How To Determine Lawn Care Pricing (Part 2)

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.

Variable Costs vs Direct Costs vs Fixed Costs

Learn the difference between variable costs (direct costs) and fixed costs in your lawn care & landscape business.

A lot of times if you do a Google search, or if you went to college and you studied accounting, a lot of the examples are based on manufacturing. They’re manufacturing examples or they’re the production of some product. It can become confusing.

There’s a lot of interchangeable terms.

Variable cost is a term that’s used frequently. More common, in the landscape industry, is the use of direct cost. I like to talk in terms of direct cost instead of variable cost. You will also hear, and you can watch my video on this, the term “fixed overhead”.

I’m going to go into a little bit of an explanation here. Let me first talk in terms of direct cost because we’re going to use that term instead of variable cost. Direct cost is a cost that varies based on production. As an example, if you win a design build job, you will incur some extra costs to complete that job. You may need to hire some contractors, rent a dumpster or a Ditch Witch, pay out a sales commission, or incur material costs such as plants. Those are direct costs.

Had you not won that design build job, you would never have incurred the material cost, the permits or the rentals. Therefore, it’s a cost that, again, is only incurred when you win the work and when you perform the work. If you’re looking at your profit and loss statement, these direct costs, are going to appear under your revenue at the top of your report in the cost of goods sold section.

What you do is, look at your revenue generated for whatever time period your P&L is looking at. You subtract out of that revenue, your sales revenue, your cost of goods sold. This is your direct cost. That leaves you with your gross profit margin. Your direct costs are going to be one of your biggest expenses inside your lawn care business because your business is so labor intensive. Or, if you’re in the design builder construction side of the industry, materials are going to be a huge cost to your business which falls under direct costs which is part of cost of goods sold.

Again, direct costs and variable costs are often used interchangeably when you’re reading accounting books or performing Google searches. Within the lawn care industry, the more common term is “direct cost”. Generally, what most people do is they take all of the other costs and they put them under “fixed overhead” or “indirect costs”.

There really are some other variable costs in the business that, oftentimes, will get lumped into fixed overhead or indirect costs, but are truly variable. You have to figure out what the standard is for your business, what the standard is for this industry. I would recommend following the standard for this industry.

Let me give you an example of what I’m referring to. You could have what might be considered a variable cost by some, for example, website hosting or maybe marketing. Some consider marketing a variable cost because if things aren’t going well, you could shut off all of your marketing. You could stop running pay-per-click ads or sending out direct mail pieces. Those costs are somewhat variable.

It’s far easier to stop those types of marketing costs than it is to exit out of a three-year lease or to stop paying for truck insurance. Those are fixed costs. Marketing is an example of a variable cost. However, what you’ll see oftentimes, is that a lot of companies will look at their marketing expenditure for a period of time. They will put it into the indirect cost section on their P&L.

What they do is, they take gross profit margin. Remember that’s your direct cost subtracted from your revenue. That gives you your gross profit margin. From that, they subtract their fixed overhead and indirect costs. Oftentimes, you’ll see marketing or advertising as one of those costs that get subtracted out. I wanted to make the point that as you’re reading and as you’re thinking through what is a fixed cost versus a direct cost versus a variable cost, marketing is a great example of a cost that will fluctuate. Therefore, it is somewhat of a variable cost.

For example, you might have website hosting, as I am showing here. That’s a marketing cost. You can’t really turn off your website and shut it all down. A lot of times, that’s obviously a fixed overhead or an indirect cost, whereas pay-per-click, where you’re paying for clicks in Google, you could shut that down by pausing your campaign in an instant. That is more of a variable cost.

The takeaway is that you need to sit down with your accountant and pay attention to what’s done in the industry to figure out if, even though there’s some variability in that cost, as in my example of pay-per-click, it might make sense to follow industry norms or the recommendation of your accountant. You might also hear the terms sometimes called “general and administrative costs.”

Those are some things to think about. Universally in our industry, you will hear “direct cost”. Direct costs are directly tied to the job. If you do not perform the job, the costs are not incurred. If you perform the job, the costs are incurred. That’s why they go into your cost of goods sold section on your profit and loss statement.

What is Fixed Overhead?

 

In your lawn care business you’ll have two types of overhead.  You’ll have fixed overhead and variable overhead.  I have a separate video that explains variable overhead.

