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 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. 

Why You Should Stop Providing One Time Services (Such as One-Time Mowing or Fertilization)

 Should You Stop Providing One Time Services?

For example, providing one of any of the following: lawn mowing, bush trimming, fertilization, weed control application, pest control visit, spot ant treatment, etc. is generally not worth the time or effort,  ESPECIALLY for one-time clients.  Exceptions can and should be made for regular full maintenance clients.

I am not referring to a one time flower installs, mulch install, sod, landscape, spring cleanup, or leaf cleanup.

However, regarding leaf clean-ups in areas where the leaf cleanup is a small job, it’s typically not worth it.  In Northern states where the leaf cleanup is a large job and sometimes requires a vacuum truck, that is a different story.

Continue reading “Why You Should Stop Providing One Time Services (Such as One-Time Mowing or Fertilization)”

How To Raise Prices Without Making Your Lawn Care Customers Mad

Has it been years since you increased the price of your lawn care and landscape services?

In This Video Learn The 4 Keys to “How To Raise Prices”

The question is, how do I tell a client that I need to raise the price? How do I tell them that I need to charge more for the spring clean-up or for the initial mowing? How do I explain it to them without them getting mad?

I’m going to give you the four things to consider.

Remember how much or how little you knew when you got started. You think about this business every single day. When you wake up, you’re thinking about it. When you go to sleep, you’re thinking about it. You live it seven days a week. You think about it constantly. But, when you first got started, remember how little you knew about the business, how little you knew about the industry. Now think about how little your clients know. It’s so easy to assume that they understand. They don’t think about any of this stuff that you deal with.

Now, why did I say all of that? That’s the key to everything when it comes to explaining to a client why you need to charge more. They don’t know your business. They don’t understand it. They don’t know the challenges and the cost involved. As far as they’re concerned, if you’re in the lawn-mowing business, anybody can get a mower out and mow a lawn. If it’s tree-trimming, all he’s got to do is get up there and cut that limb off.

Basically, that’s how a lot of people think. They have no comprehension of what goes into this. They don’t understand all the costs behind the scenes. They don’t realize how much it costs just to get the truck to their house. So, when you say, “I need to charge this,” that means nothing to them. They don’t know why you arrived at that number.

Here’s how you’ve have to think about raising prices and explaining it to a client.

First, you have to educate your clients. You have to tell them some of this stuff. If you want to sell something, it’s about education. If you want to raise a price, you’ve got to educate them on why. Why is to their advantage? Why does it matter? Why are you doing this? You need to tell them that. Education is key. They know very little. You know a lot.

You need to teach them a little bit about what you know so that when you ask for something, it’s meaningful. They understand why you have to raise the prices or why it takes extra time to complete a job. A lot of times when you explain to them, you’ll find out people aren’t upset. They get it. They work, they have jobs, they do things, they understand when things take a lot of time. So, education is key.

Second, you’ve just got to be honest. I think that’s the absolute best approach in business in general. Lay out your case. Be honest. If you screw it up, come clean and just tell them. If you’re running behind, tell them why. Be honest. If you try to cover it, or if you try to make stuff up, your team sees you doing that. Then they do it. If you are dishonest with your clients, your people will be dishonest, and then you will be a dishonest company. Your company and your people mimic you. You need to be honest. Your need to be forthright. Tell people the truth.

When I say to be honest, it’s not always being honest about a screw-up or mistake. Sometimes it’s just being honest and saying, “Look, the reason we’ve got to raise the price is we thought it was going to take three hours but it takes five. For the last four times we’ve been eating the extra cost, but I’ve got to tell you we’re losing money every time we’re out here. We really love working with you. I really want to keep you as a client, but is there any way you can help me work this out? We need to make a price adjustment for this to make sense.” I’m not saying to say it that way, but it’s that kind of an attitude of just tell them the truth. Tell them exactly what’s going on. Explain your case. Educate them. Be honest about the situation and then propose a solution. You’ll be surprised how often that it will work out for you.

Third, explain it. That’s part of being honest. Just lay out your case. Tell them what’s up. Tell them why. Explain exactly why you’re asking for more money. It’s not because, “My wife and I decided we want to buy a Ferrari, and we figured out that if we charge every customer two extra dollars, we could do it.” You tell them the truth. “Look, we’re not making a ton of profit here. The reason we’re doing this is gas prices have gone up. The reason we’re doing this is because now that you’re having us mow the backyard, it costs us more time and money. The reason is because we originally came out and looked at your irrigation system and there was only one zone, but that was broken. Now when we come back, you have a second zone that’s no longer working. We didn’t anticipate this. We need to charge extra.” It’s all about explanation, education, and honestly explaining what’s up.

