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EC's Profitable in Low Voltage Market

April 7, 2019

Pricing Low-Voltage Voice/Data/Video (VDV) Services

Electrical contracting firms that offer customers services in the voice/data/video (VDV) market can successfully earn large profit margins by providing effective VDV solutions. But they’ll need to consider more than just selling time and material with a markup or expanding service offerings. Instead, companies need to focus on how they market the services they already offer, along with the specific calculations they use to assign value to these services.

One of the values that VDV market entrants might make is the assumption that their main value lies in effective management of installation. While that is a vital part of what contractors offer, customers likely aren’t viewing that fundamental process as a product. Instead, their aim in hiring a contractor could be to gain innovative IT solutions, and installation facilitates that goal. By providing these services to a client, a contractor can add value to their services, thereby justifying higher profit margins.

Profit, Investments, and ROI

Contractors entering the VDV market need to know that they will find it necessary to invest resources into personnel by means of accurate training. In addition, test equipment, marketing, and other necessities will also need to be part of any strategy to build a VDV business. Whether this includes outside borrowing or internal reallocation of assets, one good rule of thumb is that business investments should be on par with risk. Corresponding markups on your services not only serve to grow your business, they also illustrate the value of your specialized skill set and experience that set your company apart. Customers can recognize this and make a return on your initial investments possible.

Pricing vs Costing VDV Work

Costing VDV work is essentially an estimate of both direct and indirect costs of performing any given VDV task. These could include labor, materials, equipment use and upkeep, along with lease and rental costs. The total cost–’overhead’–is a sum that a company can use to determine the level of funding necessary to carry out an entire project. 

Pricing is often a direct output of cost, with markups added in during the bidding process. A standard percentage or amount can be used across the board, and more nuanced pricing can be figured out for individual projects. If the client is more focused on the installation than the IT solutions it will provide, then it can be treated as a commodity and competitive bidding is fitting. Different pricing strategies factor in if the contractor is able to work directly with the client to define value and design parameters.

Pricing Strategies 

VDV pricing approaches can vary widely. The right one depends on the company, their market, and their goals. Here are some things to consider when deciding on an ultimate pricing strategy:

Small vs Large Firm: Many small low-voltage electrical contracting firms working in the VDV market are fine with the size and scope of their business and are more focused on keeping the status quo than they are growing their business. These individuals are often very skilled at their chosen technical specialty and have low overhead costs. All these factors combined mean that this type of firm will often win a bid that is based solely on price and their ability to handle a very specific task. Larger firms with more diverse offerings will naturally need to charge more in order to cover the costs associated with keeping their business running, and so could lose out to a smaller firm, depending on the client’s needs and goals.

Using Markups: This pricing strategy consists of costing a job and then adding on a set markup percentage. The resulting sum is the final price. Markups are best used in situations where the client is concerned about price alone and they aren’t focused on special skills or abilities, but instead see all bidding firms as equal. The downside is that in order to get business, a firm could end up delivering services to the customer for a sum that is below their true value. In these cases, VDV work would not be adequately compensated and a company’s risk could outweigh their return.

“Buying” Customers: Firms entering the VDV market often need to build their customer base, and so use low pricing to outcompete other VDV installation companies. While they might woo customers away for a time, hoping to increase prices to gather a sound return, customers willing to leave one company for a lower price aren’t likely to stick around through inevitable future price hikes. If the customer’s focus is on cost alone, they will have no hesitation to leave their current provider for another undercut price. Using low prices for an extended period of time to drive competitors out is another strategy that VDV firms often employ, but once a monopoly-like status is reached, the next upstart can take the place the current dominating firm once had, and the cycle starts anew. Work is plentiful, but profits can be hard to come by.

Choosing Customers

Successful VDV contractors invest time in choosing their ideal customers. These individuals are often company owners who understand that quality VDV systems are at the heart of their businesses. Because they’re relying heavily on this technology, they appreciate expertise in project management, technical knowledge and experience, and a contractor’s dedication to a quality installation. They want to deal with a financially and organizationally stable company, since that translates into stability for them as well. Ongoing technical support and maintenance are also vital. Only a full-service VDV contractor can bring these elements to the table, and this type of customer is happy to pay a sustainable cost, since they are selecting a provider based on factors besides price alone.

Pricing VDV Services 

Whatever pricing strategy you choose to adopt, there are plenty of internal and external factors to consider when pricing your services. External factors outside of your control might include general demand, your place in the VDV market, level of risk, and market uncertainty. 

Demand. Customer demand can drive decisions around which services to offer. Low demand could mean that you won’t be able to achieve a markup that would make financial sense. The opposite is true for a service that is in high demand. That said, be careful about the level of markup, as this can dictate customer retention and long-term feasibility. Offering a vital service at a lower profit margin can go far to retain customers over a longer period of time while also making the market less attractive to potential competitors.

Market position. As we’ve established, certain types of customers will evaluate your services on price alone, while others will focus on your offerings first. Where you fall within the VDV market can help to determine where you should fall with pricing. If your company installs or removes cable lines, customers often view this, not as a skilled or high-quality service, but as a commodity. On the other hand, system integration, being an authorized service provider, or other higher-tier, specialty services are naturally seen as more skill-based and will merit a higher price in customers’ eyes. Of course the overall pricing needs to match market position, or customers will go elsewhere.

Risk and Uncertainty. A basic job with no special considerations follows a set pricing outline. But when you’re working with systems that have performance requirements that go beyond industry standards, it can take a lot of legwork to accommodate client needs. The same is true if there are undefined requirements regarding various technical factors of a project, such as those surrounding site conditions. The higher these risk factors and uncertainty climb, the greater the markup you have the right to apply. Customers should understand that factors outside of the norm that require extra skill and attention will result in higher cost–this is true across all sectors.

No matter your pricing strategy, providing value and education to the customer are critical to success. Ensuring that customers recognize that what you’re offering them sets you apart from competitors can go far to build loyalty and long-term retention. Whether you focus on bidding or negotiation will also dictate how you settle on a workable pricing strategy.

Rely on Charter Estimating

At Charter Estimating we specialize in evaluating your project and providing you with a reliable, workable estimate to present to clients. That work has helped us to determine the key elements that factor into successful VDV pricing. If you are an electrical contractor in need of help with your next proposal, please don’t hesitate to reach out.