Learn why your lawn service prices should fall in the top 20% of your market.
I get the question all the time: How much money should I be charging for my services? How should I price my services? I’m not going to directly answer that in this video but I do want to talk about a concept that I think is really important.
I have been studying marketing since around the end of 2005. When you start studying marketing, you get introduced to a lot of really interesting people and they obviously teach on subjects other than marketing.
I noticed that what a lot of the gurus in the marketing industry tend to teach is that you should price your services at the very very top of the market. You should be the highest priced provider in the market for whatever it is that you want to sell.
I don’t really agree with that for the service industry and for my service business. That’s the point I want to address. As you’re learning how to price your services and you are working your strategic plan to get to the price point that you want to be in the market and be able to sell a lot of work at that price point so that you can make a good amount of profit, what I believe you want to try to accomplish is you want to be in the top 20%.
If you were to look at the pricing in your marketplace, whatever the service is that you’re selling, look at 50 competitors and write down the cheapest price somebody in your market charges to provide that service, and then write down the highest price that someone in that market would charge to provide that service.
Let’s just use fertilization and weed control. If someone for a 5,000 square foot property would charge $25 to do fertilization and weed control at that property, and at top end of that market somebody would charge $75 to do that service. If you picture that on a whiteboard or on a chart, you want to be pricing in the top 20% of the market. If you were to plot all the lawn service prices for everybody in the market and you were to divide that into 20% chunks, you want to see what the pricing is at the top of that 20% chunk.
I don’t know what that would be in your market, but you want to slowly figure that out over time. You’re not going to figure it out when you first get in business. You’re not going to figure it out on day one. You figure it out over time and as you figure it out, you start to price at that price point.
Now obviously, your service quality, the quality of your people, your customer service, everything has to improve and grow and get better so that you can get those prices. But, I believe that the sweet spot is in that top 20%. Why is that? Because if you’re the highest priced provider in your business, you can’t really build a big business.
If you know me, then you know that my whole concept is to build a business big enough to have somebody that runs it for you. Then, you also have to have a couple of layers so that even if that main person leaves, it wouldn’t all end and you’d have to be the guy running it again.
You want to build a business big enough that you can afford to have people to run the company for you, and that takes a while to get to that point. To get there, if you are the highest priced provider in the market, it’s hard to get enough business, enough volume of business, to build a business big enough to do that.
If you’re too cheap in terms of pricing, you can never hire the right people, the best people. You always have equipment problems and truck problems and employee problems, and you can’t afford to market. You can’t afford to do anything, so then again, you can’t build that business.
That top 20% sweet spot to me is the point that gives you enough money to grow a great company that can run itself and that will allow you to take a lot of money out of the business, and it will allow you to build, again, a big enough business to accomplish everything that I just said.
Watch Jonathan’s video to learn why you should raise lawn care prices 10% and how to get your clients to agree to pay it.
If I’ve been guilty of anything in business, it’s been under-pricing, not asking for enough money, and questioning the prices that I’m asking for even after I think through how much I need to charge.
I’d recommend that you take a look at, or do a few Google searches, around the topics of if you can raise prices by X and lose X number of customers. For example, you might Google something like, raise prices 10% and lose customers. Just look around and do some reading.
Several years ago, I read some books on pricing and so I raised prices in my business. I had done some price increases before but generally I had been scared to do that. I’ll tell you right now, I’m still under-priced in everything we do.
A lot of times the reason we’re under-priced is because we don’t have the confidence to raise prices. Or, we are not communicating correctly to explain to our client exactly why the price that we’re charging is the price that we should be charging and why it delivers to them tremendous value. I think most of us make that mistake so you might check yourself and see if you have that same mindset as well.
Here’s the concept, and this number that I’m about to state will change so your profit margin will affect what I’m about to say.
If you raise lawn care prices 10%, you could theoretically lose 25% of all your customers and make the same amount of money at the end of the year in terms of take-home profits. Remember, take-home profits is all that matters. There’s been some studies in the service industry that say if you raise prices 10%, you can lose up to about 37% of your customers. That’s huge.
I am positive that if I raise my prices 10%, I would not lose 25% of my clients. If I lost 5%, think about how much additional profit that would make me in my business and think about how it would affect your business. If you could raise prices 10%, only lose 5% of your clients, how much more money would you make?
The point here isn’t to give you the exact answer. It’s to give you a concept that proves to be true every single time you dig into it. Do some Google searches to research this and it will give you additional confidence to price your services correctly.
Should you sell your landscape business? Listen to the video to find out the 4 reasons you should make that move.
