The Kamikaze Contractor, Part 2

I want to continue the blog I started last month when we looked at a hypothetical contractor who I named Kamikaze Ken.   (Click here to retrieve that blog post.)  In Part 1, I simulated a typical reaction to a recession market by having Kamikaze Ken cut his prices 10%, to discover that under those conditions, he would not survive the recession.

Now let’s run another scenario, using the simulation software I introduced in Part 1 (click here to download a free copy).  I’ll reset Kamikaze Ken’s pricing on row 20 to 0% and this time, simulate a drop in business- let’s say, a 30% drop in business.  (To do this, I type a minus 30 in the Volume column on line 20.)  At first glance, Kamikaze Ken loses $57,900.  So the question becomes, all things being equal, if his volume drops 30%, how much would his prices have to rise to net out $15,000 on the work he does get?  (That is, what offsets his drop in volume so he makes the same profit he did last year?)  The answer?  Only 14%.  That means he would have to sell a $5,000 job for $5,700.

That may seem like a tall order until you consider one of the factoids about the market:  on average, 24% of the people shop on price and on price alone (low bidder wins, period).  Another 17% shop on value (they’ll pay more to get what they is valuable to them).  The other 59% can go either way.  And research shows that they end up buying in the segment the sales person comes from.  If the sales rep is a price-driven person, they’ll buy on price; if the sales person promotes value, they’ll buy on value.

The long and short of it is that to some people the market is price-driven.  But to me, 17% plus 59% (or some 76% of it) is NOT!  Those are the people I want to sell to. And to do that, I need to know how to sell a strong value-proposition, one my customers want.  If Kamikaze Ken can figure that out, he can probably raise his prices 14% (or more), stop trying to sell to that 24% who wants low-ball prices all the time, and make as much as he did last year on 30% less work this year.

Kamikaze Ken could either offer the same old wagon full of bargain-basement junk he has been offering all these years (and try to get 14% more for it), or he could learn how to put together a power value-rich package and sell it for a higher price than he does now-perhaps 25% or 30% more, not just 14% more.  Most contractors know that 18 SEER equipment can fetch 25% to 40% more than 13 SEER equipment, yet most are afraid to  offer it lest they lose a job to a lowball competitor.

But let’s get really drastic for a moment.  What if this recession gets so deep that Kamikaze’s sales drop by 50%? Could he survive such a disaster?

By using the spreadsheet I reference above, when I set up the Volume input for -50%, with no other changes, Kamikaze ends up losing $106,500-this would surely bankrupt him.

But I can also simulate the effects of selling the top of the line and controlling costs and overhead.  If I enter +15%  in the Pricing input cell, -5% in the Costs cell (simulating better job design and less waste, since the spreadsheet already reduced direct costs when I reduced the volume), and reduce overhead by 21%, I can get Kamikaze back to where he was before the recession hit.  But cutting overhead by 21% is a huge job!  What if Kamikaze can only cut overhead 10%?

Then he ends up losing $13,500 instead of making $15,000. But who says that 15% is all the price increase Kamikaze could get away with?  Suppose he offers the best product he has to offer and can realize not only a gain in sales due to a gain in the costs of equipment, but also a gain in sales because he can sell a value-rich proposition for more margin dollars than a low-value package.  Suppose Kamikaze could get 22.5% more in sales due to a product shift and a sales practices shift?  Is such a jump possible?

Many dealers who have learned how to do just this tell me that it is not only possible, it is EASILY doable.

Ah, but can Kamikaze Ken learn how to sell like that?  THAT will be the topic of the next blog.

Stay tuned, fiscal fans!