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Pricing for profit

Features - Cover Story: Benchmarking your Business

Smart pricing sets a strong foundation for solid profits.

Lawn & Landscape Staff | November 5, 2013

You’re not in business to give away landscape services. But that’s what happens when you price projects without analyzing your costs. Every expense in your business takes a little bite out of the profit of a job – materials, equipment depreciation, labor, even the utility bills you pay to keep the lights on. “Of course, you want to maximize your profit and bottom line, because that’s what business is all about,” says Jim Huston.

Pricing services correctly will ensure the maximum profit margin. Reference the budget charts on page 63 to see where you should start. Huston says lawn care companies should achieve a 25 percent net profit margin – “that just seems to be what the market will let you get away with,” he says.

Installation work generally reels in a 20 percent net profit margin in a normal market, Huston says. Today’s market can bear a 15 to 20 percent net profit margin for residential installation jobs. Commercial work doesn’t net quite as much – more like 10 to 15 percent. “The commercial sector is more competitive,” Huston says, making a comparison to the retail world: commercial work brings in more of a “re-wholesale” price.

Maintenance businesses should shoot for 10 to 12 percent net profit margin, for both residential and commercial accounts. “These are averages, but they are realistic,” Huston says. Irrigation service work can bring in about 20 percent net profit margin, while tree work ranges from 10 to 15 percent net profit margin (commercial) or 15 to 20 percent profit (residential).

Homework:The price is right

Huston has developed a pricing worksheet based on a three-man maintenance crew, but you can apply the bottom-up pricing concept to any service in your business. First, review the charts on page 63 and compare those benchmarks to your numbers. Then, once you know your expenses are in line, begin plugging expenses into this worksheet to be certain you’re pricing for profit. Download it at www.lawnandlandsape.com/
benchmark.

Service diversity can help ensure a healthy profit margin in spite of challenging market conditions. But Huston reminds that the vital signs vary depending on the service. “You have to look at each division in your company and figure out whether it is on track for labor, materials, etc.,” Huston says.

Now, how do you achieve these profit margin benchmarks? Back to Huston’s motto: price it right, produce it right and produce enough of it. While there are various approaches to pricing a service, one methodology that takes into account all of your businesses expenses and includes that profit cushion is a bottom-up process. “Essentially, you’re building cost upon cost upon cost,” Huston says.

Figure in your labor cost per hour, your labor burden (payroll taxes), the cost of materials and equipment, and so on. (See the direct costs column of your profit and loss statement.) Once you figure your total direct cost, add your overhead – office staff salaries, rent, advertising, etc. (The overhead expenses in your profit and loss statement.) Now, add on the net profit margin according to the service you are providing. Finally, ask yourself: How is the market going to respond to this price?

“Really, you’re digging into raw costs, then once you put those together and add your profit, you must decide if it is a price that you can sell,” Huston says.

Another method is the top-down approach. “There, you ask yourself: What is the market going to let me get away with in terms of pricing? Work backward from that, figuring in expenses.” What you end up with is a profit margin, though not necessarily the target profit you might have in mind.

The key is to work through your budget and understand your cost of doing business. Know your direct costs and overhead. Plan on a profit margin that aligns with these benchmarks so you can be sure you’re growing a business and not digging yourself into a hole. (Remember who is the last person to get paid when times are tough – and any time, for that matter.)