I often hear so many people talking about wanting to sell their company. Many people want to build their business for the next three years and then want to sell it. I’m sure I’ve said this in other videos. But, my argument is, if you build a real company that’s capable of running itself for the most part, if it doesn’t require your constant involvement and it makes you a nice amount of money, why would you want to sell your landscape business?
In my mind, the only reasons that you’d want to sell that business is one, you’re looking out into the future and there’s something that’s going to change from a technology standpoint or a market standpoint that is going to potentially seriously handicap your company. Or two, if your company’s worth, say, one million dollars and you currently make $100,000 a year off of that business, you could sell it, take the million less the taxes, and you can reinvest it and make more than $100,000 a year. The math would be you sell the company for a million, you get to keep 700,000. You now can take that 700,000 and you could earn 140,000 a year on that money.
Now, in the example I just gave I think that’s something like a 20% per year return, so good luck with that. That’s not easy. To get big returns like that you’re going to be an active manager in the next thing you’ve invested in. It may even be high risk and you have a chance of wiping out that principle.
A third reason you’d get out of the business is if you just simply hate the business or the industry so much and it’s not fixable, meaning you can’t turn it into a real company that runs itself, or you’re just completely sick of it and unwilling to do it. If you’re just completely fed up with the business and you’re just treading water, the business will eventually end. It will go under, and if you’re not willing to fix that or change that, then you’re probably better off selling the company, because eventually you’ll get nothing for it.
The fourth example is that you’re burned out, tired, and worn out. If you’re not willing to do the work to become a new person, to learn how to be a CEO, learn how to motivate and train your team, learn how to build a real company with some processes and procedures, learn how to do marketing and sales, your company will grind to a halt. If you’re not willing to do some reading, and maybe go to some conferences and network with other people, and really learn the business and learn what it takes to grow yourself and grow your team into the people that you require to be a great company, I would say you’re probably better off to sell your landscape business…maybe even getting a job.
I know that sounds really harsh, but these are the reasons you would sell. The idea of just selling to get a big amount of money, it generally has to be so big that you’re probably not really set. So the idea of selling is generally not the best approach to have in mind. The items that I just gave you, those are the reasons why you’d sell. I’d recommend that you look hard at building a real company that can run itself so that you have no need to sell…unless you just absolutely want to or get offered an insane amount of money to do so.
Watch this video to learn how to set lawn care pricing to earn the most profit for your business.
If you’re watching this video, I’d highly encourage you to watch video number one and video number two if you have not already, because this video is based on the last two videos. And in it, I’m talking about how to figure out lawn care pricing for yourself as your business evolves.
In the last video, what we did was figure out the time for eleven properties within the seven thousand and seven thousand nine hundred and ninety nine square feet range. Remember, we’re using mowing as an example and we determined that our price based on hitting our target of forty dollars per man hour, the price needs to be twenty nine dollars and seventeen cents to mow properties within this range.
So basically what we’ve done, is we went through our business and we just simply tracked our time and measured our properties and we figured out, for all the different square footage ranges, what we need to be charging to hit our goals and we could do this for every service…fertilization, weed control, lawn mowing, aeration and all the different service types. Then, what we do is we basically build out our lawn care pricing. We call it a price matrix in Service Autopilot. It could be just a layout like this for you inside a spreadsheet. We figured out in our business, hypothetically I’m saying your business, that for five thousand to six thousand square feet, you might need to charge twenty eight. And for six to seven thousand, you might need to charge twenty eight dollars. Again, keep in mind, we’re using fictitious numbers to lay out a simple example.
So, just simply lay out something like this for the different services at different square footage ranges. Then, when you go out, you measure the property with a measuring wheel or you go online and you measure it with satellite imagery or pictorial imagery. You can literally look at the square footage, look at your spreadsheet, or if you use Service Autopilot, it will figure out for you based on the price matrix and it will give you a price. Service Autopilot really simplifies pricing and it also helps ensure that you’re always pricing your properties to achieve your target man hour rate.
So, that’s the basic premise of figuring out your lawn care pricing from the beginning so that you can set it and then price off of it from that point forward.
Now, something you might find as your business evolves, you might have originally set prices like this, at twenty eight dollars and twenty eight for this square footage. But, then what happens as it evolves and as your property makes changes and maybe as a little bit of the market you serve changes or the demographic you serve changes, you’re going to notice that maybe you’re starting to achieve a little bit different man hour rates. So, maybe your goal is to achieve a man hour rate clocked around forty eight dollars. So, let’s just go with that.
