PRICING FOR RISK: How Much Should Each Service Sell For?

Jun 14, 2016 | Pricing

The profit you earn on each of your services is driven by a few factors: the marketplace, how it is priced and sold, how efficiently it is produced, and how much overhead must be recovered.  However, the profit you earn should ultimately reflect the risk associated with each service. The higher the risk, the higher the profit you should aim for.

It is with this thought that you begin your budgeting process: start with the profit you want to earn on each service, and work backwards, developing a plan to hit your profit goals.

In the past I would guide my clients when budgeting to aim – at a minimum –for 10% overall profit (after basic salary and depreciation.) However, the risk in the landscape industry has increased over the years (people risk, weather risk, government risk, etc.) and therefore the return on your risk should increase as well.

If you drill down by division, you can develop better budgets and strategies to earn higher returns.

Maintenance aims for a minimum 10% net profit: The risk is lower in maintenance because it is more predictable and relatively stable year to year, plus this side of your business is easier to sell when you want to exit the business. The maintenance business is predictable and thus you have greatest opportunity to gain efficiency – so the old adage “you don’t make money on maintenance” should be thrown out the window.

Caveat, if you are trying to corner the market in your area, in any service, the supply-and-demand forces will come into play and you will earn less. On the other hand, the more you can service a niche, the more likely you are to get higher rates.

Construction (and Enhancements) aim for a minimum 15% to 20% net profit: The risk is much higher in Design Build, plus this type of business is much harder to sell (exit from) for a reasonable amount because there is no recurring revenue. This means you (as a business owner) need be able to extract some of the profits (value) every year and put them into an outside investment. Depending on your market area and type of work, you should price it for 15% to 20% net profit. There are so many factors that influence the final profit of a DB job; therefore the more you can streamline your DB operations, processes, and material choices, the more likely you are to achieve more consistent profits.  Example: one superb contractor I work with that does 50% bid build and 50% design build, found that they make more money in bid build because of the consistent and streamlined nature of the work. The lesson: remove the variations of your DB work and create a more predictable bottom line.

Engaging your crews with focused incentives to increase weekly production will greatly help as well. By year end, your budget may not achieve this high profit target due to unforeseen circumstances, but if you don’t aim high, you won’t hit high.

Snow services aim for 25% net profit: The risk in snow is even greater; you are basically providing an emergency service for your clients based on risk-management. There is weather risk, people burnout risk, performance risk and equipment risk. Snow plowing has hidden equipment costs as well that can affect your year-end profit. Moreover, one out of every 3+ years may be a dud, so it is triply important that you make great profits in the good winters. Some snow contractors make consistently high profits, and others do poorly. Depending on where you stand, it may be time to rethink your approach to snow.

Budgeting for ROI: Some business owners believe the market sets the price and controls the profit. This may be true for order-taking, low bid work and high commodity work. However, seasoned business owners realize they must earn a proper ROI in order to stay in business long term and make it worthwhile. To do this, start your budgeting with a profit in mind, and work backwards. If you don’t plan to make good money, then after risk takes its toll, you will be disappointed with what remains.

Final thought: I recently spent the day with Mike Bogun, CEO of LandCare, who stated that companies in their first 10 years of business seem to be far more profitable than older businesses. If your business is older, slower and lacking profit – it may be time to reinvigorate it with a fresh new strategy.