Price it right

What’s the first burning question that comes to mind when you meet another landscape contractor? If you’re like most contractors, it’s: How much do you charge for services?

Smart pricing isn’t about a happy medium, or being the highest or lowest in the market. Market forces, service mix, client make-up – all of these factors figure into a pricing model. And unless you’re sharing notes with a competitor, or somone located in your region, you’re comparing apples to oranges.

If you know your numbers, you can nail the perfect price so your business profits. And isn’t that the point of a price – to charge for services so you can make money?

“When you know your numbers, you are so empowered – you know exactly what it will take to complete a job,” says Marty Grunder, green industry consultant. You’ll know whether you can let out some rope when a client asks to cut back a price. And you’ll know when to hold tight. You don’t want to work for free, remember.

Losing nickels and dimes is a big deal when you look at the cumulative effect of poor pricing. Being “a little off” can cost a lot of money that companies could be keeping as profit.

Jim Huston, consultant/owner of JR Huston Consulting, shares how a company employed technicians who worked nine hours per day, but the owner was only billing seven hours per day for each employee. That added up to $120 per day of under-billing – and $120,000 for the year. When figuring price, the owner simply didn’t account for all of his technicians’ time.

Another client increased his price by $10/hour per employee in September because he wasn’t achieving profitability benchmarks. (Those are found on page 10.) “We realized this in February, and this year, he increased his rate by $10 and it made a huge different on his net profit year-to-date,” Huston says. Specifically, this contractor will “find” an extra $60,000 in revenue by correcting that pricing discrepancy.

Pricing properly is the key to actually making money in business, but a range of market forces and even client scenarios that make picking your price challenging. Here are some factors to consider as you build your price.

A History Lesson. Start pricing right by reviewing your mistakes. You know, the job you bid on for 100 hours and spent 150 hours completing – or the account that gets billed $5,000 per month but seems to tie up all your time.

Rather than brushing off pricing mistakes with a “we’ll do better next time” attitude, really study what went wrong (and right). Talk to your crews; find out what happened in the field. Do so with a mind toward improvement, not reliving the past.

“Smart entrepreneurs don’t make the same mistakes over and over,” Grunder says. “Keep score. Pay attention to pricing mistakes so you can reflect on what happened and make changes.”

Scope Out Your Market. If you’re a landscaper in Tampa, Florida don’t bother comparing your pricing with an owner in The Hamptons. Cost of living is different – so is the client base and the overall economy. Know what competitors are charging, but focus on companies that are in your area and that perform the services you also offer to your target customers.

“If you must charge dramatically more to make a profit than your competitor, then maybe that’s a service you should not take on,” says Jason Cupp, a Kolbe certified growth consultant.

So, before you do take on a new service, determine whether you can achieve a desirable profit margin and still compete in your market.

One of Cupp’s clients earning $1.1 million annually – $400,000 in construction and $700,000 in maintenance – discovered his revenue and profitability would increase if he closed the landscape install division.

“Maintenance is fully scheduled and there aren’t as many weather and material issues, and it’s not as capital intensive,” Cupp says. “After two years of not doing landscape (construction), the company is more profitable than ever. They are already back up to more than $1 million in sales. They realized that their cost of goods sold for landscaping was $0.75 to the dollar, and it is $0.45 for maintenance.”

The improved profitability has lessened owners’ stress. “Their lives are drastically different both financially and operationally,” Cupp says.

“ SMART ENTREPRENEURS DON’T MAKE THE SAME MISTAKES OVER AND OVER. KEEP SCORE. PAY ATTENTION TO PRICING MISTAKES SO YOU CAN REFLECT ON WHAT HAPPENED AND MAKE CHANGES. ” Marty Grunder, green industry consultant

Know Your HAWs. Hourly average wages (HAWs for short) is “the core of how you price your work,” says Bill Arman, consultant/partner in The Harvest Group. HAWs includes burden (taxes, workers’ compensation, health benefits, Social Security, Medicare, etc.) for every revenue stream.

The labor burden for positions in a landscape company varies. For example, tree climbers have a higher labor burden because of workers’ compensation costs – safety is a bigger issue for the tree professional than a gardener. That’s why you must figure HAWs for every profit center.

Here’s the math Arman provides to figure out HAWs: Add the base pay rate for each person in the given revenue stream, then divide it by the number of employees to get the average wage. Then, add the labor burden. The result is your hourly average wage. The price of your services must cover this wage plus account for a profit.

Cupp refers to this figure as the “loaded cost of employees,” and he reminds contractors that it’s much more than the hourly wage.

Cost of Materials. Now that you know your HAWs, figure in the cost of materials to find out what a project is really going to cost you. Again, this depends on the service. Landscape installation services are materials-intensive; maintenance is more about moving equipment.

Cupp advises against pricing per square foot, since materials costs can vary significantly. For example, say a client chooses pavers that are $22/square foot vs. the $7/square foot option. If you bill that client a price-per-square foot to complete the job, there’s a major profit discrepancy there.

Or, what if a job requires more equipment, or will take more time because of access issues on the property or other complexities? A straight-up square foot pricing structure might be good for a back-of-the-napkin estimate, but it doesn’t account for variables that can add up and eat away profit.

Overhead Recovery. You’ve got your hourly wage and know the materials cost. You’ve figured in time for the nuances of the job – the hours you’ll bill for the project. What’s left is overhead: The cost of keeping your lights on.

“Office staff does not make the company a single dollar – by answering phones, invoicing, getting the mail,” Cupp says. “The people who make your company are those out working in the field.”

That means, all of those administrative expenses must be rolled up into a nice, neat hourly cost that can be included in your pricing. Otherwise, you’re footing the bill for overhead from your own paycheck. “Recovery” is the key word here – you want pricing to automatically recover the cost of your overhead.