If you’re trying to achieve forty eight dollars per man hour when you’re mowing, and you’re nailing that on this property right here, five thousand to six thousand square feet. But, now on six thousand to seven thousand square feet, you’re not. You’re more on this forty six dollar per man hour range. So then, you’d probably need to raise that price to about twenty nine dollars to continue to achieve a forty eight dollar per man hour range.
In video number two, we went through and we tracked all of our time and that helped us figure out how much we’re making per man hour. Then, once we figure out how much we’re making per man hour, and we figure out averages across the square footage ranges, we can then really analyze our business and we can really adjust the business. Something we found years ago at our business is, we were really doing okay in this five thousand to ten thousand square foot range. But, as soon as we got into the bigger stuff, fourteen, fifteen, sixteen thousand square feet for residential, we weren’t making money, or, we were not making good money. It wasn’t holding up.
In my example right here, notice what happens, we’re pricing six thousand to seven thousand square feet at twenty eight dollars. Remember that these are made up numbers, these are not my exact pricing and it would be totally different for you and your market. But in my example, notice that, six thousand to seven thousand square feet is priced at twenty eight dollars. We’re pricing fifteen to sixteen thousand square feet at thirty two dollars. But what’s happening on those properties based on how long they’re taking us, we’re only making thirty seven dollars per man hour. Our target in my example, was forty eight, so notice how far we’re under performing.
So what that would tell me as the owner of the business is that, we either need to stop doing properties like these or we need to figure out how to be more efficient. Maybe we need to construct a route that has bigger equipment on it, so that we can go through this type of property faster and we basically group all of those properties into one crew and get through them faster. You’ve got to watch out on the back side though. You could drive up your non-billable time. You might get your per man hour time, you might optimize it and make the per man hour time you want, but then your non-billable goes way up. You may end up with tons of drive time and so you still don’t end up profitable for the day.
There are lots of considerations here and those are things to think about. And, I know that I’m not going to win as much business, but at least when I do win the business, we’re making money and that’s the goal.
And so, the point of this screen here is to show you two things. Once you figure out your average pricing by square footage, you then take that and you set that for each of the square footage ranges. Then over time, you re-analyze your business and you figure out by square footage range, what man hour rate you are earning right now, on average. If it’s too low, you back into it. If you want to go up to earning forty five here, if you want it to go up to forty eight, how much do you need to raise this twenty eight dollar price? And if you watch my video number one, or excuse me number two, and you paused the video on some of my formulas, then you can kind of figure out how, this one here is about raising the price. So you can look at my formulas and figure out how to do this for yourself.
I hope that makes sense. If you have questions about this, post them in the comment section and I will, based on the comments, potentially record additional videos on this topic.
Learn how to set lawn care pricing to earn the most profit for your business.
In a prior video, we were talking about how to price. This is part two. Part one sets this video up and I recommend watching it. We’re talking about the subject of how to learn to price your work versus copying the pricing of someone else. Let’s now look at some actual numbers. There’s a couple of things to know as I go through this video.
One, we’re going to talk in terms of per man hour pricing. How much are you making per man hour? When I’m talking in terms of per man hour here, for example, I could tell you that you need to be making forty dollars or more per man hour. When I say forty dollars or more, that includes their salary and their labor burden meaning the taxes you’re paying them. It would include worker’s comp. It would have overhead things in there such as insurance and truck and fuel and administrative costs in the office.
All of that is rolled into this one number that you need to be making per man hour to pay for that employee, all the overhead that goes into selling the work, and having the office administration support that individual. As we’re talking about these per man hour numbers, that’s what all is included within that number.
Let’s talk details here. In this example, I have eleven properties. First, what we did was, we went out and measured all of our client’s properties and figured out for those eleven properties their gross lot. Let’s just use gross lot square footage. We’re using a mowing example so in video number one we were using a mowing example and I’m going to continue to use a mowing example. For these eleven properties, they all fall within the seven thousand to seven thousand nine hundred and ninety square foot gross lot. I know that’s a small property. I’m just trying to keep this example really simple.
Then, what we did was we went out and we tracked time for all of the mowing jobs that we performed. When the truck arrives, we start the clock. When the crew gets back in the truck, we stop the clock. For these eleven properties, here’s how much time we were on the property. We were physically there for twenty minutes, physically at this property for twenty-three, physically at this one for twenty-one. We ran three man crews, so when you take the time we were physically there, multiply that by the number of individuals in the truck, we had total time at the property of sixty minutes. That means three men were there for twenty so, twenty times three is sixty.
