What the construction industry can learn from Apple
What does a construction company have in common with the world-famous technology company Apple? First and foremost, not that much. But it should! At least in the area of pricing, thinks Jonas Stamm from Molteo. He explains why in his article.
How does your company currently calculate its prices? The costs plus a small buffer and the profit? That's how most of the contractors I've talked to still do it. This puts you directly in a price war with your competitors: Who has the lowest price? Who can offer it even cheaper? Should I reduce the buffer to get in on the bidding?
I would like to show all entrepreneurs an alternative to this price-driven hamster wheel: value-based pricing. Because your business can be more than the sum of labor and materials. Wouldn't it be an appealing idea to simply set prices that people pay without grumbling, like the tech company Apple?
What is value-based pricing?
Value-based pricing means that pricing is based on how much customers are willing to pay for the value of a product. Brands that take this approach consider the interests and needs of their customers. So if a construction company wants to take this approach, it needs to find customers for whom price is not the most relevant criterion. For example, this target group might focus on quality, transparency and information during construction, or adherence to schedule. Sounds unrealistic at first for the price-driven industry. However, I am sure that these customers exist.
The advantage of this type of pricing is that companies can charge more for products and services that are considered high value. This allows companies to be more flexible in their pricing. But this marketing also brings plus points for customers. We have compiled the four most important advantages for you.
1. Reduced risk of quality deviations
When customers ask for an estimate on a construction project, they are presented with costs, but have no idea of the quality at which the project will be completed. Likewise, contractors often have little room to explain how the price is arrived at. Turn it around and sell the customer, for example, a "premium construction project" at price X and highlight his skills with references and his track record, and everyone knows in advance exactly what to expect. The customers know how the company works, and the company knows the customer's needs. Together, they minimize the risk of planning errors as well as unrealistic expectations. If, on the other hand, a construction project is calculated on the basis of the pure cost of completion, there is always a certain risk that quality deviations will occur. After all, if the customer demands a fixed price and a fixed date for completion, the contractor has no choice but to reduce quality in order to achieve that.
2. More fairness in payment for services.
Many companies hardly differentiate when charging hourly wages to their customers. At most, a distinction is made between master craftsmen and journeymen. However, this creates an imbalance directly on two sides. On the one hand, the customer may pay the same hourly rate for a worker who is not as experienced as for someone who has already successfully performed the exact service required umpteen times. On the other hand, these two employees are often paid identically. Thus, the experience and thus better quality of work does not pay off for the one employee. In value-based pricing, experience and qualifications can be taken into account. So if the customer demands an iphone and not a phone or in our case an ihouse and not a standard house, he will surely understand that only the best workers of the team can implement this project. And that has its price. Of course, as a contractor you have to have your construction competence management up to date (we will report more on this in the coming weeks). Because that's the only way to put together the right team for the project.
3. Increased transparency for all parties involved.
By focusing on actual value in terms of benefits to the customer, pricing becomes easier for all parties involved in the project. This is because companies can better plan and document their services before the contract starts, which increases transparency between them and the customer. In addition, we advise all contractors to think not only about products such as the construction work itself, but also about services that can be a real added value. For example, you could offer your customers to take care of the registration for electricity and water as well. Especially if you do this more often, it hardly takes any time at all. For the customer, however, it rounds off the complete ihouse package.
4. Easier planning and documentation requirements
When planning and documenting construction projects, it is often difficult to correctly record the hours worked and the materials used. This is because traditional pricing of projects by cost or hourly rates can be very ambiguous. Moving to a value-based pricing model makes planning and documenting construction projects much easier. It also makes a virtue out of a necessity - recording all hours and documenting construction work. Customers will greatly appreciate open, modern and timely information and the transparency that comes with it. This can be achieved quite easily by setting up a construction site newsfeed, for example.
The future of the industry
The future of the construction industry looks bright as more and more companies switch to a value-based pricing model. Technological advances are making it possible for companies to be transparent about their performance and track records. As a result, customers have more confidence in the construction process. As a result, they are willing to pay a premium for projects that can be carried out with a lower risk of quality deviations. In addition, due to the ever-increasing affluence in our society, people tend to buy more convenience products. What has long since arrived in the middle of society in food retailing will gradually become a trend in the construction industry as well. However, this change does not mean that projects will necessarily become more expensive, but that the actual costs will be known in advance. Any rework or even legal costs can thus be replaced by a higher initial price. The technology and the new way of documenting the construction process thus reduce the number of legal disputes.
The bottom line, of course, is that every contractor must ask himself or herself which pricing strategy is right for him or her. Do you always want to offer the lowest price, like Aldi? Or, like Apple, do you want to create a high-quality product that people are happy to pay for? The decision is in your hands.