Owned and Operated - Episode #158: Pricing Effectively Based On Your Efficiency

Hosts: John Wilson & Jack Carr
Release Date: December 31, 2024

Introduction & Context

In Episode #158 of Owned and Operated - A Plumbing, Electrical, and HVAC Business Growth Podcast, hosts John Wilson and Jack Carr delve deep into the intricacies of pricing strategies within home service businesses. This episode, titled “Pricing Effectively Based On Your Efficiency,” focuses on how businesses can optimize their pricing models by understanding and enhancing their operational efficiency.

Business Growth Highlights

John Wilson opens by highlighting the impressive growth their business has experienced, stating, “This year has been a really big ride for us. We invested a ton into growth. We invested a ton into marketing. And like, we're up. We're up actually 50% still year over year. 49.8 to be exact.” (02:00). This significant uptick is attributed to strategic investments in marketing and process optimization.

Jack Carr echoes this sentiment, adding, “We're up year over year, estimated by the close of this year, 100 plus percent.” (01:14). This growth not only surpasses industry averages but also sets a robust foundation for future expansion.

Focus on Pricing Strategy

a. Setting the Problem

The conversation pivots to the challenges of pricing, especially in the plumbing sector. Jack Carr explains, “We were, I think, really close to market rates. People are happy with their pricing, our guys are happy with the pricing. There's no issues with pricing on the H VAC side.” (07:14). However, discrepancies arose in the plumbing department due to incorrect pricing entries, leading to significant operational headaches.

b. Pricing Formula and Framework

John Wilson introduces a fundamental approach to pricing based on business overhead and operational efficiency. He states, “You take your overhead, you take your efficiency, and you figure out what you need per hour.” (08:38). This method ensures that pricing not only covers costs but also aligns with the company’s efficiency levels.

He further elaborates, “Efficiency is the big nut to crack here. So you take your overhead, you take your efficiency, and you figure out what you need per hour.” (10:15). By assessing factors like overhead costs and technician productivity, businesses can establish a pricing model that sustains profitability.

c. Managing Discounts and Dynamic Pricing

The hosts discuss the delicate balance between maintaining set pricing and offering discounts to secure business. John Wilson emphasizes the importance of “strategic dynamic pricing” versus “out of control discounts,” stating, “Dynamic pricing to fill the board is strategic and those are two different things.” (24:28). This strategy allows businesses to adjust prices dynamically based on current demand and operational capacity without undermining overall profitability.

Sales Training and Team Alignment

A significant portion of the discussion centers on aligning the sales team with the company’s pricing strategy. John Wilson shares his approach: “Take away the rights. Like, hey, great, can't trust you with this. No problem at all. You will not be able to discount.” (24:05). By restricting unauthorized discounts, the company ensures that pricing integrity is maintained across all customer interactions.

Jack Carr adds insights on training, highlighting the necessity of educating the team on the value proposition and cost structures: “What does the training look like around that? Because we've gone through the training on like why we have to be priced this way…” (26:10). This education helps the team understand the rationale behind pricing, fostering better adherence and reducing unnecessary discounts.

Compensation Structure and Incentives

The episode delves into how compensation structures can influence pricing behaviors. John Wilson discusses tying bonuses to critical financial metrics: “For frontline managers, 60% of your bonus is based on gross margin. 30% is based on EBITDA. The final 10% is did you complete your rocks.” (35:00). This alignment ensures that employees are incentivized to focus on profitability and operational efficiency.

Jack Carr shares his experiences with performance pay and the pitfalls of unguarded discounting, noting, “Allowing people to discount combined with performance pay without any kind of guardrails creates this really bad situation.” (28:10). Implementing safeguards, such as reducing commissions when discounts are given, helps maintain pricing discipline.

Open Book Management

A key strategy discussed is open book management, where financial metrics are transparently shared with the team. John Wilson explains, “We have gross margin trackers up there. Like, hey, our materials have to be like 22% and if we're over it, like people are scrambling.” (34:01). This transparency empowers employees to make informed decisions that align with the company’s financial goals.

Jack Carr appreciates this approach, stating, “More of an open book type mentality with their company.” (34:24). It fosters a culture of accountability and collective responsibility towards achieving financial targets.

Key Takeaways and Conclusion

John Wilson wraps up by emphasizing the importance of understanding both gross margin and gross profit, stating, “Divorcing those two concepts is really important because when you start playing the gross profit dollar game and you understand the nut that you have to crack every day, that's when pricing starts to make more sense.” (21:35). This nuanced understanding allows for more strategic pricing decisions that support sustained business growth.

Jack Carr concludes by reflecting on the practical applications of their strategies, expressing optimism about future growth: “October was awesome. I'm excited.” (41:05). Both hosts encourage listeners to implement these insights to navigate pricing challenges effectively.

Notable Quotes

• John Wilson: “Efficiency is the big nut to crack here. So you take your overhead, you take your efficiency, and you figure out what you need per hour.” (10:15)

• Jack Carr: “We're up year over year, estimated by the close of this year, 100 plus percent.” (01:14)

• John Wilson: “Pricing should be strategic. Dynamic pricing to fill the board is strategic and those are two different things.” (24:28)

• Jack Carr: “Allowing people to discount combined with performance pay without any kind of guardrails creates this really bad situation.” (28:10)

Final Thoughts

Episode #158 offers invaluable insights into the delicate balance of pricing and operational efficiency within home service businesses. By sharing their experiences and strategies, John Wilson and Jack Carr provide a roadmap for businesses aiming to optimize their pricing models to drive sustained growth and profitability. Listeners are encouraged to implement these strategies and adapt them to their unique business contexts for maximum impact.

For more information, visit www.ownedandoperated.com.

Timestamps Reference:

• 00:00 – Introduction
• 01:14 – Business Growth Highlights
• 02:00 – Continued Growth Discussion
• 07:14 – Pricing Challenges in Plumbing
• 08:38 – Pricing Formula Introduction
• 10:15 – Detailed Pricing Framework
• 21:35 – Gross Margin vs. Gross Profit
• 24:05 – Managing Discounts
• 24:28 – Strategic Dynamic Pricing
• 26:10 – Sales Training Insights
• 28:10 – Compensation and Performance Pay
• 34:01 – Open Book Management
• 35:00 – Compensation Structure
• 41:05 – Conclusion and Future Outlook

This summary is intended for informational purposes and reflects the discussions and content presented in Episode #158 of the Owned and Operated podcast.