Fixed costs make up fixed overhead.  An example of fixed cost would be rent, insurance, admin salaries, office expense, depreciation, utilities, and the cost of your estimators.

The characteristic of a fixed cost is, it’s one that doesn’t change very much and it’s not affected by activity. Whether you perform a lot of work this week or you perform very little work this week, your fixed costs, or fixed overhead does not fluctuate.  It remains fairly constant and it is fairly easy to predict.

You want to be very slow to add these fixed overhead costs because, if there’s a decline in your business, it’s hard to get rid of these costs.  If you go out and you sign a three year lease on an office space, it’s a fixed cost.  You know every month your office is going to cost you $1,000 a month.  If your business takes a significant decline, it’s very difficult to get out of that three year lease and eliminate that $1,000 a month expense.

Insurance on your office building is an example of a fixed cost because the insurance cannot be eliminated without eliminating the lease.  Therefore, that insurance cost doesn’t go away until the lease itself goes away.

Admin salaries are fixed.  Yes, you could let those individuals go but, generally to keep your business operating and running, you have to keep your admin team.  Therefore your admin salaries are considered to be typically allocated in your fixed overhead numbers.

Watch the video about variable overhead and also watch the video about an elementary way to calculate fixed overhead within your business.

Why You Never Make Money in Your Lawn & Landscape Business

Do you feel like you don’t make enough money in your lawn care & landscape business?

Are you frustrated?  Not getting ahead?

Watch this video to learn exactly why this is happening and how to finally make money in your lawn care business.

 

In your lawn care business, do you feel like you don’t make enough money? Do you feel like as you grow your company, things aren’t getting better, that there’s never money leftover?

I’m going to show you in this video exactly why that’s happening. I’m going to show you why the business doesn’t feel like it’s ever improving.

Some of the common complaints that we hear from guys are, they feel like they’re not pricing the work correctly, not making enough money, the business never gets better, there’s never any money leftover no matter how hard they work or how much they grow, and they feel like they’re just always scraping by.

When they started the business, things felt good. Then, as the company grew, they felt like they could never get ahead…feeling trapped by the growth.

I’m going to show you some numbers. Now, if you get caught up in the numbers that I’m demonstrating, you’re going to completely miss my point because I have not put the thought into this to come up with real numbers. Don’t be caught up on the numbers, they’re only to get you thinking and to illustrate my point.

Let’s say when you first started out, you were working for somebody else working 40 hours a week.

You were making $14 an hour, which means you were taking home about $560 a week. We’re ignoring taxes and all that. Let’s say you were in this industry and the company had some seasonality in it, so you worked this job and maybe another. Again, just keeping this simple.

You worked 40 weeks of the year, so you were making $22,400 per year. Then you decide since you have all the experience, that you can start your own company and make a lot more money.

You go out and start a lawn care company. Let’s say, overnight you sell 40 hours a week worth of work. You are now doing the exact amount of work that you were doing for your prior employer. You’re working 40 hours a week, but now you’re selling your work at $30 a man hour.

Whether you’re mowing yards or doing irrigation or installation, you’re selling that time on average for $30 a man hour. If you’re mowing yards, and you price the yard at $30, that means it takes you about an hour.

If you’re making on average $30 a man hour, and you’re working 40 hours a week, you’re making $1,200 a week. You’re doing way better than you used to when you had your job. You’re still working 40 weeks, but you’re making $48,000 a year instead of $22,400.

Things feel good. You think, “This is great. If I could just grow this business more, I could make a whole lot more money. If I were to go get more jobs and hire more employees, think of all the money that I would make.” You think growth is going to fix your problem and it’s going to let you have this really great lifestyle and you’re going to make tons of money. You run the numbers and think, “Man, if I had people I’m going to make a lot more money.”

This is where you really can’t get stuck on my numbers.

If you’re selling time at $30 an hour, but now you get a helper. If two of you are doing a job together and you sell that job for $30, that means you can only be on that property for 30 minutes because your 30 minutes plus his 30 minutes equals one man hour. That’s $30.

If both of you work an hour on the job site, you better bill $60 to make $30 a man hour. Now you’re selling your helper’s time at $30 a man hour. You think, “Oh, I could hire a guy for $14 an hour. I could sell it for $30 an hour. Think of all the money I’ll make.” But there are all of these costs.

