the monetary value, can you tell how much your services are actually worth to your customers?
For instance, home renovations could be an investment. Or, a home could be a dream come true in your customer’s eyes. You’re offering so much more than just the brick and mortar. Let your price reflect that.
4. Focus on long-term business goals
A common pricing mistake contractors make is fixating on a particular project or season.
The construction industry is very dynamic. Building costs and demand often fluctuate erratically. Design a pricing plan that’s flexible enough to future-proof your business against market changes.
There you go—a brief guide to cost-plus vs. value-based pricing in the home building and construction industry.
Remember to choose either strategy based on what you’re selling, who you’re selling to, and your brand’s position in the market.