Now, what we did because we weren’t sure how to price, we heard one of our competitors say, “Hey I charge thirty dollars per man hour for a property that’s seven thousand to seven thousand nine hundred and ninety-nine square feet.” Now if you watch video number one on pricing, you’ll know why this is such a disastrous thing to do. Don’t copy someone else’s pricing.
Let’s say you did that. You heard that I said thirty dollars is a good price for seven thousand to seven thousand nine hundred and ninety-nine square feet so you went and you charged all of your clients that have that square footage that price. But, now you’ve started tracking your time and you’ve figured out what you’re actually making per man hour.
Now, something else I’ve said is I believe that at a minimum you need to be charging about forty dollars per man hour, minimum. Now look what happens because possibly you copied my pricing. Once you start tracking time on this job, you made thirty a man hour. On this job, you made twenty-six dollars a man hour and let’s look down here, you made thirteen dollars a man hour on this job. It took you one hundred and thirty-two minutes, over two hours to perform this job. You made thirteen a man hour.
You pay your guys fourteen dollars an hour so you’re not even recovering what you paid them per hour. Not to mention the overhead which includes fuel, the truck, the taxes you’re paying them, and the insurance. So, you’re really losing money. You’re basically paying this client to let you mow their lawn. That’s what happened because you may have copied my pricing and because maybe you weren’t ever tracking your time to know how you were doing.
I say “you” in general, not “you” specifically.
All right, so what’s happened now after tracking these eleven jobs, you’re making an average of twenty-four dollars a man hour. That is not a profitable number that you can build a good business on. I’m positive of that. I don’t care what market you’re in. You’ll see some really low numbers in the commercial business but they just have totally different margins. It’s a different business. But, all of what I’m talking about holds up in residential and in commercial. All of my numbers in red here are the result of copying somebody else’s price and you’ve ended up with basically very low profit margins and probably a business that you don’t love.
Now that you’re tracking your time and you’ve measured all of your properties, you can actually figure out what to charge. For example, if I want to make forty dollars per man hour and I know that that property took me sixty minutes, then I can do a little bit of math and you can see my formula is right up here. If you want to copy this stuff and just pause the video, you can reconstruct this spreadsheet. But, you can see that I need to charge this client forty dollars, not thirty dollars if I want to make forty a man hour. On this client, I need to charge them forty-six dollars, not thirty dollars if I want to make forty a man hour.
If I go through here and work on all of my pricing, it will show dramatic results. Here look at this one. I need to charge sixty-six dollars, not thirty dollars for this property to get myself to an average price of forty dollars per man hour. Once you’re aware of pricing and where you stand as a business, you can start to make some decisions on how to set pricing. If this were my business and I was looking at this, here are some things I would do.
First off, I’m not quite sure what this fifty-three is here so I’m going to delete that. Something is not quite right about that number. The calculation must have been wrong. Oh that’s what it was. I know what I did there. That was actually correct. Here’s what this tells me. If I look at my eleven jobs, then I need to be charging on average fifty-three dollars to mow a seven thousand to seven thousand nine hundred and ninety-nine square foot property. That’s what these numbers are telling me.
If I want to make forty dollars per man hour, that needs to be my price. By the way, for me in my market, that’s way high. I would never get that so my numbers are fictitious. I made up these numbers in terms of how long this took. As a result, these numbers are all false. I could never get fifty-three dollars. In fact, thirty dollars in my market is a high-end price. It’s towards the top of the market for just mowing a small lawn like this. Don’t get caught up in these numbers please, but this is what the data is telling me. I need to be charging fifty-three dollars.
Now, here’s what I would first do. I’ve taken a bunch of properties. I’ve figured out how long they take so that I can figure out what the average amount of time it takes me to do a property of this size. That allows me to find my average pricing. Immediately, I would look at some of the anomalies. This one here, this one here, this one here, and the ninety-nine minutes down here. I would look at these and figure out why these properties take so much longer than all the others. Is it us as a company we’re doing something wrong? Is it that there’s something about these properties that isn’t right? Or is it that these properties are in an area, maybe that they have tons of trees on these properties?
Then I could make some decisions. You can look and see that you just aren’t making money on certain types of properties so you decide not to do those any more. If that were the case and you took your worst performers off the table, now look at what it does. It gets your price down to twenty-nine dollars.
Now we’re starting to get into a more realistic price. I’ve just gotten my poor performers off the table. I either fired or I left the market which probably meant firing them, but I made some decisions in my business and now I’ve got more accurate pricing. Maybe it’s a part of town where you just don’t make any money on properties that size so you leave that part of town and you go where there are more properties like this one and this one. These are properties that I can get through a lot faster, maybe I go find a lot more of those types of properties.
