In Minor's League: May 2000

QUESTION: I am new in the industry. What is a good profit margin to shoot for?

ANSWER: This is a topic of keen interest to most landscape professionals; however, it is a difficult one to answer. Much of my answer would depend on what services you specialize in.

Generally speaking, I think it is safe to say that landscape maintenance contractors are usually more profitable than design/build contractors, which are usually more profitable than landscape bid/installation contactors. (And although my business wasn’t built around irrigation or chemical lawn care work, these were among our most profitable services.)

The reasoning behind this varies and is generally pretty accurate.

I would say, as a rule of thumb, the best landscape maintenance contractors have a profitability range of 15 to 20 percent. For design/build, the best are probably in the 10 to 15 percent range, and the best landscape bid contractors are in the 5 to 10 percent range.

Many factors influence profitability, including the owner’s lifestyle as well as the obvious – how efficiently he or she is running the operation. Also, keep in mind that there are exceptions to these rules on the high end and most definitely on the low end. I would advise you to contact the Associated Landscape Contractors of America and order the Cost Operating Study, which compares different profit scenarios by company type and size.

Before leaving the subject, let me say that my experience has shown that many contractors in this industry have a level of profitability in their mind that is acceptable but they have not raised their internal expectations. As a result, they reach only this desired profitability. There are many ways to increase profit margins. I have talked about these in previous columns and will talk about more in the future. The bottom line is this, raise your company’s expectations for profits and I think you’ll see higher margins down the road.

QUESTION: How do we satisfy customers that are part of a consumer class that cannot be satisfied?

ANSWER: Today’s consumers have raised their level of expectations. I have also found that there are many customers who simply cannot be satisfied. To assume that an entire customer class can’t be satisfied, however, is somewhat of a generalization and possibly a defeatist attitude. But I can certainly empathize with you about the difficulties of many specific types of customers.

My approach would be to do everything that you possibly can do in satisfying a customer that is reasonable and is within the parameters of the contract. For some customers that is simply not enough and you will have to accept that fact. Understand that a certain percentage of your customers will go away and try someone else because they either cannot be satisfied and/or they just want to or need to save money. To the extent you can, hold the line on the parameters of your contract. For some of the unreasonable customers, this is the only impetus they need to go away and, frankly, that is not all bad.

Many numbers get tossed around regarding customer retention. I have heard people boast of customer retention rates of 90 to 95 percent. I wonder how they do this. Is their retention this high because they are that good or because they give in to every customer demand makes regardless of the request and whether or not it is within the scope of the contract? Remember, profitability is important for you, your employees and, believe it or not, your customers. If you cave in to every demand your customers make you risk eroding your profitability.

Without question, certain customer classes are more desirable than others. Unfortunately, every contractor is chasing those desirable customers. I don’t think pursuing a class that is difficult to deal with is wrong. Just understand that a good portion of that business is temporary and will have to be replaced each year.

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