Finally, when you’re doing a massive price increase across a lot of clients, test it. Let’s say you have three hundred clients you want to raise the price on. You don’t just go out and raise the price on three hundred clients. You call up a couple of clients and you explain your case. Education, honesty, and explanation. If all three clients decide to cancel, you’ve got a problem. You don’t want to go to four hundred clients. If all three clients say, “Cool, I get it. No problem.” Go to all four hundred clients. If a couple of clients say, “Wait a second. Why now are you raising my price, because you just raised prices last year, and I can go down the street and get somebody else?” You listen to their concerns. You take those concerns, and then you go approach three more clients and tell them that you need to raise prices. But, now you know how to answer the concerns when you’re talking about why you’re raising the price. If you’re writing a letter, you can address the concerns you heard in the letter telling your clients why you’re raising the price.

These are your four tips when you consider adjusting prices or making changes. When you do this, especially when you test it and try it, it’s not so intimidating. Your clients will be far more understanding than you think they’ll be. Just remember, it all starts with explaining to them and educating them on your reasoning.

Good luck.

 

Why Are My Lawn Care Business Profits Shrinking As My Company Grows?

Learn why your lawn care business profits will shrink as your company grows…

The culprit of declining profits is almost always one of two things:

1) increased overhead you didn’t expect and therefore budget for or

2) incorrect pricing of the work you sold (often because you are unaware how much overhead cost you will incur to perform the work, especially as the business grows)

The good news is your lawn care profits (profit margin of your business) do not have to decline.  You can protect your margins by understanding overhead and how overhead will change as you grow your company.  With this understanding in mind you will be able to price work correctly to maintain your desired profit margins.

Watch this video to learn how to avoid the trap of declining profit margins.

Video Transcript

Hey, it’s Jonathan.  I get this question, but it’s never specifically asked the way I’m about to say it.  It’s just asked in all kinds of different variations.  Basically the question is, “Why is it that as my company keeps growing I’m becoming less profitable”, or “Why is it as my company keeps growing I have less and less money”.  Let me give you some numbers first and set this up and then let’s talk about it.

There’s a lot of reasons why this might be.  The one I’m going to point out, in this video I’m going to talk about is specific to overhead.  Let me give you an example first just to build up a scenario and then let me talk through this.  Don’t get caught up in my numbers.  Don’t get caught up in the numbers being perfect.  Don’t get caught in the math, it’s just for the sake of an example.

Let’s say that you make $10.  We could even say $10 a year.  However you want to think about this, you make $10 a week.  Let’s use you bring in $10 in revenue.  You start out in your company, you’re out there doing the work, you’re spraying the lawns, you’re mowing, you’re doing whatever, you make $10 today.  Let’s use a daily rate.  I made $10 today.

If I’m spraying lawns I had $2 in material cost, I had some gas in my truck, I had a few costs and I had $2.  At the end of the day I have $8 left over.  I made $8 today.  That’s 80% on my $10.  In gross revenue I made 80%.  Good day, I made $8.  Obviously it’s not a good day, but just for the sake of math.

You start growing the company a little bit more and you start selling a lot more accounts and now you need some help.  You still make $10 a day, but now you need somebody else to go do the work for you.  You’re not on the truck, you’re sending somebody else out to do this work for you.  You have $10 in revenue for the day, you have that same $2 in cost as when you were doing the work, but now you have $5 in cost to send somebody out to do that job for you.  Now you have $3 left over.  That’s 30%, 30% is awesome, that’s a great margin, again oversimplification here.

Then you start going a little bit more.  You get more accounts, you get a few more employees, you keep adding to it, and then you have to go get an office.  Then maybe you have to hire a salesperson and then you’ve got to hire an office manager to work the phones.  You’ve got to get an accountant, you’ve got to buy some computers, you’ve got to do a million different things called overhead.

