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Find your pricing sweet spot

Features - Formulas for Success, Industry News

How do you maintain margins and keep customers happy with your price structure in a competitive market? Three landscape firms share their strategies.

Kristen Hampshire | August 11, 2011

Pricing services is a science and art. There are hard numbers that figure into a company’s cost of doing business, and there must be a return-on-investment for an operation to thrive.

The emotional side of pricing is trickier: What are customers willing to pay for the services you provide? What are competitors offering? What does pricing say about your reputation – can a higher price tag prompt customers to value your services more? Or, will prospects just leave that big, ol’ bid at the front door?

“We lose a lot of work but we gain a lot of work,” says Jessica Neese, controller of In Bloom Landscaping in Atlanta, of the firm’s higher prices for design/build services than competitors in their area. “Reputation matters – referrals are powerful.”

There are players who are just “throwing prices out there,” Neese says. “I think a lot of companies are trying to cover cash flow situations,” she reasons. “If we can’t turn a profit, we won’t even bid on it.”

This month, Lawn & Landscape spoke with three landscape firms about how they manage to get prices that deliver favorable margins and what adjustments they’ve had to make in this economic environment to attract new business.



Smarter pricing through strategic partnerships
The jobs Commercial Scapes bids for projects today – mainly in the government and municipal sectors – are priced about 25-35 percent less than they were about five years ago. The decrease is steep. But Michael LaPorte says the industry in his area has followed suit.



So LaPorte had to figure out a way to cut costs inside to produce lower prices because the feedback at the bidding table was, his numbers were too high. “We were getting feedback on our bidding, and we found out we were out of the ballpark,” says LaPorte, president of Commercial Scapes in Bristow, Va. Specifically, he was told the prices he proposed were 10-25 percent above what commercial customers wanted to pay in his Washington market, which LaPorte says is strong and competitive.

“We quickly tried to adjust pricing on plant material and brainstormed how we could self-perform other services,” he says, listing irrigation, hydroseeding and light excavation.

Before 2007-08, when the housing market began its swift decline, LaPorte won about 15 percent of commercial landscape bids – the company places bids daily. “When we saw we were being out-priced, we were getting about 5-6 percent of the jobs,” he says. Today, Commercial Scapes’ success rate is 12-15 percent. “Owners are happy to see the lower prices,” he says simply.

But LaPorte is no low-baller. “We have always priced with profit, never at breakeven, and we always know our break-even point,” he says. The way LaPorte can cut prices is by “looking inward instead of outward,” he says. There are efficiencies his company realizes through better business practices. For instance, crews report to work at 5 a.m. so they can beat the logjam D.C.-area traffic. Trucks are loaded the night before. Email is used for job schedules, change orders, submittals and other communications – there isn’t a lot of time for run-around on today’s expedited job schedules.

Beyond the basic tightening of the belt, LaPorte has explored creative ways of working with suppliers to reduce his expenses, so he can pass the cost savings on to commercial clients. For one, the company partnered with a sod farm that was having tough times. LaPorte bought into the farm and Commercial Scapes harvests the sod. “That was a gain in market share for us because we can offer better prices, knocking about 25-30 percent off of sod services,” he says.

Two years ago, Commercial Scapes began working with a topsoil processing plant, taking landscape waste from trash companies to the processor to produce compost. “Now, we are actually getting paid to use our own product,” LaPorte says, figuring an annual savings of about $180,000. “By [using our own topsoil], we were able to actually lower prices and increase income.”

Also, Commercial Scapes purchased four dump trucks this year so the company can deliver its own sod and trees rather than subcontracting the work. “By self-performing these services, we don’t have to pay trucking companies or topsoil providers, which helps us to pay down our own overhead and gives us better margins in these products,” LaPorte says.

No company can afford to operate in today’s market without slimming down expenses, LaPorte says. “If you are going to win and be successful, you have to look inward and trim the fat out of your operation and negotiate with suppliers,” LaPorte says. “There are always deals that can be made out there.”



Holding fast, running lean
Jim Webb remembers when only five landscape maintenance companies served the Jackson, Wyo., area. Now, there are more than 100 operations and a good lot of them are one-truck wonders. “There is so much more competition now,” says Webb, president of Valley Landscape Service. “Guys who used to pound nails now have a walker mower and a trailer and they are all coming out of the woodwork.”

