Getting started - the price break transition

[bajaru]

I built a light duty CNC router from buildyourcnc.com and got busy mostly making signs. My plan was to start out with low prices and then once I figured out what I was doing and got my name out there, I would raise my prices and eventually turn this into a full-time endeavour.

I'm at the point where I basically know what I'm doing and I'm getting repeat business, which is awesome of course, but I really need to raise my prices if this is going to work out. A short while back, I made a sign for a fella for $40 and now he wants another one. That $40 sign took me 5 hours to make the first go 'round, which was OK at the time, seeing as how I was still learning and all. I bet I could do it in 3 or 4 hours now, but that would still be around $90 - $160 if charge what I think my time is really worth. I want his business, but I can't justify it now for what I charged the first time.

Should I raise the price a little, and hope he comes back for more work later and raise the price again later, or stand my ground to make it worth my while now, which would be 2x - 4x the original price I gave him and I fear might scare him off?

Has anyone else gone through something like this?

-Thanks

-Brian

[pauljohnstone]

Originally Posted by bajaru Should I raise the price a little, and hope he comes back for more work later and raise the price again later, or stand my ground to make it worth my while now, which would be 2x - 4x the original price I gave him and I fear might scare him off? Has anyone else gone through something like this? -Thanks -Brian

This is a difficult situation. The problem is that there is a huge emphasis on cost when people purchase something.

There's no point in making him another sign at $40 if it's not worth your time.
This is not a charity. But you need to keep in mind that one large reason for the repeat business is because you were so inexpensive the first time.

I think you are going to have to raise your prices, and accept that you are going to lose some customers. Good luck. It's difficult to start out with low prices and get the consumer to accept paying more. He's going to counter with "hey, the first one only cost $40, you're screwing me".

[BobWarfield]

Work this customer up to it, and get him to let you use his name as a satisfied customer.

Charge him halfway to profit on the next sign and let him know you need to go all the way after that.

If customers understand you're losing money on a job, they're much more understanding. Your biggest issue with them is whether someone else is willing to undercut what you have to charge to get to profit.

But I would definitely try to treat your first customers well, even if you lose a little here and there, and provided they are willing to speak up for you. You can't beat customer testimonials to help you sell your service.

Cheers,

BW

[harryn]

Bob has a good idea there. It is helpful if you are straight honest with the guy and tell him what you are doing and your plan. I have found customers remarkably helpful if you tell them your challenges and ask them what they think you should do.

You do need to keep in mind that someone with a heavy duty router might be able to do the sign in 1/3 the time, so you are still competing on the "job", not really just the machine time.

Coffee is a great way to have this conversation.

[harryn]

Hi, there is one more aspect to this which might be helpful. When you are making a bid and planning to loose money or just not charge as many hours as it is going to take, try to document that to the customer early on.

Example
- Project estimate - 8 hours x 40 hours = $ 320
- New customer discount = $ 160
- Quoted project price = $ 160

That way there is a "reason" tied to the discount, and it is easier to justify not giving as much or any discount on the new project.

[bajaru]

Thank you everyone for your comments!

I took your advice and I finally talked to the fella about it all and he knew he was getting a steal on that first one. He was fully expecting me to raise my prices the next time around and was super cool about it. On job #2, I'll charge him halfway between the first job and making a profit as BobWarfield suggested, so at least I won't be losing my butt on the next job. I also really like the idea of detailing his discount on the invoice. Why didn't I think of that??!! (Because I'm a newbie, that's why.) Nothin' wrong with full disclosure - I think that'll make him feel like I'm not sticking it to him, later on. Thanks harryn!

This customer displayed the sign I made for him and has already gotten several "interested" inquiries from people wanting their own signs. If even one of those prospects pans out, it'll be some awfully cheap advertising I got by "losing money" on the first couple jobs.

-Brian

[ger21]

Imo, it makes no sense to lose money on another job??

The problem is it doesn't really work according to your original plan. Typically, the people that you lost money to, won't be willing to spend what the proper costs should be. You don't think doubling the price for the next job, and then doubling it again for the third won't scare him off? If it doesn't, he'd have paid the full amount in the first place.

And hopefully, your "word of mouth" customers won't all be expecting the low price that the original purchasers paid. Because I'm sure most asked "How much did you pay for that?"

And what kind of signs are you making where you don't charge for the materials?

[bajaru]

I'm still starting out, so I'm OK at this time, charging less than the market rate, for this one customer. For now, I'm considering it my "marketing expense." I mean, say I charge him $65 the next go 'round, where I could have charged him $90, so that's $35 in advertising. I can accept that for a little while.

He told me he's not mentioning to other people the price he got and he supplied the material (scrap wood from his family's farm).