Since I got rid of some properties, I’ve got a new price. I’ve figured out that I should be charging about twenty-nine dollars on average for a property between seven thousand and seven thousand nine hundred and ninety-nine square feet. I set that price and now that’s what we start to quote. Then periodically I come back through here, and if you use ServiceAutopilot, this is on the job costing report. Out to the right you can figure this stuff out. We have a training that teaches you how to do this or you can copy all of my formulas and my spreadsheets and you can figure this out for yourself.
As your business evolves and you optimize the business meaning as you raise prices, you become more efficient, you change your setup, and you change different procedures and training within your company, these numbers are going to change from year to year and you can go back and reset pricing. Another option is, if within seven thousand and seven thousand nine hundred and ninety-nine square feet you just find a ton of variance, meaning that at the top end versus the low end of those seven thousand square foot properties there’s three or four dollars in pricing variance, then maybe you break all of this down into ranges.
You look at all of your properties from seven thousand to seven thousand and five hundred square feet. You plot the time. You put in how much you want to make per man hour and notice again in my formula I have forty dollars in there if you want to copy this, it’s forty dollars. You put in how much you want to make and it tells you what you need to be charging and you figure out your pricing based on that.
Everything I just told you, you can do it for yourself very easily and you can do it for every single service you have within your business.
It’s true. It does take work. It’s absolutely true that it would be easier for me to just to tell you how much you should charge, but look at how dangerous that is. I think it’s impossible tell someone how much they can charge, but it’s possible to give hints and say, “I feel you need to be at least forty a man hour or fifty a man hour or sixty-five a man hour depending on what that service is.” For each service, pest control versus lawn care versus mowing, you do need to be achieving a different man hour rate. You have a different cost for the people. You have a different cost for the trucks that they’re running.
You do need to be achieving a different man hour rate depending on the service and in some cases it doesn’t cost you any more to provide one service over the other, but the market will support a higher price. You should be charging a higher price. That’s the way to think about it.
In video number three, we’re going to move on to looking at setting rates.
Learn how accepting credit cards will help you get paid faster.
What is it in your business you think you can’t do that maybe you just haven’t tried or haven’t tested? We have all these assumptions about how business works and how life works. Yet, a lot of times we are wrong simply because we haven’t been educated or haven’t learned about specific topic.
Let me give you an example. One of the biggest things that made my business better years back was we decided that we would only work with clients that paid us with a credit card each week. We performed the service and then charged their credit card. It was a big change.
A lot of people in our market weren’t doing it. I have told hundreds of people about this idea because one of the biggest bottlenecks in growing your company is cash flow. You’ll never get big if you don’t have the money to get big.
One of the ways to solve the cash flow problem is to auto charge your clients’ credit cards the day of or the week after service so that you’re getting paid fast. Then, you can time that with payroll. It just changes everything.
Most don’t believe this is possible. They say it won’t work in their market or that their clients wouldn’t do that. That was exactly what everybody said in my market. I just finally got the courage to try it, but at the time really nobody else was.
Why is it that this industry is the only industry, or one of the few industries, that believes that you have to send an invoice at the end of the month and get paid a month later? I know not everybody does it that way, but for example, the lady that cleans our home, we leave her a check every single week. She cleans my home, she gets a check that day.
If you’re an HVAC company or a plumber that comes to my house, I pay you when you perform the work right there at the job site. I have the guy that comes and washes my car. He swipes my credit card as soon as he washes my car.
I have a pool guy. The pool guy sends me an invoice at the beginning of the month for all of the weekly services I am going to receive for the month. I pay him in advance. I can go down the list of all the different providers that I use in my home.
We had our hardwood floors handscraped and re-stained. I gave the guy half the money down and half the money when the job was done. When I had my house painted, I gave the guy part of the money up front and then I gave him the money in stages as he finished painting my house because it took several weeks.
There’s almost nobody that I deal with at my home that sends me an invoice at the end of the month and then expects me to pay them a month later. In other words, floats my money for 60 days.
Again, I say, what is it in your business you think you can’t do that maybe you just haven’t tried or haven’t tested? I ask myself that all the time and that’s where the big breakthrough has come from.
Do you pay yourself too much or too little to run your lawn care & landscape business?
And… what is the maximum salary you should pay yourself?
Watch the video above and find out.
This is a good question from Tony.
How much should I pay myself? What percentage of our revenue should go towards our salary?
