[Cover Story] The Price is Right

After four years of holding prices steady, Jeff King of ABES Pest Control in Florence, Ky., finally hit point break. Having detoured from his typical schedule of raising the prices of commercial and residential services in opposite years an average of 5 to 8 percent, he knew his bottom line couldn't handle another season of soaking up cost increases.

It was time for a little adjustment. After all, the cost of doing business hadn't stalled during King's self-imposed price embargo. "The price of fuel and chemicals, insurance liability and things like that are increasing no matter what," he says. "We pretty much had to increase our service prices at this point — we tried not to increase prices for as long as we could."

Customers didn't mind the hike. "They were receptive," King says. He simply explained why: He had been swallowing the extra costs himself and he could no longer continue that and stay profitable. Clients were OK with the 7 percent price increase. "We try not to do a full 10 — that would be great, but the 7 percent increase was enough to help," King says of sharing the burden with clients. (He was sure to tell them this, too.)

King raised prices the right way. He communicated the "why" with customers. He could have raised prices higher — but he didn't. And he was conscious of his market segment and the perceived value of his service. "The saying I like to follow is, 'Price is forgotten long after quality is remembered,'" King says.

But the American consumer has not pushed price to the back burner. The public has been Grouponed into figuring that services should be offered at low, low prices — and that if they wait long enough, that (insert item here) will surely land on the sale rack.

"You see models like Priceline.com that are so profitable because customers are getting educated and they are more value-conscious and price-conscious," says Ashutosh Dixit, associate professor and pricing specialist at Cleveland State University in Ohio.

So how do service businesses like pest control providers raise prices when the consumer is exhibiting a new frugality in the wake of the Great Recession? How do pest management professionals arrive at the decision to raise prices? And, what strategies can they deploy to get the prices they want?

PCT talked with price strategists and business owners to learn how to deliver necessary price increases without alienating customers — and how to position price as the secondary factor in the buying decision. Here are seven rules to help you get the right price.
 

Give Face Time. When a friend bends your ear about troubles, you listen. If you have a strong relationship with clients that goes deeper than the contract, they will be receptive to conversations about cost pressure and the need to raise prices. "Remember, people buy from people they know, like and trust," says Marvin Montgomery, a sales training consultant with Employers Resource Council, a Cleveland, Ohio-based human resources organization for businesses. "If you get to know that customer and they like and trust you, the message you deliver won't be taken as severe."

Of course, this means technicians must call before providing service, ring the doorbell and talk to the client on site, follow up and ensure satisfaction. "If you communicate and stay visible on the property, that will protect you whenever you have to increase prices," says Joey Harris, chief operating officer, Cook's Pest Control, with offices in Alabama, Tennessee, Georgia and Mississippi.

"If customers don't see you, they don't know what you are doing, and if you are not communicating with them effectively, that is a recipe for someone to be really sensitive," Harris adds.
 

Get Real. Deep discounts on service prices are likely to erode value. While it's tempting to drive volume by offering lower prices, this model isn't necessarily a recipe for success. Tim Smith, managing principal at Wiglaf Pricing in Chicago, Ill., and adjunct professor at DePaul University, wrote the book Pricing Strategy: Setting Price Levels, Managing Price Discounts & Establishing Price Structures. In his blog, The Wiglaf Journal, he shares the case of Nordstrom department store, which was grappling with a declining income in the 6 to 8 percent range during 2008 and 2009.

Competitors were performing at the same clip, and industry giants such as Target and Macy's took the route of increasing discounts to plow through the recession. Nordstrom did things differently.

Instead of fire-sale clearances, Nordstrom expanded its menu by offering clothing lines at lower price points. Customers on tight budgets could continue to shop at Nordstrom, and the store maintained the integrity of its brand by not slashing prices on luxury lines. The result: Nordstrom's fourth quarter profit rose by 11 percent in 2009, Smith writes. And first quarter 2010, profits were up 44 percent because of increased customer visits and higher sales. Margins during that same period improved by 2.4 percent because of reduced discounting.

The lesson: Rather than competing with players who slash prices, consider expanding your services to accommodate the market segment you are trying to reach.

On the contrary, some pest control services can demand a higher cost. For instance, Harris shares that termite control can command a top price. "When it comes to tangible damage that can be seen, property damage, that kind of thing, most people are open to a price increase," he says.

PMP Jeff King uses a different pricing structure for services that require more time and materials, and therefore are a greater expense to his company and customers. Specifically, he's referring to bed bug services and critter control. He charges an hourly rate for these offerings rather than the by-square-foot fee structure in place for basic pest control services.
 