However, even at these el-cheapo rates, my phone's not exactly ringing off the hook. I'm thinking of getting a real marketing person or even a college student on the "payroll." Maybe offer them 15% or so commission. To tell you the truth, this whole thing is still an experiment and I'm just trying to figure it out as I go. I'm confident that I've got a few decent skills to offer the world and I know bookkeeping, but my marketing toolbox is practiaclly empty...

-Brian

[logos]

When I started in a machine shop back in late 60's I heard the man I worked for tell a customer that want a unrealist price for a job "I can go broke sitting on the poarch with a lot less effort"

[Geof]

It is not possible to change things after the fact but for anyone reading this don't charge less than "market price" for anything any time. When you are novice you are going to take longer to finish a job and you may be making an hourly rate much below what you need to survive in the long run but you make up for this by working like a maniac for more hours in the day. Never let your customer know what your hourly rate is, just what their final price is. And your price is your price, don't bargain and cut it down unless you get something for it; lower cost material, less detail in the job, a discount for multiple pieces. If you show willing to drop a price obviously you were over-charging in the first place, or at least that is the conclusion the customer makes.

[BobWarfield]

Originally Posted by bajaru However, even at these el-cheapo rates, my phone's not exactly ringing off the hook. I'm thinking of getting a real marketing person or even a college student on the "payroll." Maybe offer them 15% or so commission. To tell you the truth, this whole thing is still an experiment and I'm just trying to figure it out as I go. I'm confident that I've got a few decent skills to offer the world and I know bookkeeping, but my marketing toolbox is practiaclly empty... -Brian

Figuring out how to sell is the number one problem for most businesses, small or large. It's great being a small business owner, because you're in charge. But on the other hand, "Who you gonna call?"

You have to wear all the hats--foreman, designer, machinist, floor sweeper, CEO, and VP of Marketing and Sales. And like it or not, you're going to have to get pretty good at all of them too.

Just remember one thing--there's more than one way to be successful at all of it. There's no single formula, no "Always do it this way and you will succeed."

Find out how others go about whatever it is you think you're weak at doing. Machinists are a gregarious lot, witness these boards. But be sensitive to the fact that some of them will figure you're a competitor. Find the ones who won't. And find other kinds of successful small businesses you can consult with.

I'm frankly surprised we don't see more threads on how to help small businesses succeed. PM has a forum for the purpose, and there are some interesting posts there, but from what I can tell, there's a much bigger demand for help than supply of answers.

I've been involved with a lot of high tech startups. I've founded 3 and been a part of 2 others. Learned a lot along the way about how to grow a small business. I'm an engineer by trade, but I have kept my ears open for what some world class marketing and sales people had to say.

I write another blog where I share some of those insights. This one, for example:

http://smoothspan.wordpress.com/2010...need-starters/

I will try to put together some content more directly related to machinists and manufacturing and start to post that on CNCCookbook every now and then.

Getting back on topic for this thread, there is one more observation I'd make. Will Rogers or someone like him once said you need to treat everyone like they are your friend, or treat them all like they are your enemy. I'm in the treat them all like a friend camp. It doesn't really matter if they are or not, you'll find out soon enough and move on if they're not.

In that vein, I've had great success doing just what I said with customers. I've doubled prices after practically giving away a product at first. I've gone on to raise them from there further. Sure, a few customers decided to move on. That's where you need to be sure what you're offering and where you're pricing it aren't going to be undercut. The vast majority had been treated as friends all this time, knew I had a lot of integrity, and just dealt with it. And those customers were my best salespeople. They referred other customers to me, and they stood up as references when I needed them.

A lot of businesses don't have that. I wouldn't want to be without it.

Cheers,

BW

[harryn]

Originally Posted by bajaru I'm still starting out, so I'm OK at this time, charging less than the market rate, for this one customer. However, even at these el-cheapo rates, my phone's not exactly ringing off the hook. I'm thinking of getting a real marketing person or even a college student on the "payroll." Maybe offer them 15% or so commission. To tell you the truth, this whole thing is still an experiment and I'm just trying to figure it out as I go. I'm confident that I've got a few decent skills to offer the world and I know bookkeeping, but my marketing toolbox is practiaclly empty... -Brian

Brian, consider looking at this another way. This is your business, and no one is going to be better at "selling" your services, and pricing them, then you are.

Consider to hire out your book keeping, marketing materials / web site, CAD, even the machining, but at this stage, you need to be the guy in front of the customer.

I am always stunned by people that are willing to essentially turn their business (sales dept) over to someone that is just getting paid a commission. Imagine what it says to a guy that is just getting paid to "get the order at any price." What do you think the results are going to be?

When you do this, you are essentially saying "I am not willing to invest in getting sales for my company, but I want you to do it for me, even though I can fire you tomorrow." If you can't hire someone full time, hire them 2 days a week to make a list of customers for you and set up appointments for you to visit.