Asking for a price increase from one of your customers can be one of the most challenging and intimidating tasks for any manager. While this seems to be par for the course in many industries, janitorial contractors often struggle with this aspect. There are many reasons for this. Some people are just plain afraid of conflict – they’d rather not wake the sleeping dog. Others are afraid that asking for a price increase will invoke customer to get other bids. Still others assume that since we are a complaint driven industry, the customer will not be receptive to any sort of price increase without a long history of remarkably stellar service.
Despite our fear or trepidation to go after price increases, WE MUST! We leave money on the table, squeeze profits out of the business, and interestingly enough, we don’t do what most customers already expect from us. So to help you gain confidence in asking for an increase, let me lay out a 5-step plan you can implement to get those increases. Remember, price increases add profit directly to the bottom line. You can’t afford not to get them.
Step 1 – Know Your Job
Before you approach your customer about a price increase, you must have a complete understanding of the status of your job. At a bare minimum, you need a good grip on the following information:
- Are the specifications you bid the same specifications you are carrying out currently?
- Did you have a consistently healthy profit margin spanning the last six months? How did this compare to what you initially bid? Are labor hours and supply costs close to your initial estimate? If you are not doing an accurate job cost statement each month, then you cannot accurately answer this question.
Without this information, you don’t have the foundational knowledge needed to justify your price increase. A price increase always requires justification, and knowing your job gives you part of the information needed to make your pitch.
Step 2 – Know Your Customer
Having a thorough grasp on your job is the first half of the foundational equation. The other half is knowing your customers. You may know your job, profit margin, costs, etc., but without knowing the status of the relationship with your customer, you are not in a solid position to negotiate for a price increase. Here are the basics you need to know.
- How does the customer feel about the level of your service? Have you been doing regular (i.e. monthly) partnership meetings and getting an overall score from your customer contact. Six months of scores averaging 8/10 or higher means the service and satisfaction level is high. Without a good gauge of your service level (from the customer’s perspective), you are not in a good position to negotiate for an increase.
- How does the customer feel about the relationship? There is a difference between great levels of service and a great relationship. Many cleaning contracts have been lost despite great service. If communication has been strong in addition to great service scores, you are ready to move to step 3.
Step 3 – Recap The Big Picture
Anytime you deliver information that may be difficult to swallow, always begin with a recap of your relationship. In step 3, your goal is to help the customer see a couple of things. First, due to the complaint-driven nature of our industry, you need to reinforce your value to the customer. Explain to them the progress you have made, share with them the great quality scores, and let them know the value you add. Second, communicate your desire to form a long-term partnership. I like this word “partnership” because it sends the message of a mutually beneficial relationship. When a customer believes you want to serve them well for a long-time to come, they are less likely to think of you as a cash-sucking vendor only out for a quick buck. Preach partnerships!
Step 4 – State Your Case With Honesty
As grandma said, “Honesty is the best policy.” I am not an advocate of pretending that margins are tight when they are not, or complaining that costs have risen when in fact they have not. If your bluff is called, then credibility and trust are gone forever. Instead, be honest with your customer. You want to serve them well and make a fair profit. Now explain to them the obstacles to making that happen. Here are a few potential reasons:
- You misbid the job. Let’s face it, this happens sometimes. When it does, it is usually best to stick it out for a while, then go after your price increase at renewal time. Don’t be afraid to admit this mistake. If the customer wants you to succeed in your service, they will understand that you can’t continue at the same service level for the same price.
- The scope has changed. Scope creep is a very common thing in service contracts. Small tasks get added over time that add up to significant hours each month. By knowing your specs and the additional scope items, you can easily make your case for the increase.The expectations have changed or were misjudged. “Clean” is an ever-moving target, a subjective expectation that varies from customer to customer. Part of bidding is judging the “clean-factor.” There are times when we flat miss the expectation level and need to ramp up hours to meet customer demands. This can be the hardest reason to convince a customer of a needed increase, but if communication has been solid, you should be able to get on the same page.
- Cleaners need a raise. If the customer has quality as a top priority or they really like some of your staff, then they will understand that cleaner pay rate matters. Make sure to add more than the actual pay increase to cover taxes, profit, and additional future pay increases.
- Other costs have risen. The last few years have given rise to external factors increasing our costs of doing business, with health insurance and minimum wage hikes being the two major ones. These and other external cost drivers are easy to explain and usually don’t come with much pushback.
During this step, let me encourage you to be open about your job costs. I don’t recommend getting overly specific, but be “sufficiently vague” so they understand how the costs are derived. When the customer understands how your costs are figured, they will be in a better position to sympathize with your case.
Step 5 – Ask Them “Do You Think This Is Fair?”
I absolutely love this question! If they answer with yes, then they have agreed to your case. If they answer no, then they are in a position to explain why what you said is not fair. If you have been honest in your reasoning, then this is a tough task for the customer. To say your case is unfair implies that you have been dishonest or are asking for something unreasonable. Now they are in the hot seat to explain why.
The most difficult response to deal with will be a customer who acknowledges your case is fair, but says they don’t have the budget to make it happen. In this case, your response should be, “Well, Mr. Customer, what things could we eliminate from our current scope of service to make up for these additional costs I have incurred so that we can keep service quality at a level you expect?” Once again, you have placed them in the driver’s seat of answering the hard questions.
Bonus #1 – Update Contracts
One of the great things about price increases or price changes is they give you the opportunity to update your contract and lengthen your term of agreement. Anytime you get a price increase, ALWAYS sign an updated contract with newer and longer terms of service.
Bonus #2 – Give Price Reductions
If you want to forever solidify your relationship with a customer, give them a small price reduction. Trust is built when another person believes you have their best interests at heart. When you offer a price reduction, you can be sure that trust will grow and the threat of rebidding will be nearly eliminated. The two situations that make price reductions possible are as follows: (1) You have a profit margin that is higher than what you normally expect out of an account. (2) You offer some scope reductions that don’t affect perceived quality.
Bonus #3 – Add Additional Services
Adding additional services is a great way to skirt the “price increase” conversation. If you think a customer could use an additional service you offer, you can often wrap up your needed increase into that extra service, or at least lower the needed increase. This can help ensure the customer feels well taken care of.
Your 30-Day Challenge
I want to encourage you to go get a price increase over the next 30 days. If you are not accustomed to getting increases, start with a small customer. Doing hard things will become easier with practice. If you use the above steps and you find success, let me know. I want to hear your story!