It seems this topic is discussed frequently within the home inspector community. How should you price your home inspection? How should you price your ancillary inspections? Furthermore, how should you counteract a “cheap” inspection?
Let’s start off by discussing the emotional side of pricing strategies.
When a new inspector comes in your market with a low-ball strategy, you may feel threatened. You may feel you need to lower your inspection cost in order to compete. Also, you may feel as a business owner, a sense of urgency to prepare for counteractions.
In this article, we are going to discuss how you can respond to competitor pricing, not only from a low-ball standpoint, but from a general pricing action plan.
Pricing is a strategy
Plain and simple, your price listed on a home inspection and ancillary services is a strategy.
That being said, can we really be frustrated at someone who offers a cheap inspection? On the other hand, can we be mad at a company for having a high inspection cost, in which, they somehow keep booking inspections? It is a business strategy after all.
The simple answer, no, we can’t get frustrated over the actions of our competitors. As we say, the price of the service is a direct correlation to what they feel their time is worth. As a tradesmen, you are offering your time. Your experience in this profession correlates to how much time you may use or you may feel is needed.
Ultimately, a higher priced service means a higher level of experience and service. All while, a lower priced service means a lower level of experience and service.
The Math & Science of Pricing
Let’s dive into the math of pricing. How can you make the most money for your home inspection company? As it is suggested, the lower the price, the more units needed to be sold. Compared to the higher the price, the less units needed to be sold to make the same amount of money.
Let’s say you offer home inspections for $249. In order to make $100,000 you need to sell 402 inspections. All while, if you offer $449 home inspections, you need to sell 223 (almost half as less). So how do you sell your service for more?
Sean D’Souza, from PsychoTactics why clients buy – and why they don’t, suggests that higher pricing simply receives more attention. Sean relates your pricing to how you would purchase tile for your home flooring. You want the most expensive tile right? It’s better-looking, longer-lasting, and speaks “I am rich.” It just may not be in the budget as of right now, however, as a salesman, you need to pitch your inspection with a solid reason to why it is priced more. Sean finishes by saying, even if a client does not purchase the expensive tile, they will continue to want it for next time. That being said, seven years later, the client that got the cheap inspector will want to purchase from a more expensive inspection company the second time around. This is especially true if the cheaper inspector missed items.
Now all this is generally speaking. So in order to assist you in pricing, my suggestion would be to come up with a solid few USP’s – unique selling points. For instance, you could list: highest-rated, free follow-ups, and free protection-plan. That way, when a client calls in and says “I am just shopping” your sales manager can respond, “Okay, well I’d just like to let you know we are the highest rated in the area, we offer free inspection follow-ups, and all of our work is backed by a protection plan for those unexpected failures.” – It is statements like that, that really get a client to think again about their purchase decision. They can very well ask the next inspection company, well what do you offer that is different from XYZ company.
I have also included a useful article for pricing strategies you may want to use this year. The Ultimate Guide to Pricing Strategies – By HubSpot
Theories on Pricing
Now to pricing theories. The most vital aspect, in my opinion, of your small-business ownership. Let’s talk about Game Theory with the Prisoners’ Dilemma.
Prisoners’ Dilemma:
Say you are innocent and being arrested for a crime. The police make another arrest who they say is your accomplice. During interviews, the police say, “If you confess, it’ll make your prison sentence easier.” The police then explain the possible sentences:
- If both you and the other person confess, you each get 5 years in prison.
- If neither of you confesses, you each get 30 days in jail.
- If you confess and the other person doesn’t, you will be set free and the other spends 10 years in prison.
- If the other person confesses and you don’t, he goes free and you spend 10 years in prison.
That being said, do you confess about your crime? Or, do you remain silent in hopes the other does not confess either?
The same dilemma appears in pricing. Assume there are two inspectors covering one area. Both have equal share, same net profits, and high prices.
- If you both keep prices high, you each make 100k in profit at year-end. This totals to 200k in industry profits.
- If you both compete and lower prices, you each make 50k in profit at year-end. This totals to 100k in industry profits.
- If you lower prices and your competitor doesn’t, you make 120k in profit and your competitor only makes 30k. This totals to 150k in industry profits.
- If your competitor lowers prices and you don’t, your competitor makes 120k in profit and you only make 30k. This totals to 150k in industry profits.
Understanding this is an extremely simplified version of the real-world, what do you see? As the home inspectors compete on pricing, total industry profits fall, Realtors and clients begin expecting lower prices, and a price war can continue. While undercutting prices may work for you in the short-term, it is assumed the your competitors will follow-suit.
So what should you do? Well, the simple answer is to NEVER compete solely on price! Sure, sales to make year end numbers are fine. However, if you do compete on price, understand your profits and the industry profits stay lower.
This is what is learned in business school. High executives understand not to get into price wars only if they know, they can price out their competitor. That is, make the price so low the other business files for bankruptcy. Soon after, the survived company can hike prices with no competition. This is exactly what Amazon has done to the retail industry.
So how should you price your inspection company? Price your business according to your experience, what your company offers, and never price against a competitor unless you’re willing to accept the consequences.
Finally, having the largest net profit margins as possible saves your business from possible attacks. If there is anything you can get away from this article, it is lower your company operation cost and carefully spend your money.
With 2020, comes another year of inspection company challenges. You should always stay informed on industry changes so check out our quarterly conferences.
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