Let’s say when you think about how many hours a week you work and you take the cost of your truck, the cost of gas, the cost of equipment, and you just divide those costs out by the number of hours you work a week to arrive at an hourly cost to run the truck, hourly cost of gas, hourly cost of equipment.

I’m going to say it for the fourth time…these numbers are not exact and are solely to make a point.

When you run the numbers, you’ve figured out that it cost you about $2 an hour to run your truck (these are working hours), $1 an hour for gas, and so on.

This employee now has a truck, gas expenses, equipment expenses, supplies, he has insurance on his truck, materials cost, and you are paying his worker’s comp and a storage unit. There are so many other costs that I didn’t even account for here.

On an hourly basis, if you were to look at all those costs, he’s costing you about $21.67, which is quite a bit more than the $14 an hour. That doesn’t even account for payroll costs, or what they call labor burden. That’s immediately another 8% of the $14 an hour.

Now you’re billing him at $30 an hour but you’re spending $21.67 on him. For every hour you work this guy, you’re making $8.33. If you are still working 40 hours a week, and now your employee is also working 40 hours a week, you were making $30 a man hour before, now you’re making $38.33.

You were getting to take home, in my very elementary example, $30 a man hour which was equating to about $48,000 a year. What’s great is, now you’re also getting to take home another $8 a man hour because you have a helper. Well, then you get another helper. The realty is that you have to go sell enough time to keep this other guy busy. You now don’t have time to work 40 hours a week. You have to be doing things to generate business.

You’re out doing estimates, answering billing questions on the phone, answering sales questions, and selling. Now, you’re really putting in 70 hours a week.

You’re worn out. You’re working weekends and most nights. The business is starting to get really stressful and frustrating. The only answer is, you’ve got to work a little less. You need to get off the truck for part of the week so that you can do all the other activities of the business and have your team now generate the billable revenue.

As you add more employees, all of these new things happen in the business that take all of your time. You can’t be out there doing as much work. Let’s say that you were to get out of the field, or start to reduce your time in the field. If you want to continue to make $48,000, or make an equivalent of $30 an hour, you now have to take these guys so that you’re selling their time at $8.33. You now need 3.6 of these guys.

You need almost four guys out there in the field doing the work, so that with the money leftover, you can make the $48,000 a year that you were making before when you did all the work yourself.

Basically, now you have four guys doing the work for you, but now you’re busy doing all the other stuff for the business and you’re not making any more money. That tends to be the exact problem that most guys get into. You have four guys, you’re swamped, and you have no where to keep all your equipment.

Keep in mind, in my example there’s no profit leftover, you’re not building any money in your bank to protect you for a rainy day, and you’re not putting any money aside to go buy new equipment. You’re not doing any of the stuff that you need to be doing. Your are simply surviving in this example.

Now, you sit down one night and you’re overwhelmed and beat down because nothing is getting better. You have four employees but, they break stuff and things happen. That cuts into that $48,000 that you were making. You’re not always truly making $8.33 per guy. Something’s always happening.

You think to yourself, maybe if you had eight guys things would get better? That means you better get out there and hustle and sell and do everything it takes to grow the business.

Pretty soon you’re so busy again and you’ve hit a brick wall. You’re back in that same spot again. If you’re married, your wife’s worn out with you. If you’ve got kids, you never see them. You don’t know what to do.

You think, maybe you should get an office assistant. If you got an office assistant, that person could answer the phone and do a lot of the smaller activities that you’re doing so you’d be freed up to go do the bigger stuff.

You get an office assistant. Now you need an office and phones and you need all these other things. Your office equates to about $1 an hour for the time you sell across your guys. Your office assistant equates to about $2 an hour for every hour of time you sell for a guy.

You also have about $1 to help pay for the office expenses. The utilities cost you about 50 cents. Now, notice what’s happened down here, your cost has gone up to $25 a man hour, and so now you have to have almost five guys to make the same $48,000 a year you were making.

This is the trap that keeps happening. This is what happens so often.

A guy starts out and he’s making decent money. He wants to grow the company. You look up three years later and you’re thinking, “I’m not making any more money than I was making before. Maybe I’m making less or barely more, but I’ve got all these people, all these trucks, and I’ve got all this stuff going on. Why is there no additional money for me?”