That doesn’t mean Webb is actually competing with these outfits to keep existing clients. But he knows when he gets a “no” on a bid, it’s because of price and not quality of service. The fact is, most customers don’t talk about price to Webb. “I usually turn in a bid, and rarely do I get called back and asked any questions,” he says. “It’s either they call back and hire me or we don’t hear from them.”

Over the years, Webb has maintained steady prices. With only a handful of exceptions has he adjusted his price to please a client. In one instance, a longtime client got a maintenance bid for $20 less per week. “I said, ‘I can’t match what the other company will offer, but if it means keeping you, I’ll meet you halfway,’” Webb says, knowing that he’d make $10 less per week on the job, but he’d hold on to a loyal customer and still make a profit. “If it had been someone new, I don’t know if I would have done that.”

Webb knows how much he can negotiate prices because he tracks expenses carefully. For the last six years, he has worked with an industry “bottom-line expert” to crunch the numbers. He has spreadsheets that outline costs: equipment, labor, etc. He knows exactly how much each man-hour costs him. And he prices accordingly.

But Webb takes other measures to keep prices competitive. This year, he hired four more employees so he can control overtime. “That will kill you,” he says of a budget line item he can now avoid. He is also managing payroll. “I haven’t lowered anyone’s salary, but I haven’t given any raises,” he says.

Fuel prices are a bear. “But we’re trying to be efficient with routing,” Webb says. “I’ve had a few people request days for their mowing and we try to fit them in to make them happy, but we also need to keep a nice, tight route where we aren’t wasting fuel.”

Webb expects a 15-20 percent profit margin, “which is high,” he admits. “But I’m in a high-end market. On lawn care services, he gains a 40-50 percent profit.

When a customer asks Webb to lower his price, he holds firm. “I tell people, I know what my overhead is. I suggest that they ask the competitor for his proof of insurance and licensing. I can show mine.”

The result of finding ways to keep his operation running leaner: steady performance. Valley Landscape Service’s revenues were down just $40,000 last year over 2009. “Considering the state of the economy, I think that’s really good,” Webb says. “Some were down 50 and 60 percent, and some are out of business.”


 


 

Pricing with a personal touch
In Bloom Landscaping takes a show-and-tell approach to prove to potential clients that their service is worth a higher price than the competition. “We invite any of our leads to come to our home garden,” says Jessica Neese, controller of the Atlanta-based firm. “We are big gardeners. It’s our business, but we live it.”

This personal touch gives people the confidence they seem to be looking for, and the knowledge they are willing to invest in. “Landscaping is very foreign to a lot of people,” Neese says. “They don’t know how to evaluate it. They don’t know what the plants are. A lot of it is built on trust, so when they can actually see what you do and they like it, I guess people are willing to pay more.”

By “more,” Neese says In Bloom’s prices are never the lowest, and on jobs less than $100,000, the company shoots for a profit margin of 15 percent. On larger projects, a 10 percent margin is good. “There is no chance we can win a (big) job unless we are a 10-12 percent profit margin.”

In Bloom started recognizing this push for lower prices in 2009 when revenues gradually began to drop. “Sales in general were dropping everywhere,” she says of the market. “But we just started losing more jobs than winning, and there were more people bidding on projects.” People started shopping their services.

“We had to be super-aware of what our costs were,” she says. And In Bloom knows exactly what expenses go into each job before preparing a bid. Neese crunches the numbers, figuring overhead and labor costs – and the time it will take to complete a job so she can figure a break-even point. Each year, she builds a budget by figuring out the total hours crews will work in the field and all overhead costs, breaking them down into a per-hour overhead cost. The same is done for labor. “Labor is easily figured out by figuring out your burdens and your actual – what you pay for your people,” says Neese, who has a business background. “You work backward by adding materials and subcontractor costs and add your mark-up.”

In Bloom has been able to stay competitive in the market while maintaining margins by bringing all of its work in-house and investing in people, Neese says. All workers are cross-trained. As a result, employee turnover is low at In Bloom; workers have been on board for five and eight years.

“To maintain my people and help them learn, we pay them well,” Neese says, noting that their knowledge is what clients are willing to pay more for. Plus, customers like that there are no subcontractors on the job. “That is another selling point,” she says.

Meanwhile, pricing pressure is letting up slightly in Atlanta, Neese notices. People are still cautious, and they still want several bids for their installation projects. “It’s still really competitive but we are seeing a little bit of a shift from everyone going for the lowest price,” she says. “I feel like people have tried it that way and are not getting the quality they want.”




The author is a frequent contributor to Lawn & Landscape.