He says, “My question is simple but I haven’t seen it asked before. I have partnered with my boss and we are in the planning stage of our lawn care company. We work for a Forbes 200 company as managers. We’ll be adopting many of the same processes we use here at our company. My question is this: What is the percentage range we should be putting toward our salary? I know the goal is 20% net profit. In saying that, what is the percentage a sole proprietor partnership should be looking to pay themselves? Thank you for your time.”
So, there’s a couple of things weaved into this one question here that I think is worth addressing. Let’s start with the salary range. I don’t think there’s a magic answer to this one. I’m sure somebody has an answer but everybody makes up answers to everything. So, I haven’t the faintest idea.
I’ve started a bunch of companies and, in my case for a number of them, I haven’t been paid at all for some period of time. In the software company, I think it was 3 1/2 years that I never got a cent. I just put money in. And so obviously, that’s not the road that most people can travel, or maybe shouldn’t travel. So, the real question is not how much should you pay yourself but, how fast do you want to accelerate the thing that you’re trying to build?
The reason why in my case I haven’t taken money out of some businesses for some period of time, and why in some cases I’ve put money in, is because I wanted to grow the businesses faster. In the case of my lawn care company, we just put some money in to get it started and never put money in again. We didn’t know enough to go faster. So that was our problem there. I think that tends to be the case with most guys who want to raise money. It would do them no good because they don’t know what they don’t know yet. You just have to get in and learn the business, the industry, and what clients want. Adding money to that doesn’t solve the problem.
And so, where I’m going with that is, that same concept that I didn’t take money in the beginning because I wanted to put all the money back into the business to grow a little bit faster, applies in a different way to you.
I don’t think there’s a percentage because I could say, “well, you know, you should take 5% of your gross revenue and put that towards your salary.” But, that’s meaningless because if you have no money left over, you can’t take 5%. And, if you have tons of money left over, now you have the consideration of, do I take more than 5% of gross revenue as my salary? By the way, I totally made up that 5% number, so don’t go off that at all.
But, my point there is if now you have money left over and you have more than 5% of gross revenue left over. Let’s put math to this. Let’s say you do $500,000, 5% means you only make $25,000. You should make more than $25,000 in pay off of your $500,000 business.
But, let’s say you have a $100,000 left over of the $500,000. Now you have a decision. You could take all the $100,000. There’s nothing wrong with that. It’s your business. You created it to become a profit machine. In that case, that’s 20% of your revenue that could go towards your salary.
And so, again, I’m being simplistic here. We’re not talking about profit. We’re just talking about money that you can take as a salary. But, your decision is, would you rather take $25,000 of that and put $75,000 back into the business? Maybe your goal is to get it to $1 million next year.
This is the constant consideration in everything you’ll do no matter what stage you get to in your business. It will always be, how can you best utilize your pile of money? Is it best to take it off the table and put it in your personal bank account and maybe invest it personally? Or, is it best to put that money back into the business?
The thing that I don’t think most people think about is, we’re building assets. For most of us, our wealth is going to be in our businesses. It’s not going to be in equities that we are buying, or real estate, or other investments that we’re making. Our biggest asset is going to be in this company. So, you have to think in terms of utilization of your money.
I’m going slightly off topic on you here but, I think this is how you make the decision. I can’t give you a percentage. So, you need to make the decision on what the minimum is you and your family can live with. You and your boss have to answer that. Your boss who’s about to be your partner. And, by the way, you need to make sure that as soon as you’re partners, you no longer think of him as your boss. You have to get away from that mindset.
So, now back to the real question. What’s the minimum amount that you can live on? I would recommend that you live as frugally as you can for three years. I’d say more if you want to be more aggressive. Your attitude has to be that you’re making an investment in the company because it will change the course of your life and your family’s life, forever. You’re going to give up a lot of stuff for three years and take as little money as you can and you put as much back in so that you can get the business bigger faster.
There is no magic here. If you want to grow a big business fast, it takes money. And if you don’t give it the money, you don’t grow a big business fast. And so, you’re going to have to take less money up front so that you can have big money later. There’s no question about it.
If you guys get to a point where you just flat out don’t know how to make your business better, then you might as well take all the money out and quit putting money into the thing. Just let it grow organically at its own speed because you’re dumping money into it and it’s doing you no good.
And once you reach a point where there’s enough money left that you could take a pretty large salary, in the six figures, then what I think you do based on the accounting advice I’ve received over years, and you need to double check all of this for yourself, is you pay yourself a salary that is equivalent to what you could go hire somebody else for to fill your shoes.