It’s because you’re still selling time at the same price you were selling it when it was just you. But now, you have all of these expenses you never had before. I didn’t even put in marketing expenses. There is a whole list of expenses that I didn’t account for. This, again, is a super elementary example. My numbers are all wrong, but you get the idea. This is exactly what happens.

Now look what happens if overnight you were to change your hourly rate to $40 a man hour. Now how many guys do you need? See? You’re now making almost $12 an hour for every hour you sell of a guy’s time. Now you only need about three guys.

Let me just illustrate that one more time because this is a critical point. I need almost 17 guys when I was selling time at $30 an hour. If I sell my time at $40 an hour, I need barely two guys to make what I was making before. Now imagine that I actually still had the 17 guys, but now I’m making $11.83 per man hour on my 17 guys. Let’s do that math.

For every hour that ticks by in the day that you have 17 guys out in the field making you money, making you $11.83 an hour, you’re accumulating $201 every hour that passes. On a 40 hour week, you’re accumulating $8,000 a week. Originally you were making $48,000 a year, and we used the example of working 40 weeks a year. Now, you’re making $321,000 a year.

Now, this is an exaggeration. With 17 workers, you’re not going to make $321,000 a year in take-home pay and be growing the business and everything else that it takes. My numbers are flawed, but can you see the difference in the problem?

Originally you kept your hourly rate at the same hourly rate as you were originally selling time for when it was just you and you felt good. You were making money. Then as you grew the business and you acquired all of these additional expenses, you didn’t consistently adjust your rate. As a result, you kept adding people, but the business wasn’t getting better. In my example, we were still selling time at $30 a man hour.

It was taking something like 17 guys to generate the same income that you were making years back. By simply adjusting our rate that we sell time for, look at the dramatic difference it had. You would go from making $48,000 a year to $321,000 a year. This is the power of constantly adjusting your rates.

Now, granted, you can only sell time for so much. You have to be competitive in your market. The trap is that so many guys go out and they build a company and everything’s going well. They keep adding more and more expenses to their business, but the rates aren’t going up. They’re either not becoming more efficient as a company, or they’re not adjusting the rate that they sell time for. Their margins keep getting smaller and smaller.

The only way to solve the problem is to keep hiring more and more people and selling more and more. You can’t sell your way out of this problem. You have to, at some point, correct your pricing. For those in commercial contracts, or those in residential contracts, the only way to fix the problem is to either get rid of all the work that originally built your company, or raise the pricing on all the work that originally built your company.

Oftentimes, the contract that you have doesn’t respond well to you taking as big a price increase as you need. If you realize three years later that you’ve been underpricing and you have to go back and raise prices 30%, that immediately gets most of your clients to go out and look for better pricing because it’s such a huge price increase.

Oftentimes, that’s the only way a guy can fix his business because he was underpricing his work from day one. This is maybe my final point. If you’re watching this and you’re just getting started in business, make sure that you’re pricing your work today, right now, at a price that will support your business as if you already have all of this additional cost.

Now, with that being said, if you’re pricing your work correctly today, when it’s just you and maybe a couple of helpers, then you should be making a lot of money. Don’t spend all that money. You should be putting it in the bank to help fund the growth of the company.

Let’s say, you’re out there with a couple of workers and you’re making $65,000. If you’re spending all that $65,000 to support your personal lifestyle, when you want to grow the company and you go through the phases of your business where you start to hire people and start to add costs, you won’t have the money to put in. You go through these ups and downs in the business where some of that money that you’re pocketing now is needed for the business. You can’t take quite as much out because you’ve got to invest a bit in the business to hire some people and buy some equipment.

My point there is that this is what happens. This is a common trap. A lot of guys early on make a lot of money when they’re pricing correctly. If they spend all that money to buy a house, a car, a cool truck, or whatever, if they’ve got kids, now they have no money leftover. They have to continue to make that 65 to 70 grand a year just to live personally.

These guys have no money to invest in the business. They aren’t able to take a temporary pay cut to afford all the expenses of the business to take it to the next level.

If you pay attention to these numbers from day one and you’re aware of them, you will grow so much faster and your business will be so much better.

Why Underpricing Work Hurts Your Clients & As a Result Your Reputation

 Stop Underpricing Work… It’s Critical to Your Reputation and the Future of Your Business.

If you are underpricing and undercharging for your lawn care work, you are doing your clients a huge disservice.  Let me explain.