Now that same analogy.  You make $10 bucks for the day, you have $2 in cost, you have $5 in employee costs, but now this overhead.  The people answering the phone, the cost of the office, all this other stuff, a truck for you the manager.  Once you divide that out you figure out that it costs me, with all this overhead that doesn’t produce revenue.  Overhead is what it takes to run and make the business function and operate.  It’s not producing revenue in my example here.

Once you figure it out it costs me about $1.50 a day in overhead.  Now take that $1.50 out.  So $10 you made today, minus $2 for costs, minus $5 for employees, minus $1.50 in overhead, we’ve got 50 cents leftover, that’s 5%.  You can quickly see how in a business if you price…  For example when you first get in business and you go out and you price a lawn and say I can make a lot of money.  I’m mowing the lawn, if I do 10 of these lawns a day or if I spray 10 of these properties a day based on what I’m charging, I’m going to make a nice living.  It’s definitely better than the living I used to make when I worked for somebody.

Then the business, because you’re pricing your work really well, very competitively and you’re doing a great job because you’re the guy, you’re the owner, you’re all invested, you’ll do whatever it takes, business starts growing.  Then you have to start having other people do the work for you and they don’t work quite as fast as you work and there’s all these other factors.

Now you need to build some infrastructure in your business to support them, again called overhead, then you start adding all of these costs, but yet you’re still pricing exactly the same way when it was just you and you had virtually no costs.  You can’t, with that old pricing model, absorb all of the costs in your business that has now been created to run this bigger business.

I think of True Green as being a highly inefficient business.  I don’t know, I’ve never worked at True Green.  I could be crazy, maybe they’re not.  I view them as being a highly inefficient company.  Why does True Green have to charge more money than most other companies and even companies that are a good size?  It’s all because of the layers of overhead.  It’s the offices, it’s the management, it’s the layers of management, it’s all the overhead.

They’ve also become a real organization.  They have laws to comply with.  They have legal concerns.  They have all kinds of business risk that they’re trying to mitigate and eliminate and they have to put more people in place.  They have to cover their butt.  They’ve got to do more paperwork.  Now they have to hire more people to do that paperwork.  They have to make sure that they’re doing their safety meetings because they don’t want to get sued.  They’ve got to make sure that they’re taking every precaution with their chemicals.

This stuff just keeps adding up and adding up and adding up.  Also as you get further down the food chain from the owner, who was all in on this company, this is his baby, you bring in other people that are a little less passionate, work a little less hard, aren’t going to do 70 hours a week because this ain’t their thing.  They’ll work hard and they want your company to do well, but at the end of the day they’re not going to do what you were willing to do.  Why should they?  They don’t make or have the potential to make the kind of money you have.  You get a little less efficiency from all of those people and that costs your company money.

You can see how all of these little things add up.  The point I want to go back to, and all of that’s overhead, the reason that a lot of businesses get themselves in trouble is when they started they priced their business one way.  Yeah, they took a little bit of a price increase here or there, or maybe they only took a price increase on new clients.  You cannot generally follow your pricing levels from when you started your business or even a couple of years into the business.  Those levels have to evolve, they have to change and they have to go up.

There’s a reason that bigger companies price higher, they have to because they have all kinds of overhead to run a company of that size.  If you want to build a real company some day with a management team, maybe even a president that runs the company for you, you better price in a lot of overhead because it takes a lot of people to do that, to build that kind of a company.  You can’t operate off of yesterday’s pricing models.

This is one of the dangers of a lot of guys that get into business is they don’t understand up front all of the costs that are coming down the road.  There’s no way you could.  If you read and think about it, yeah you can project a few, but you’ll never fully be able to project all future expenses.  Given that, you want to, when you start your business, don’t underprice the market.  Do not.  Price, if at all possible, from day one just like you have all the overhead.  That will leave you more margin in profit to grow the company faster and reinvest.

Price like the market, at least at average market price, from day one in my opinion.  That way you have the money there and your contracts and work that you’ve already sold is priced correctly to allow you to grow.  What happens is a lot of guys start and they have all of these customers and they made a bunch money and as the company grows they become disenfranchised with their original clients because they don’t make enough money on them.  Then they start to neglect them, that hurts your reputation.  You don’t want to do that.  You don’t want to play that game so price it right.