So for example, if you’re the president of the company and you’re running a $5 million company, let’s say you could go hire somebody with a lot of experience to become president of your company for $120,000 a year, hypothetically. Well then, in that case, you should probably be paying yourself $120,000 a year. You should pay yourself what it would cost to replace you.
The remainder of the money left over in the company thereafter is what I would call profit. The remainder of that money then can either be reinvested or can be distributed to the owners of the company.
Remember, my point was, that once you reach a point where you could really afford to pay yourself quite a bit and still leave money in the company to grow it, then, at that point you cap your salary at a number that it would cost you to bring somebody in to replace you and then, the remainder is considered profit.
And that’s the way I look at it, and that’s the tax advice that I’ve been given over the years. And, again, you would double check that for yourself.
My final point in response to your question is, you made the mention that your goal is 20% net profit. I would just mention to you that I don’t think 20% net profit is generally achievable in the commercial space unless you’re running a fairly small business. That used to be the case, but things have really changed. So, if your goal is 20% net profit, you need to, in my opinion, have a heavy residential element to the business. You’ve got to be very strategic about it to achieve that. But you can achieve it more likely, I believe, in a big residential company which is a little more challenging to build.
This questions is from Jacob, and the question is, “How much money should I be making per hour as a business?” I can’t tell you exactly, but I can give you some information that will probably help you. Let me first give an example in commercial. Commercial maintenance, first you’ve got to understand there’s a lot of factors that go into this. That’s why there is no real easy rule of thumb. You could talk to one guy that’s predominantly commercial and you’re going to hear a lower hourly number; whereas, if you talk to a guy that’s residential you’re going to hear a higher number.
If you talk to a guy that’s doing lawn mowing, you’re going to a number; whereas, if you talk to a guy that’s doing irrigation, you’re going to hear a higher hourly number. It’s all over the board. That’s why I say there is no way I can possibly directly answer, but I can give you some clues.
Let’s start with commercial. In commercial you might hear a guy say, “Yeah, we have to achieve a $25 per man hour number.” You might hear somebody else say, “I need to achieve a $30 man hour number, or $35 man hour number. That’s kind of a range, $25 to $35 is a range I’ve heard in the commercial space, and the reason you’re going to hear … But you’ve got to analyze it more than that. A guy could be in commercial and he could say, “Our goal, we need to achieve $28 per man hour to be competitive in this market and at this moment in time.”
Things have changed over the years. You could have a guy that got out of the business in 2002. He could say, “Back when I was in the business in 2002, we were hitting $34 a man hour. Well, now it’s 2013 and everything is different. He may not be able to sell work at that same man hour rate if he was still in the business. Now he might have to sell at $27. Things have changed. Things have tightened up and people are very competitive. You have to be very careful that you’re talking to someone that’s talking in today’s prices.
Second, if you talk to somebody that’s in the commercial space and they predominantly serve smaller commercial properties where they’re going from property to property more like serving large residential. That’s a totally different game than a guy that’s serving big commercial where he sends a truck to a job for the entire day, or he has a crew that services a property for 3 days, or he has 5 crews that go to a property for 2 days. Totally different businesses and they’re both called commercial and, they’re, therefore, are going to have completely different hourly rates.
If I can send a crew to a job site in the morning, and they come home at night. Then tomorrow, I send them to the same job site and they come home at night, or if I could send them to a job site in a truck and all their equipment is stored on site and they just drive back to their homes they don’t even have to come back to my office, I can build a lot lower rate than if I have to send them to one property, send them to the next, to the next, to the next, to the next because you have what’s called unproductive, unbillable time built in to your pricing in that second scenario.
In my first scenario, we’re billing straight time. I send them out to the property. We’re billing time all day long except for their break. I don’t have the unproductive time of as much load and unload time. I don’t have as much travel and drive time. I don’t have maybe a time built in to send them on parts runs and material runs. It’s a totally different game so I can look at the numbers different.
Now let’s say that you have a commercial … First, understand that I don’t have a whole bunch of cost so I could maybe sell work at $30 an hour, whereas, if I have a lot of drive time and unproductive time, I might have to sell work at $40 a man hour when we’re actually performing the work because I’ve got to factor in the drive time and all that unproductive time. Now I’m quoting 2 different rates when you’re talking to my comp-, me versus another company where we serve both commercial, but we have different types of commercial.
You’ve also got to know if this hourly rate includes drive time or not. Again, in the commercial space I might say we need to achieve $27 a man hour. For $27 a man hour, that means the moment we finish one job get in the truck and drive to the next one and complete that job, that’s all time on the clock. That drive time is built in to the job time that follows, and, therefore, all of that time together, drive and production, for all of that time I need to be averaging $27 a man hour.
