Lump Sum Contract or Detailed Pricing?
Sharing pricing with a prospective customer is a pivotal moment in the sales process. Will they like what they see? Will the number meet their needs or set up a long, back-and-forth that ends without a deal? Getting this step right is crucial to winning business, but what strategy works the best? Present a lump sum contract, or break out the numbers? Both styles of pricing come with pros and cons. Here’s a guide to help you decide which method will work best for your business and help you win more jobs.
What Works for the Customer?
At the end of the day, the method that’s going to work best for you is the method that works best for your customer. Spending a few minutes getting to know them will help you know which method will likely best for them. You will want to balance this with your needs, too, but the goal is to find a win-win solution.
Lump Sum Contract for The Single-Price Customer
Is this customer the the type of person who starts out by asking, “Give me the bottom line?” Those customers are clearly asking for a lump sum price quote. But, also consider the customer who becomes confused and overwhelmed by industry terms or details. Do they glaze over when talking about specs? They will probably be happier with a simple, easy, and straightforward lump sum price.
Are they asking questions about what might change the price? They could be pointing out risks they aren’t willing to take on. If you’ve looked at all the risks and are confident in taking on the challenge, a lump sum contractor might fit their needs best.
Some customers might look at a lump sum contract and think that you aren’t giving them the details they need to compare quotes. If they raise this concern, you can always offer more detail if they have questions. Even with one number, they can still compare bids with your competitors – just in a simplified way.
The Detailed Pricing Customer
On the other hand, some customers will start out discussing every detail. To earn their loyalty, and their business, you’ll have to break out your pricing. Consider giving them detailed pricing, also called unit cost pricing. A lump sum is going to frustrate them. They are likely to expect clear information as to which item costs what. They may want to haggle over prices. They’ll look at why you priced items or labor the way you did. Make this type of customer happy and the result will likely be positive reviews and word of mouth referrals.
A customer who wants all of the details could also be a warning sign, and you’ll want to take note. Some customers don’t understand the cost of running a business. For example, you have overhead that their cousin who offered to complete the work doesn’t. Be ready to explain why your costs are what they are and how they compare to industry norms. This isn’t a bad thing, as long as they are ready to learn and you’re ready to explain.
Another way to gauge whether this is the right method is to charge an itemization fee. Tell them you’re happy to provide more detailed pricing, but only if they’re willing to cover the cost of the additional time it takes. If they respond positively, then you can be confident that they wouldn’t have chosen you without it. You can always apply that fee toward the cost of the work if they accept your offer.
Breaking it all down
Spelling out all the details causes you to slow down and think through the work more carefully. It’s easy to underestimate a number – maybe a labor cost or supplies. You may be able to catch something you might otherwise gloss over if you only used a lump sum approach. This is especially important when it comes to protecting your profit margins. Now is the time to crunch those numbers, before you present them to your customer.
Detailed pricing also conveys transparency and trustworthiness. Since fewer contractors tend to do this, you’ll stand out from the competition right away. When you include all the details, there’s no question as to what’s included and what’s not. For example, if you list “removing debris from the area,” they’ll have clearer expectations as to how you will clear the jobsite.
On the other hand, customers who ask for detailed pricing might be the exact customers who are going to question every itemization. They could be the type to scrutinize every detail – especially your profit margin. Change requests will be almost guaranteed. If their motivation for detailed pricing is because of budget constraints then they will want to trim your profit margins as far as they can.
These customers tend to question every little detail. You may have to explain decisions or reveal more than information than you’d like about how you run your business. This method could lead to losing business to competitors with nitpicky or unreasonable customers.
Points to Remember
While the majority of customers will be happy with lump sum pricing, you should be prepared for the fact that it won’t work for everyone. Even if it works best for you, treating it as “business as usual” could be undercutting your bottom line. Customers who are looking to compare bids item by item among contractors will be frustrated if each one provides lump sum pricing. Your business will stand out positively when they are comparing.
Lump sum contracts could backfire from people who are looking for more information. It could even generate negative reviews. If they don’t know all the details that you put into their property, they can feel “ripped off” if they were unhappy with your service.
For your accountant, you might want to keep an in-house version of unit pricing. Lump sum pricing may not satisfy their need for information, even if you only show your customers your lump sum estimates and invoices. Building detailed invoices, or job costing, is a great way to evaluate the profitability of your work.
Keep in mind that the lump sum method can favor the customer as well, if you treat it as a fixed-price quote. Many customers will expect a single-price to mean a fixed-price unless it’s clearly spelled out. If you have surprises half way through the job that increase your costs, you end up taking on the responsibility. Savvy customers know this, and appreciate your willingness to take that risk on their job. However, you could find your profit margins being trimmed or eliminated with lump sum pricing.
Choosing the Right Option
Both methods meet the needs of different types of customers. You can make your customers happy and win more business by using the method that best matches the situation and customer expectations. Keep in mind that you’re not tied to one method or the other, even if you have only used one in the past. Flexibility and confidence to use the right method for the right customer can really take your business forward.