Figuring out the correct price to charge customers for services is difficult for many pumpers. And it becomes even more challenging when one competitor consistently undercuts other local pumpers to “buy” market share.

How do pumpers avoid this conundrum and other pricing pitfalls? To find out, we talked with Per Sjofors (pronounced “pear so-force”), the founder and chief executive officer of California-based Atenga Inc., a leading authority on pricing strategies.

When companies can’t figure out what to charge for their products or services, experts like Sjofors help them make cents of it. He’s helped companies in more than 50 industries determine what to charge for everything from stem cells to shovels. He’s even worked overseas, helping banks in Nigeria set fee structures. But his strategies and advice also are applicable to many small businesses here at home.

Pumper:

What’s the most common mistake small businesses make when setting prices?

Sjofors:

The most common mistake I see overall is business owners using their gut feeling to determine prices. This is particularly true with small businesses. People don’t use their costs as a basis. Instead, they pull a number out of thin air and hope it’s the right price — and it never is. They don’t understand how important price can be in their quest for profit. This obviously leads people to leave money on the table. Or, if the price is too high, they don’t attract the business they deserve.

Pumper:

So how do people go about figuring out a proper price?

Sjofors:

The first thing people need to do is figure out their costs, and not just the obvious ones like your truck payment, fuel, insurance and the like. We see a lot of small companies that don’t calculate their costs at all, and just wait until the end of the year to see if they made a profit or not.

The challenge is to accurately account for the cost of your services — the staff you need, amortization of equipment, the time it takes for someone to clean a grease trap versus the time it takes to pump a septic tank, and so on. You also have to account for your normal corporate overhead.

When we talk with clients, we look at what we call the contributing margin, which is the cost of service minus the variable costs. This helps us determine which services are most profitable. Basically, you remove any fixed costs — rent, utilities and so forth — from the equation. Instead, you focus on how you allocate equipment and time and any other variable costs of providing your services. This will help you determine which services are more profitable. For instance, maybe you’ll find that pumping grease traps is more profitable than septic tanks.

Pumper:

What else can pumpers do to determine prices?

Sjofors:

You need to understand the demand curve of your client base. One way to find this out is to experiment with different prices and see how sales change. The important thing may not be how often you close business at that price level — maybe it’s one out of every 10 customers. What’s more important is your profit margin.

Let’s say your cost per job is $500. What you may find is that it’s more profitable to take one out of every 10 customers at, for example, a price of $1,000 per job — which provides a $500 profit margin — than to obtain five out of 10 customers at $550 — which gives you a $250 profit margin ($2,750 in sales minus $2,500 in costs).

Now you have a decision to make. If you have a lot of equipment and need to keep it running, maybe $550 is the right price. But if you have only one truck, maybe $1,000 is right.

Pumper:

How do you deal with a newcomer who undercuts the competition on price?

Sjofors:

Price wars are always a mistake. When one guy comes in at 25 percent less, and everyone else does the same, then no one makes money. There are no winners in a price war. Just look at the airline industry.

What you need to do is maintain your price. That (price-cutting) competitor may take away some business for a time. But if he’s pricing his services below his costs, he’s going to go out of business eventually. Those guys become fly-by-night operators.

You also have to send a message to your existing customers: You’ve provided good service for many years, and it’s not possible for this newcomer.

Pumper:

What else should pumpers consider when setting prices?

Sjofors:

Businesses need to vary prices to fit different circumstances that boost costs. Say you charge $35 for delivery. But if a customer is 35 miles away and delivery requires a drive through Los Angeles traffic, and your truck is on the road for four hours for a $60 order, was that an order the company should’ve taken? No.

So septic pumpers should charge more the farther they have to drive. If you have a customer that’s 57 miles away with a small tank, and you charge the same price to pump it that you charge everyone else, that customer becomes less profitable.

Pumper:

Are there ways pumpers can charge higher prices than their competitors?

Sjofors:

Differentiation is very important. As an example, in Atlanta, Ga., we worked with an exterminator that services restaurants. In the extermination industry, the service has become just as much a commodity as pumping septic tanks.

This particular exterminator differentiated himself by promising to completely eliminate bugs with technology that isn’t poisonous, not just control them. He guaranteed that if customers found a bug in their restaurant, they could call him 24 hours a day and he’d come out and eliminate the bugs. The end result? He found he could charge a rate 10 times higher than before.

Pumper:

How can pumpers figure out how to differentiate themselves?

Sjofors:

You can do market research, but that’s prohibitively expensive for many small businesses. So instead, do your own competition analysis and research, and determine what you can deliver to customers that no one else does — and charge for it. Maybe you add to the perception of the value of your services by providing a higher level of professionalism, or clean trucks, for example. Or emphasize that as a pumper, you’re protecting homeowners’ groundwater, not just cleaning out septic tanks.

Pumper:

What’s another common pricing mistake?

Sjofors:

Holding prices at the same level for too long, for fear of losing customers. To avoid making customers angry, the most effective rationale for raising prices is explaining that costs have gone up. You can say, “Look, we’ve been able to hold prices for five years … now I have to pass on a portion of my cost increases onto you.”

Now, if there’s no ongoing relationship with a customer, you can raise prices tomorrow. But for long-time customers, frame it like this: “We’ll raise prices next month, but if you promise to use us the next time you need service, we’ll hold the current price for one more visit.”

It used to be that prices always went up in January, but that’s not the case anymore. Customers will be more accepting of price increases if you habitually raise them the same time each year. It doesn’t have to be a big increase — maybe just a few percent a year. That’s much better than holding off on any price increase for five years, then suddenly finding you need to raise them 20 percent at one time, just to survive.