Then if you talk to a different commercial company doing the same type of work, they might say, “We need to achieve $32 a man hour. When they say $32 a man hour, what they’re thinking is once we set foot on the job site from that moment in time until we complete that job, I need to achieve $32 a man hour. They don’t give you … They don’t have a number for that drive time in between. That is a cost, but they’re not tracking that time and saying, “While we’re driving, we need to be achieving $32 a man hour.” The $32 a man hour is only for the time on the job site. They are not pricing in … They are pricing in, in a sense, but they’re not counting drive time in their hourly wage that they quote as a company, better said, hourly rate that they’re trying to achieve. Hopefully that makes sense.
Whenever you’re asking questions in your market because by market pricing an hourly rate is different as well. It’s totally different in Texas than it is in New York. It’s totally different in Alabama than it is in Connecticut. It’s totally different in California than it is in Florida; different markets, different rates, different employee costs, different everything. When you’re researching this in your local market and you’re asking these questions, the questions to know to ask are, “Does your rate include drive time? Does your rate include … Are you doing big commercial? You doing smaller commercial?”
When you move into residential, it’s sort of the same thing. If I can send a client … If I can do 3 large residential properties in a day, I don’t move my truck as much. I don’t have some of the costs of the guy doing 35 little bitty jobs per day and so my hourly rate might be bigger. If I’m doing pest control in their one-off visits, my rate has to be higher than it might be for mowing 7 yards in a row because: 1. My pest control tech has a higher level of training, a higher level of licensing. We’re using chemical. He also is having to do more driving to get to each of these one-off jobs that are called in and booked by appointment, and so that rate’s higher.
A lot of times when you’re asking a company, “What’s your hourly rate?” They might give you a blended rate across service offerings, but the real questions is, “What’s your hourly rate for mowing? What’s your hourly rate for irrigation? What’s your hourly rate for pest control?” Those are the clues. Those are the questions and that’s what you’ve got to ask. I’ve heard $25 to in the $30s for in the commercial and I’ve totally seen for maintenance and for maintenance and lawn care, I’ve seen guys in the high $20s to well into the $40s, and $50s, and some in the $60s for residential.
I would add one more thing. You will sometimes hear about a guy in residential or commercial and their averages are a really high number and I’m making this up, but I’m doing $50 a man hour. Then you’ll talk to another company and they’re doing $42 a man hour. These are made up numbers, but it communicates a point. Or you find a guy does … Let me exaggerate that a little more. You’ve got a guy that’s doing $40 a man hour in residential and then you compare him to another guy that’s doing $60 a man hour in residential. Now I can tell you, for example, in Toronto, Canada, they bill at a lot higher rate than we do here in Texas. That’s because a completely different area.
That’s one difference, but the other difference is, you might have a guy billing out at $60 and when you dig in the guy that’s billing out at $60 is running about a quarter million dollar a year business. He’s been doing it for quite a while and he’s slowly acquired those clients; whereas, the guy that’s running a $9 million or $10 million company, he has to sell a lot more work and he has a lot more attrition he’s dealing with where he has to get more and more and more clients. It’s harder to sell work so he can’t sell $10 million of work at $60 an hour.
There isn’t enough people to buy at $60 a man hour, but when you’re running a smaller company and you’re getting the business over time and you’re a little … You’re more able to cherry pick because you only have to sell so much work, you could sell more work at a higher price, but when you want to scale to $10 million, you’re not going to be able to sell at the same prices and scale that fast. Hopefully, I’ve communicated that clearly in that you can if you’re very strategic and say, “I want to run a smaller company and I’m going to cherry pick the work and I’m going to sell it at a high price into very specific neighborhoods, or very specific types of clients, and I realize there’s only so many of them, so I can only grow this business so big, but that’s okay. I’m going to achieve this high dollar per hour rate.”
If that’s your plan, that’s doable, but you’ve got to be, of course, in the right market. But if your plan is you want to build a $10 million residential company, in most markets good luck selling at very high prices. I’m not saying you can’t sell at higher prices that are very profitable. I’m just saying you can’t sell at the extremes of the market and find enough people to build a $10 million per year business because they just aren’t out there. You can’t sell at the very, very top of the market and get that much, that big of a percentage of the market.
Again, these are all questions as you’re thinking about this to ask yourself and ask others so that when somebody says, “Yeah, we sell at $25 a man hour,” you don’t go out and copy the $25 a man hour. You got to really dig in. I hope that helps you as you’re analyzing this and researching it in your local market. Good luck.