When we are shopping for most things — groceries, furniture, clothes, hardware, fast food, whatever — we expect to see the price prominently posted so we know what the item will cost before we buy it. On the other hand, there are many situations in which there is no standard price and we expect businesses to give us a quote on what the job is going to cost before selecting a vendor and authorizing a go-ahead.
Car repairs, yard work, all phases of construction and machine shop work are all businesses where this will happen and in which the task of estimating the cost of a job is extremely important — to the customer and the business. Let’s look at it from the business’ point of view.
Visualize a horizontal line that represents the “right” price for the job. When I say the right price, I mean the price at which I — representing a business — have figured in all my costs and expenses and added a reasonable profit. Any price quote below that line would mean less of a profit, and if it goes too far below, it would mean a loss. Anything above the line would bring in greater and greater profits.
Of course, I doubt there is any business that can quote the perfect price every time, and keep in mind that almost always, you’re quoting against competing businesses that do the same kind of work.
So let’s see what happens when your quotes vary greatly over and under the “right price” line.
For the jobs you have quoted accurately — i.e., close to the line — you will get your share of the jobs. If there are five businesses quoting, you can reasonably expect to get 20 percent of the jobs. But chances are that you’ll get all of the jobs with which your price was “below the line.” Remember, those are the jobs in which your profit becomes less and less — or worse, a loss. Conversely, you will get very few of the jobs with which your price was above the line — where you would make a higher-than-normal profit.
If you have been following me, you will realize how important it is to consistently generate quotations that are close to the line. That is when you will get your fair share of the jobs and make a fair profit. (Getting more than your fair share could involve better marketing or better technology, but that’s another topic.)
Accurately bidding jobs is not the end of the story. The way to improve your bidding accuracy is to take the time to analyze each completed job to verify that the costs that you estimated were accurate.
If your costs were greater than you estimated, you didn’t make the profit you anticipated. Worse yet, you may have lost money on that job while continuing to think that you had made money. That could prompt you to quote subsequent jobs too low and to continue to get losing jobs. That is not the way to succeed in business.
— Paul Burri is an entrepreneur, inventor, columnist, engineer and iconoclast. He is not in the advertising business, but he is a small-business counselor with the Santa Barbara chapter of Counselors to America’s Small Business-SCORE. He can be reached at email@example.com.