Many companies struggle to accurately determine and implement a solid pricing strategy for their landscaping jobs. Why? They don’t fully understand their labor and material costs which leads to inaccurate landscaping bids.
The result is they leave a lot of profits on the table. The industry average net profit is around 5 percent. I argue it should be around 12 percent. Let’s look at how to devise and implement a pricing plan to get those profits up.
It starts with understanding your burdened labor costs for each line of service. For more detail on this step, finance expert Greg Herring, CEO of the Herring Group, and I addressed this topic in a series of webinars on pricing. You need to understand the average cost to put a person on a job for every division: landscape mowing and maintenance, irrigation, snow, construction, lawn care, and so on. Knowing your accurate hourly rate is critical to pricing your landscaping contracts correctly. It’s surprising how many contractors don’t know these numbers well.
Resources and data available in your landscape business management system can help you determine these rates.
Next, understand the totality of your costs by division and account for those in your pricing. Not knowing these costs is one of the biggest mistakes Herring says he sees landscape contractors make. For example, equipment costs are typically much higher in maintenance divisions.
“We routinely see maintenance divisions that are losing money and people aren’t aware that’s the case,” he says. “They’re just saying, ‘We’re making 5 percent net profit and we don’t know what to do to get to 10 percent.’ They’re failing to realize they have a money-losing division.”
Other times, companies in the north are making a lot of money on their snow division and losing money on the landscaping side, but they haven’t broken out their revenue and expenses between white and green.
“That impacts their pricing because they don’t understand the totality of their costs at the divisional level,” Herring says. “All revenue dollars do not produce an equal amount of profit.”
Determine what services and customer types you can price at a premium. For the record, it’s OK to have divisions that break even or even lose a little bit of money, but you need to know which divisions are the most profitable to develop a business strategy that optimizes revenue growth in those areas, Herring says.
“It’s going to be different for every company in every market,” he says. Solutions like Aspire business management software, which makes it easy to see your most profitable services or customer types, are a much-needed tool for this step.
Avoiding bad habits
In addition to not fully understanding costs, bad habits are pervasive in landscape company pricing strategies. Avoid these at any expense.
- Incorrect estimating. If you lack a landscape business management system that gives you good feedback about your jobs, you might continue to estimate jobs incorrectly forever. For example, you may not give your production team enough hours, causing you to underprice jobs and ultimately lose money on them. (Not to mention, this scenario causes the production staff to resent the sales or management staff because they feel like they can’t get the job done in the number of hours allotted—and they are often correct.) Or, you might give production too many hours, making you too expensive and causing you to lose out on work. We call it “estimating” for a reason—these are ballpark guesses, after all. But if you have good job cost data, including your cost of materials and labor, you can make educated guesses on the total cost of the job. For example, if you can pull up a job in your software system and look at the crew that performed it, the size of the property, and how long it took them, you’re well on your way to pricing future landscaping projects properly.
Another estimating pitfall is making the same person responsible for estimating and selling the work to prospective clients. I always recommend splitting up those roles in the bidding process. The estimator’s job is to get the right man-hours on the project. If he’s also the salesperson, he may tend to massage those to get the sale, consciously or subconsciously.
- Pricing around “what the market will bear.” Inevitably, some companies will lower their prices to get work. Maybe they’re desperate or they feel bidding the lowest price will lead to more work later on. Maybe they hope their production team can make it up. Or, in construction, maybe they plan to rely on change orders to bring the price back up. In fact, in construction I often advise companies to take the work and build out their schedule because a full schedule often becomes the primary driver of profit. But in landscape maintenance, I don’t advise you to take jobs you know you’re not going to be profitable on. It’s important for a maintenance job to make money on its own and provide upsell opportunities. In maintenance, you don’t want to end up with dogs in your portfolio that you’re going to end up firing anyway.
As Herring explains, you can’t ignore the market, but it’s simply one factor in determining your pricing, along with your overhead costs, markup, and the data you have about the customers you’re already serving. If you allow the market to drive your pricing strategy, you’ll certainly lose out on profits.
“Pricing at ‘what the market will bear’ also assumes you have perfect knowledge, that you know ‘what the market will bear,’” Herring says. “You’re assuming the pricing in all areas of the market has been commoditized and companies are just selling hours and materials. And that’s not true.”
- Devaluing your work. To that point, a frequent misconception Herring hears in the green industry is that you’re “just selling hours” to potential clients. If that’s the case, then your knowledge of plants means nothing. Your experience executing a project is worth nothing. Your brand is worth nothing. And we know that’s not the case because companies with strong reputations can sell certain services at a premium. In these cases, clients are looking for more than a commodity. They are getting something other than just new landscaping: Maybe they know you’ll do the job well and that’s what they value.
With this information in mind, what’s a landscape business owner to do? It’s simple: Use the technology and tools at their disposal to identify and then fix their pricing problems.
“Aspire allows us to see when we have underpriced a property so we can make a calculated decision on how to increase that price,” says Matt McCoy, president of McCoy Landscape Services in Marion, Ohio. “We can also see which accounts are pulling down the average gross profit so we can work to replace them with higher-yield accounts.”
To McCoy’s point, I recommend lining up your accounts top to bottom and looking at the profit margin. If it’s a construction job, you can do a post-mortem and realize you made a one-time mistake and you’re not going to do that again.
In maintenance, go to your bottom 10-20 percent of accounts and reprice them. If they leave, they leave. If they stay, great. A lot of those clients already knew they were getting a great deal, and they are willing to take the increase. Certainly, all new proposals go out at a better price, and you can home in on the better-priced work moving forward.
“Software like Aspire allows you to see what areas and what customer types you’re able to price at a premium,” Herring says. “Pricing quickly flows to business strategy: Where do we want our account managers and salespeople to focus? We want them to focus on the more profitable parts of the market.”
At Aspire, we understand that when you’re running a landscape company, it’s important to have the right tools for the job. That’s why we’ve developed an all-in-one, cloud-based solution with the functionality you need to keep your entire business running smoothly—and profitably. If you’re ready to take your company to the next level, contact us today!
Need help finding the right business management software? Download this helpful buyer’s guide to learn everything you need to know before selecting a solution, from initial research to final decision.
For other tips on leveraging technology in your business, read our article, "How to Leverage Technology to 'Amazon' Your Business."
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