Slim Down. Before you ask loyal clients to pay more for your services, be sure your operation is running lean and that you've taken all measures to cut costs internally. Then tell this story to customers.

Montgomery recommends a script like this: "Not only are we doing a minimal price adjustment, the major 'adjustment' has been implementing cost-saving ideas and improving internal efficiencies." (Montgomery likes the word "adjustment" rather than increase when talking price. "It softens the blow.")
 

Harris shares how Cook's Pest Control has worked with vendors to secure the best pricing on materials and tightened up routing. Everyone in the company is on board. "We get their input, as well," Harris says. And it's not all talk. "We have a strong quality assurance program—people out in the field who are making sure we are really doing the service we are supposed to do, and that helps us reduce trips (for callbacks)."

As a result, the company has not increased across-the-board pricing for a few years.
 

Be the Pain Reliever. The perceived value of a product or service drives the price. And the fact is, when a homeowner sees a cockroach creep across the floor, notices termite damage or wakes up with bed bug bites, getting rid of the problem is priority one. Price is secondary.

Demand trumps cost.

Consider how consumers deal with rising gas prices or increases in the price of meat. Our consumption habits have changed only slightly. "You still have to go to work, pick the kids up from school and drive to grandma's on the weekend," Smith says of prices at the pump. "Maybe you decide against that driving vacation, but the basic use of (gasoline) has not changed — the prices can increase and we'll still buy it."

This same theory explains why increasing volume rather than price doesn't always work. And in the case of service providers like PMPs, value is what customers are after. They want results. And they will pay for them, Smith says.

"The actual perceived value of service is what drives the price," Smith says. "The assuredness that the company will stand by its work — that the company will pay attention to special needs like children or pets, that the company is going to give customers a solid trust that their pests are under control and they don't have to worry about the problem.

When customers have a pain, the firm that offers relief is delivering that value. And cost, again, is secondary.
 

Deliver on Demand. What do customers really want, and when is the last time you asked them this question? Dixit advocates surveying customers regularly. "You have to make it easy for the person who is consuming to pay the money and people are willing to pay for premium products," he says. "So first, you have to do an analysis to find out how your product (or service) is perceived and what its attributes are."

Even though it's most beneficial to your firm's bottom line to have customers under contract (i.e., a recurring revenue stream), King said not all of his customers want to sign on the dotted line. They see a problem, they want a solution — not a commitment, he said. And not requiring a four-time (or more) service agreement has worked to his competitive advantage. Now the firm advertises this on its Web site.

Customers think: "Hey, our PCO comes out based on our needs, not an automatic four- or six-times-a-year service," King says.

When the company provided four-time services and offered a discount to those customers, some clients backed out of one or two of the services and caused a logjam in collections at ABES Pest. Today, 75 percent of customers buy into the as-needed model. Commercial customers, on the other hand, do sign on for bi-weekly, monthly or bi-monthly service.

The point is that by giving customers what they value, price becomes secondary (recognize the theme?).

Don't Wait. If you've been putting off a price increase and you continue to stall, your bottom line will suffer and you'll have a tougher time passing on the cost. Why? Likely, you'll need to raise prices by a higher percentage — the "adjustment" could surprise customers (not in a good way). The price increase would have been less obvious if you had gradually increased prices over a number of years.

"Watch your bottom line and you will know when you need to (raise prices)," Montgomery says.

Don't put off price increases. And when you do raise prices, remind customers you have been putting off this increase for some time.

Montgomery suggests this script: "We held off on this as long as we could. But we are at the point now where we have to do something. You need to know that our price adjustment is minor compared to what it could have been because we value the relationship with our customers. So the increase you'll see on your next (service) will be minimal." 

Never Fear. And don't apologize. Montgomery knows a company (not pest control) that had to add a fuel surcharge and explain the increase to customers. The owner felt uncomfortable talking about it. With this or any discussion about price, it's important to be confident, professional and fair. "If you come across as apologetic and not wanting to raise prices, the customer will begin to wonder," says Montgomery. Make eye contact. Practice your script. (See "Training Technicians to Talk Price" on page 32.)

Remember: You're the pain reliever. You provide the solution. Customers need you — and they want you. (And they like you.)

"We perform a tremendously valuable service, and as the ones providing it, if we are not 'sold' on it, then it's hard to pass a price increase along," Harris says. "We need to make sure we are doing a quality job and holding our heads up high and passing along those costs. We have to believe in the service."

Hampshire is a Bay Village, Ohio-based freelance writer. E-mail her at khampshire@giemedia.com.