I get a lot of pricing questions.  Companies aren’t sure how to price and new guys in the lawn care business have a tough time figuring out how to price.  Estimating is also challenging.  I get that. 

This is a different take on it.  It’s not the question I usually get asked, but I want to make a really important point.  If you are undercharging your landscape clients, you are doing your clients a massive disservice.

The reason I have this opinion is because most of us, and I’ve said this before, started out as the “low-ballers,” which is a word we use in the industry.  These guys are the ones underpricing and undercharging.  They’re the low-cost provider that’s screwing up their whole business because every time they go out to compete for a bid, they’re giving the ridiculously low price that makes it impossible for them to make any money.  That’s a “low-baller.”

If you’ve been in the business for any period of time, you’ve probably complained about this many times.  You’re fed up with the guys that are underpricing work.  They don’t know what they’re doing – blah, blah, blah.  There’s a temptation to adjust your pricing to match their pricing. But, what happens if you do that?  Then, you won’t make any money. This is the reason why it’s critical that you price right and do not undercharge your client.  It’s a vicious cycle.

For example, if you do not price your services correctly, you cannot afford to hire the very best people.  If you don’t hire the best people, then you don’t deliver excellent service to your clients. This is a huge disservice.  If you don’t price your business correctly, then you can’t afford to train your people. Therefore, the work you give to your clients is sub par. 

Worse, and an even a bigger sin, is the advice that you give your clients is wrong. If you tell your clients that they need something or you incorrectly diagnose a problem, you are wasting their money. If you are wrong, they could lose a plant, or a tree, or their turf could die. You have done them a huge disservice.

The way you give your clients great service is by charging them fairly and not trying to match your competitors that don’t know what they’re doing.  It’s your job to price correctly so that you can hire the best people, train your people well, put them into safe trucks that are insured, and hire licensed drivers to insure everyone is safe on the road.

I am not preaching here. The point I am trying to make is that you need to have confidence in setting the right price.  It’s absolutely the right thing to do…for your business, your employees, and your clients.  Clients want great service.  They want great quality.

Yes, you will lose some clients to the low cost provider. Eventually, they will get burned and they will be back willing to pay fair prices.

So many guys complain that they can’t get into their market because everyone is underpricing.  Think about one of the biggest companies out there. It’s TruGreen.  Their name and their marketing has supported higher prices than many companies actually charge. Oftentimes, TruGreen prices actually tend to be a little higher than the market.

There are plenty of examples of guys that are in the marketplace charging higher prices and succeeding in a massive way.  Your client wants a great product.  If you want your sales team to be highly effective, and you want your marketing to work, then invest in quality and service.

It’s kind of like a circle, it takes a little time for your sales and marketing to get going.  It takes a little time to reap the rewards of investing in great customer service. But, as the business gets a little bit bigger and there’s more word of mouth, and you get a little more marketing out there, it will all start to pay off. If you combine great service and fantastic quality, more people will see it and it will all start to come together.

Sales, marketing, customer service, pricing, quality, employees, your trucks, your reputation, how you dress…it is all connected.  The core of it all is pricing.  Don’t be concerned with what everybody else is charging.  You’re doing your clients a huge disservice if you can’t be the great service provider.

Low pricing in the short-term might give your business a boost, but in the long-term you will absolutely pay for it.  Have confidence to price work correctly.  Figure out how it needs to be priced.  Go out there and do it. Improve your marketing, your sales, and your customer support so that you can get the higher prices. 

How Much Should You Pay Yourself?

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.

Good luck!

Can I Charge More For Organic Lawn Care?

 

6 Important Points about Implementing an Organic Lawn Care Program:

1. Organic Lawn Care offers an opportunity to grow and improve your profit margins.

2. Organics can be both a defensive play for your business and a profit center because people expect to pay more for organic lawn treatments.

3. According to Tom Kelly of BeeSafe, you can charge more to cover increased product costs.  Your net margin should increase a bit.  Labor cost should stay the same if not grow as compared to standard chemical applications.

4. You can use the same equipment for organic treatments.

5. Training a technician to apply the rounds of your organic program is not very difficult.  It is a little bit more difficult, but it is not a scenario where you have to send a tech to get a 2 year degree to be knowledgeable.

6. Moving towards an organic offering is a smart strategic move to give your business the selling advantage and keeps you competitive in your local service market.