In the contracting industry, a prevalent but deceptive notion persists – the idea that pursuing higher sales volumes at lower prices will lead to greater profits. This assumption may appear sensible on the surface — secure more contracts, increase your revenue, and anticipate a surge in profits.
Be aware that this myth could pose serious threats to your business’s profitability and success! You can grab this simple (FREE) guide, “Beyond Breakeven,“ to help you see from a numbers perspective why this is dangerous, but keep reading….
The Misleading Allure of Volume Over Margin
Imagine this: you’re selling more than ever, but your bank account tells a different story. This is the harsh reality I’ve seen countless contractors face. After 30 years in the business, I’ve witnessed too many go from profit to peril, chasing volume over margin.
Think about it – a single wrong move during a tough project can turn a profitable year into a catastrophic loss. I recall a client who plummeted from a $250,000 net profit to a staggering $500,000 loss by following this flawed volume-over-margin approach.
Sandy’s Cautionary Tale
Meet Sandy, a contractor whose story is all too familiar. His company’s revenue jumped from $2 million to $12 million, yet profits were nosediving. Why? Because Sandy fell into the trap of thinking lower-priced, larger projects would balance out. They didn’t. His profits dwindled as his gross profit margin shrank alarmingly.
Revitalizing Your Bottom Line
When Sandy and I sat down, I outlined the two fundamental ways to impact your bottom line: boost revenue or slash costs. You can only increase revenue by either selling more or charging more. To cut costs, you need to either increase production efficiency (by far the hardest of these 4 things) or reduce overhead. Sandy had upped his revenue but overlooked the essence of business – a healthy gross profit margin. Remember, it’s not just about making money; it’s about keeping a consistent profit.
Gross Profit Margin: Your Lifeline
As a contractor, your gross profit margin isn’t just a number; it’s your business’s heartbeat. Believing that lowering prices for higher sales will pump up your profits is a fast track to financial trouble. It’s a perilous misconception that can drain your business’s lifeblood. When Sandy started focusing margin over volume, his business made a sharp turn-around and his bottom line started to grow!
Mastering Your Pricing Strategy
Before you even consider sending out a bid, pause. Do you have a strategy to ensure your bids align with your gross profit margin goals? Don’t let market trends push you around. Instead, arm yourself with a deep understanding of your business costs. Know your break-even point and aim for a healthy 10 to 12% net profit margin on your bottom line. That’s what successful contractors set as their targets!
Watch the video to learn from Sandy how to avoid this pitfall in your business. Make sure to check out the resources below to help you gain confidence in your numbers when pricing.
Empower Your Decision-Making
Get your real overhead breakeven percentage by following the steps in this simple (FREE) guide – “Beyond Breakeven.” It’ll guide you in understanding the correct overhead percentage you have to mark up bids JUST to break even, thus enabling you to make informed pricing decisions.
Also, explore our “Price for Profit” category on the Profit Builder blog for valuable resources to fine-tune your pricing strategy.
Your success as a contractor hinges on maintaining a solid gross profit margin – these resources will help you do just that!