Pricing is a constant pressure for landscape businesses, whether you’re operating a lawn care company, design/build firm or commercial maintenance business.
Pricing is the one common frustration because no matter the market or economic landscape, you’ll always face low-ballers and feel cornered by clients who try to squeeze the profit out of a contract.
“It’s important to know your numbers, know where you need to be and know when to say ‘when’ on lowering a price,” says Jim Huston, president of J.R. Huston Consulting.
Huston describes a contractor who wanted to lower his hourly labor pay rate by $2 an hour because it would decrease the cost of services by 10 percent and allow him to pick up more work. “We really dug into the numbers and discovered that he could lower the hourly rate,” Huston says. Well, that contractor did, in fact, end up adding many more clients because his market was particularly competitive. “If you know your costs, then you can make those decisions,” Houston says.
So, what’s the best way to figure out pricing so you know when to draw the line and know what flexibility you might have to give a customer a break? Huston suggests a bottom-up approach that will give you a minimum price to charge for services. “You’ll have low-ballers in your market that will come up with some ridiculous price and you need to know when to walk away from a job,” he says.
A bottom-up pricing strategy tells you:
- How low you can go with pricing
- How much room you have to value-engineer a contract to retain a client or compete against another bidder
- The bottom-line price you can build up from, and perhaps generously, depending on the market and economy
Get your break-even.
Before you can figure your minimum price, you’ve got to have a solid budget that aligns with industry benchmarks. With an accurate budget, you’ll know the costs for labor, labor burden, payroll (taxes), equipment costs, subcontractors, equipment rentals, vehicles and materials. You’ll also know your indirect costs, including general administrative overhead.
Find your break-even point: Add your direct costs and overhead. This is your break-even point – the money you’ve got to bring in to stay in business.
Add net profit margin: Now that you have the break-even point, apply the net profit margin. For example, in today’s healthy market, a residential design/build contractor can apply a 20 percent net profit margin to the break-even point.
Do the math: You’re pricing a job where materials cost $3,000, labor is $2,000 and labor burden is $500. Equipment is $1,500. That’s $6,000 of direct costs. Your general and administrative overhead expense is $2,000 for a break-even point of $8,000. Apply a 20 percent net profit margin to $8,000 for a price of $10,000.
Set your pricing minimum: Start the price for this project at $10,000. If your market allows, charge more. But if a competitor offers do to the same job for $8,000, let it go! You’ll make absolutely no profit if you match that low-ball price since your break-even point is $8,000.
“In a depressed market or recession, the customer’s primary concern is, ‘How low can you go?’ ‘How you value-engineer this price and come back with a lower number?’” Huston says. “So, you need to know when to say no in a recessionary or tough market.
“Now, we are not in that market – it’s the other end of the spectrum, and in a robust market, the client’s primary concern is, ‘When can you start?’”
Huston says labor is such a problem now that virtually all of his clients could do 20 to 30 percent more work if they had the labor to do it. “Labor prices are going up, so now is the time to raise your prices because as you have huge demand and a limited supply of qualified contractors, prices go up,” he says.
Huston suggests pushing the limit on pricing in a healthy market. “If you are getting every job, your numbers are too low,” he says.
How low are your numbers?
A residential design/build firm should get 70 to 90 percent of bids submitted. However, in the bid-build market, you should win one-third of the jobs you price. “And in the commercial market, you should win 10 to 15 percent of what you price,” Huston says. “If you win more than that, then you really need to look at pricing because you could be too low.”
Knowing your lowest price can help no matter your market, and applying those industry benchmarks is a way to stay on track toward profitability.
At For-Shore Weed Control in New Jersey, a specialty focus on gravel landscape services allows the business to earn a nice margin without too much competition from area businesses. The company has more than 18,000 clients and has been in business for 30 years, growing steadily during three decades.
“We have competition, but that has never been the driving force in any decision we make,” says owner Mike Matthews. When he first started the business, his theory was to make the service affordable for everyone and to focus on doing volume. “I was using a simple 10 percent rule – if materials cost $10, I’d charge $100,” he says.
That model wasn’t sustainable, though, because For-Shore took on more expenses as it grew, including health insurance, more equipment and vehicles. “Things got more complicated as we grew, and that’s when we brought a consultant into the picture to help with a budget and our pricing,” Matthews says.
The pricing now accurately covers the company’s overhead and direct costs, allowing for an appropriate net profit margin while giving the business an edge in the market. For-Shore is still a volume-focused business. “We keep the efficiency high, volume high and density high and that has been our secret to profitability,” Matthews says.