Navigating the Challenges and Opportunities of Cost per Fixture Pricing for Outdoor Lighting Businesses
When it comes to lighting contractors accurately estimating jobs, there are as many pricing methods as there are business owners. Depending on the business owner's entrepreneurial journey and the current level of business, different pricing models can be the best fit. With that in mind, I want to tackle a common question: Is pricing your projects out solely based on the number of fixtures always best? Should outdoor lighting contractors bid out their projects using the "price per fixture" method or another method?
Many people swear that their pricing structure and bidding is best, and while it's good to find a pricing model that works for you and your phase of business, it's also important to understand both the advantages and limitations of a simple "per fixture" pricing model vs a "full cost" estimation.
In this 3-part series, I will cover the advantages and disadvantages of each method and hopefully help you decide which is best for your outdoor lighting business.
Advantages of using a "Price per fixture" model
This method is easy for the business owner to implement and straightforward to train new designers. Simply count the fixtures and models and a final price can be easily tabulated with a smart phone or calculator.
Customers appreciate that your pricing is easy to understand and you can make quick decisions on adding or removing fixtures to stay within their budget. It is upfront that the total project design bid is the number of fixtures times your price per fixture. This transparent and straightforward pricing model makes the prospect believe there are no hidden costs.
From a customer perspective, the price per fixture method seems to be a fair way to structure pricing for the design project and makes it easy to compare quotes from other companies. As you increase the number of products, proportionally the total project cost goes up simply by fixture cost.
As mentioned earlier, the transparency of the estimate can make it easier for prospects to make simple adjustments and customize the design, based on the areas of the property they want to prioritize lighting. Customers can be engaged in the process and can quickly tailor the design to fit their needs and budget. Often a customized lighting design may be installed in phases, such as phase one being the front yard landscaping and home facade illumination, and phase two including the backyard living space. The client can also easily focus on a special landscape feature, statue, or area where they spend most time outdoors in the evening, knowing the pricing per fixture model.
For many businesses, just tabulating and writing up the proposal can be a bottleneck. The longer you delay submitting a quote to a prospect, the more likely they are to lose interest, have another more urgent matter arise, shift focus to another project, or spend funds elsewhere. For example, businesses who give out four to eight quotes each day, do not want a back up in unsubmitted proposals, as this means a delay in receiving deposits for new projects. This method allows for quick completion of quotes with a simple pricing structure.
In addition to being a quick method to create estimates, the price per fixture method can save time when it comes to bookkeeping and data entry into a CRM. The simplicity of the pricing, can make it easier when entering into other bookkeeping software or databases as additional line items for labor and other materials do not need to be entered.
For smaller businesses with limited overhead, a per fixture pricing structure can increase profitability quickly by simply building in more profit by increasing the price of each fixture as needed. An overall price increase of a certain percentage or even just a few dollars per fixture can be an assured way to increase profitability on projects. Systems Simplicity This method is simple and easy to implement in your business. Price per fixture bidding allows for a simple and straightforward structure to use with your current systems. It makes entering quotes and invoices in your CRM less prone to error and it keeps book entry easy. When there are uncomplicated pricing methods, it is simple to integrate into your current systems.
Disadvantages of Price Per Fixture
This method can be difficult to account for variations in labor, materials, equipment, and overhead costs. Both new designers and seasoned designers alike may accidentally undercharge for an installation because the complexity of the job is not taken into account. One common pitfall is underestimating the amount of labor required, which results in a loss for the installation. Does not account for actual business expenses: Often the cost per fixture is based on what feels right and what the market dictates. Meaning, often one creates their pricing off of what they believe customers will pay and what their competitors are charging. Unfortunately, most of the competitors are basing their prices off going a little lower than the larger, more reputable company. In many markets, no one is actually basing their prices off of what it will take to run a successful company that offers a great customer service experience.
It is almost impossible to know if you were profitable on an individual installation since detailed cost tracking is not measured, only the fixture cost. Business owners often have to wait until the end of the fiscal quarter or year to see their profit margin and make adjustments in pricing.
Lack of Incentives
Not tracking certain metrics or setting up time to measure profitability of projects results in not changing. This simple pricing method with no true cost analysis can lead to designers selling large jobs that appear profitable at first, but could lead to a loss for the company due to lack of detailed cost tracking. If you are not able to incentivize your designers (or yourself) to sell jobs that are more profitable and less risky, you will not be able to work towards more profitable projects and a healthier bottom line. If you are not tracking total overall costs on a per project basis, it is difficult to incentivize your installers and technicians to be more efficient on each project.
Lack of Scalability
This pricing method may not be suitable for larger projects where a different pricing structure may be more appropriate. As the total square footage and number of fixtures can create more complexity in a project, there are also more unforeseen expenses that may arise. With a larger property, there are more chances for added costs.
Sometimes the designer or business owner will price out the project simply on a per fixture basis, even when knowing that the price is not appropriate. They find adjusting their normal pricing method can be difficult to articulate to the customer and that the price can be negotiated anyway. They can limit themselves and therefore their overall profits. Of course, there are times when a designer bids out a project and there are unforeseen circumstances that arise to limit the profitability. For example: accidentally cutting irrigation lines and needing to repair them, cutting fiber optic cables that were not marked properly by Miss Utility, running into rocky or incredibly hard terrain that slows down trenching, going underneath a driveway, needing to rent boring equipment or a lift when adding lights in a more challenging area not included in the original proposal, and so on. There are many factors that can slow down the efficiency and limit profitability of the installation by increasing labor, supplies, and incidentals.
We have all had a nice $25,000 estimate get pared down to a decent $5-10K project, only to find out that the customer removed all of the more profitable/easier aspects of the project, leaving long distances, crossing challenging terrain, and most importantly a lot of non billable man hours. What is shocking to find is that the same customer can then shop around for the remainder of the project, now that all of the challenging aspects have been done. A price per fixture methodology makes it challenging to go back to the customer on the third revision and add in the appropriate costs.
Is a Price Per Fixture Pricing Method Best?
In conclusion, landscape lighting designers who charge clients on a per fixture basis will find this method has advantages and disadvantages. It is a simple and easy to understand method that can be beneficial for small businesses with limited overhead, but it may not be suitable for larger projects or businesses with more complex needs. It is important to consider the current stage of your business and your specific needs before reexamining your pricing model. Whether you choose a cost per fixture method or a full cost estimating method, understanding and evaluating its limitations and advantages can give you the confidence to take a hard look at your profitability and your current pricing structure and decide what method is best for your business.
Read Part 2 of this series - Is "Full Cost Estimating" Right for Your Outdoor Lighting Business?