This article is for business owners in the Greater Vancouver and Fraser Valley construction industry who have experienced severe price undercutting by competitors in their trade.
If you are a subcontractor in the Greater Vancouver or Fraser Valley area then I’m positive that at some point in your business you have lost a job solely based on price. Worse than that, you’ve probably lowered your price below what you believed was fair in order to get that much needed job. You may think it was necessary to win the job and keep your business profitable, but I believe that its not only damaging to your business but to the entire industry.
Companies that compete solely on price are making it hard for other companies to grow and succeed, especially in the single-family residential market. Subcontractors who focus on brand, quality and customer experience are finding it harder and harder to succeed in today’s competitive residential construction market. This type of aggressive undercutting is a dangerous “race to the bottom” and ultimately negatively effects the entire ecosystem of the industry. From one perspective the argument could be made that it is a matter of simple supply and demand and that the prices have been determined by what the market is willing to pay, but this idea could lead to a major problem. If prices drop to a point where most companies can’t viably compete, businesses may shut down, causing a domino effect that may lead to a shortage of quality companies and an overall drop in quality of our local construction market. In a market with such high real estate prices, there should be no reason why subcontractors can’t provide their services at prices which allow their businesses to thrive. I’m not suggesting charging ridiculously high prices and taking advantage of customers, but instead determining the right price for your business to succeed.
“My business is being undercut by companies who offer less quality and customer service than me”
Does this sound like a common complaint you’ve found yourself saying? Your next thought might be why are they getting the contract when clearly, I’m more qualified. Not all companies feel this way and may be doing very well in the residential market, however there are still many companies that are scraping by after years in business. The cause of this problem comes from both ends, with the trades and with the builders.
Low barriers to entry in the construction industry is a reason why so many new companies come and go so often. Certain trade businesses don’t require any type of certification or training to begin which results in people becoming professionals overnight. Trade companies are finding themselves undercut by newer less established tradesmen. As a response established companies may start positioning their business to offer a lower price than they normally would. To afford this it usually means cutting other expenses, such as branding costs, marketing, tool quality, employee training or overall wages. Once a business owner decides to follow this type of strategy, he or she begins contributing to problematic type of thinking in this competitive landscape. This might cause other competitors to drop their price, which you may think is benefiting the builders and owners but is detrimental to everyone.
Low barriers to entry also exist with builders. This is often the trade-off municipalities are willing to accept in the aim of city development and growth, especially in the Greater Vancouver market. With the number of builders increasing, the quality of builders may decrease which is an exact mirror of the subcontractor situation. Cheap builders attract cheap trades and vice versa. Builders who engage in that type of lowered standard for cheaper price mentality contribute to the problem.
Although the problem so far has been described by blaming competitors, builders and the market, the solution begins with yourself. Bringing respect back to your trade starts with recognizing that you simply can’t afford to charge a lower price. This starts at the ground level. Trades companies need to learn how to sell their services based on every aspect of what makes them special. Obviously this is easier said than done and you may be thinking “I’ve tried staying firm to my price and it doesn’t work.” The fact is that its not that simple. There are certain ways you need to operate your business to ensure that you can keep your prices at a reasonable level. Some of these include the following:
Find The Right Price
As a business owner understanding your numbers is the first step. Determine exactly how much revenue and profit is needed for you to achieve your business and life goals. Work backwards from your earning goals and costs to find out what you can afford to charge. Although there may be industry standard pricing per square footage, it doesn’t serve you at all to follow this pricing if it makes it impossible to make enough to be successful. It takes discipline to stay committed to a pricing strategy that may seem difficult in the short term but necessary for long term success.
Target Builders Who Value Quality
Focus your business solely on the portion of the market that values customer service and quality. Don’t cater to clients at the cheaper, “cut throat” level of the industry. At the lower segment of the market, builders and owners will probably feel construction costs are too high and therefore attempt to protect their investment profits by squeezing yours. There will always be segments of the market who value quality and experience over price. Find out who those builders are and work to network with them, while at the same time being quick to dismiss builders looking for the lowest price. The cheap option isn’t a viable option for our industry in the long term as it is much more difficult to run a high volume-low price type of business model in the construction service industry.
Sell Your Strengths
If you want to be able to charge the price you deserve, you need to convey what exactly your client is paying for. This can be done through marketing and branding. Create a business that has credibility by establishing a solid brand with positive testimonials. Don’t make the mistake of underestimating the importance of advertising. The point of advertising is not only increasing leads, but also conveying the message you want clients to see. Let them know that they are paying for excellent craftsmanship, knowledgeable trades people, reliable scheduling and an overall positive experience.
Keep Job Leads Coming In
There is an enormous difference in taking every job that you receive and choosing which jobs you’d like to take. If your pipeline isn’t full of incoming job quote requests then you’re simply at the mercy of the customer. Position yourself to turn down as many jobs as you take. This will make it possible for you to filter out clients who aren’t willing to budge on price. To do this it requires a commitment to actively market and sell constantly, even when you’re busy. Don’t stop looking for new jobs even if you have a few jobs lined up already.
Creating systems and processes for your business is vital if you want to own a successful business and not just create a job for yourself. Proper systems ensure the business is running smoothly which gives you freedom to focus on growth and improving efficiencies. These processes can involve all aspects of the business including employee and management protocols. Improving the efficiency of your business will allow you to reduce costs and improve profitability even if your job value stays the same.
This article isn’t suggesting charging extremely high prices and taking advantage of customers. Its more about determining the minimum price that you can afford to charge to keep your business successful. There is no simple solution for struggling subcontractors. I've seen too many subcontractors barely scraping by and remain at the same success level after years of hard work. A shift in perspective at all levels can push the industry in the right direction but it starts with you.