Customer retention and D/B budgets

Q. What kind of customer retention should I be getting, and if I’m getting below that, what should that tell me?

A. Customer retention is a big issue in the landscape industry. You can spend your hard earned dollars obtaining new customers. However, it’s just as important to keep existing customers. A dissatisfied customer can cost more than his or her billing amount. Customers don’t just decide to leave a company without reasons and the biggest reason for customer defection is unsatisfactory performance results. Sure, you may lose a few customers because of their budget issues or, in the case of residential customers, a lost job or illness. However, the No. 1 reason customers leave is because they’re not happy with your work.

When a customer leaves you, ask them for a reason, and take it as a learning experience so it doesn’t happen again. In some cases, the customer is in a budget crisis and you could suggest reducing services to fit their smaller budget. Generally speaking, in our industry a 90–92 percent customer retention rate is typical. You’ll never retain 100 percent, but the higher the better, and benchmark 90-plus percent as your goal.

Rick Cuddihe, president, LaFayette Property Maintenance

Q. Design/build … it has to do with financial budgets. If you had a large sell last year, would you budget that into the next year or not? Also, how do you figure gross profit on products? What should be your overall gross profit for that department?

A. We were in exactly the same situation last year. We had one design/build job that reached the $1 million mark in 2012 and made it easy to reach an otherwise challenging sales goal.

In budgeting for 2013, we decided to keep the same sales goal that we had in 2012 for that division. As a result, we will be falling short of our goal this year. It is extremely hard to capture a large sum of dollars like this through smaller jobs. My recommendation is to set your budget to match your average number of projects times your average project value. Data should be based on the last two years of sales history (include the one large job you had at a discounted rate that is equal to your typical highest value project – do not include it at its actual dollar amount, as it will skew your numbers).

Remember, if you exceed your sales goal, the extra dollars drop to the bottom line; if you miss your sales goal, then you may not have a bottom line.

I’m not sure that I clearly understand your question regarding gross profit, but I’ll give it a shot.

Gross profit (also called gross margin) is calculated by subtracting your direct expenses for a job (labor, materials, rentals, subcontractors, dump fees) from the income received for that job, and it is tracked as a percentage of income.

Our firm has a budgeted (target) gross profit of 62 percent for our self-performed design/build work and 48 percent for our subcontracted plus self-performed design/build work combined. Fifty percent is a common rule of thumb for gross profit because it means that you spent 50 percent of the revenue received on “doing” the project and you have 50 percent remaining to be split among indirect expenses (roughly 20 percent), overhead/admin. expenses (roughly 15 percent) and net profit (roughly 15 percent). Every company’s costs and pricing structure is unique, and P&L sheets are frequently set up differently from company to company, so don’t take this as gospel. It is just a basic example to help you understand how gross profit plays into financials.

Burt DeMarche, president, The LaurelRock Company

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