As I was driving into work today I happened to notice a small street corner sign stuck into the ground advertising pest control annuals for $99.00. I suddenly began to cringe as I was left wondering how a pest control company could stay in business with pricing like this. The experience got me thinking.
Why are so many pest control companies quoting such low prices with operating costs on the rise and profit margins shrinking?
I wish I had a solid answer to this question. I have seen numerous companies fail, in various industries, because they don’t know how to properly figure out their real costs and subsequently quote a job accordingly. To understand this complex issue, I dove a little deeper for some more answers.
Penetration pricing is a marketing technique many new pest control companies practice to attract new customers. The new company will offer a relatively low initial price, compared to industry standards, in order to gain a piece of the market share. After gaining a portion of the market share, the pest control company will eventually raise prices in order to increase profit margins. The company can expect some customer attrition during this process.
Setting the Initial Price Point
When setting an initial price point a company must first determine their primary customer base. A price point will inevitably dictate who your customer is. If it is your objective to be cheaper than your competitors, you can be assured that you will attract those customers where price is their main concern. These customers are known as discount driven consumers or price shoppers.
After the initial price point, a company must raise prices to stay in business. Raising prices can best be described as an art form and can be very difficult to bring about. If you raise your prices without offering something additional customers will feel like you’re cheating them. After all, you’ve already told them that your service was worth $ X.XX. We all saw what happened to Netflix when they suddenly raised their prices by 20%. Subscribers couldn’t cancel their services fast enough. When they opted to raise prices, they weren’t increasing the VALUE of their new price point.
The Disadvantages of Penetration Pricing
Penetration pricing establishes long term expectations for your services. Simply stated, you have to be careful when setting out to be the cheapest pest control company in your area, because you are essentially establishing that your new lowest price is what your services are worth. This expectation can also lead to a negative or “cheap” image preconception for your pest control company. Opponents of penetration pricing also argue that you will only attract bargain hunters that will eventually switch companies when prices are raised.
The #1 reason we are seeing pest control companies quote lower and lower prices is because it’s driven by fear. These companies are scared they will lose a customer if they raise their prices. Likewise, they are scared to ask for a more reasonable price right up front because of the possibility of not getting the customer at all. It can be argued that companies need to sell the “value” in the services they provide or do a comparison of services and providers.
Many pest control companies are voicing their desires for a national or local pest control association where these low-ball price issues can be brought up among peers, and potentially have the playing field leveled. Many would also get on board with an advertising campaign to promote the professionalism of the industry. An excellent example would be The National Association of Realtors. Working together with a number of other pest companies can provide a larger presence in the industry.
Anyone can start an association, and the benefits can be huge. Members can also qualify to get big discounts on things like insurance and cell phones with group rate buying power. This also allows for the small-medium sized companies to get together and bid on larger contracts.
A Better Business Model
I have emphasized many times previously the need for pest control companies to focus on the VALUE of their services instead of just price alone. By focusing on the quality of your service, the premium products you use, and the availability and expertise or your technicians you strengthen you company’s value to the consumer.
There are so many other ways to compete, other than price alone. Find a niche in the market and work it hard. Find a way to set yourself apart from others in your business by doing something they don’t do or offering something they don’t offer.
As an owner or manager of a pest control company, you must also educate your consumers. “Buy cheap, pay twice, and still have a pest problem!” Remember to educate, educate, educate!!
Please share any ideas on how we might become united as an industry on this issue.