Later you only have two choices, you fire that client or you raise their prices.  At some point you’ve got to get your prices right or you’ll never have profits in your business and you’ll wonder, “Why is my business not doing very good.  Oh, it’s all the low ballers, oh it’s this, it’s that.”  No, it’s just that oftentimes you didn’t know better.  I didn’t know better.  We didn’t know better.  When we started our companies we didn’t know exactly how to price and we didn’t price in all the overhead that was coming down the road to grow a real, sustainable, great business.

As your business grows you’ve got to consistently re-price work, sell it at the right prices.  You’ve got to pay attention to that.  Then you might have to go back to old clients and raise the price.  That’s the only way around it.  If you don’t you’ll slowly put yourself out of business.  It’s an invisible thing that’s happening.  As the business gets big it’s really hard to figure out where the leaks and the problems and the holes are where the underpricing is at.

This thing creeps up on you and it’s something to be very aware of.  This is how you end up with a low margin, low performing business, that you’d like to sell or get out of at some point because it’s not producing what you thought you could produce or what you experienced when you first started the business and then chose to grow it bigger because you thought, “Oh this is going to be great.  I’m going to make a ton of money.”

That’s how you look at it.  If you’re aware of that you can solve this problem or you can prevent this problem altogether as you grow.  Good luck.

Can You Grow a Million Dollar Per Year Lawn Care Business Without Getting Investment Money?

 

Hey, it’s Jonathan Pototschnik. The question is, can I grow my lawn care business to one million dollars without getting help from an investor?

The answer is yes.

There are a lot of factors that go into growing your landscape company to the one million dollar mark. Are you learning about the lawn care industry? Are you reading trade journals and marketing? Do you have a good software package? Do you have a great website? Are you hiring employees that have experience in the landscape industry? Are you answering your phones?

So many of the things that I talk about in these videos go into getting you a one million dollar a year business. Can you do it without raising money or getting outside help? Yes. But, every one of us needs to learn from the wisdom of others…those that have been there before us, that have messed up and made mistakes, and have figured out how to overcome them.

If you want to be at one million dollars in two years and you have no money, of course that will be tough. It is expensive to purchase lawn care equipment, produce marketing, and hire field employees and office staff so that you are prepared when the landscape business starts to come in. And, if you are ambitious and you want to grow really fast, then you may need to get some outside money. But, I would never do that until you know the business really well and before you know exactly how the market is.

Before going to an investor or to your friends and family, you need to be able to answer some questions.
• Do you understand the business?
• Who is your ideal client?
• Where do they live/work?
• What are their needs and concerns?
• How are you going to reach them?
• If they don’t purchase services from you, how are you going to stay in front of them?

Then, do your research and show that you have a financial plan. For example, you can say, “I’ve figured out that if I’ll spend a thousand dollars on marketing, I’ll bring in five clients that are worth $2,000 a year to me. For every thousand I spend, I am generating $10,000 a year in additional revenue, and I predict based on what I’m seeing, that these clients should stay with me on average for about four years. That means for every $1,000 I spend, I am generating $40,000 in revenue over the coming four months, and I believe I can run a 20% net margin. Not only did we spend $1,000 to generate $40,000 over four years, at a 20% net margin, I’m going to make, $8,000. I’m going to put $8,000 in net profit into our company and into your pocket, Mr. Investor, and my pocket. That one thousand turns into eight.”

That is when you can raise money. If you really want to blow your lawn care business up fast, go figure it out. Go prove that you can take a thousand and turn it into eight thousand.

I didn’t use outside capital to build our company, so I know for a fact that it’s not necessary. I did put a little money into the business to start it, but I didn’t put tremendous amounts in…probably a little more than most guys because I happened to have it. But, I got my full investment back my first year.

Really, to be quite truthful, I didn’t really know all this stuff when I got started. I mowed lawns in high school but, I got out of the business to start some other things. I got back into the lawn care business after having been out of it for years.

My first two years back, I didn’t grow very fast. My next two years were quick. After that, it kind of snowballed. Can you get to a million dollars without outside funding? Yes. It starts out slow. Don’t take a huge salary so you can reinvest money into the business. Go into this knowing it’s going to take a number of years to get there. But, you’ll get there. Be confident that you can do this without outside money.

The question is, how much are you willing to do now, to get the right software, the right website, to gain knowledge and align yourself with people that are already succeeding in the lawn care industry? If you’re willing to do all that, and you’re willing to do it now versus two years from now, then you’re going to get there a lot faster. If you’re willing to live tight so that you can reinvest money in the business to grow it faster and you’re willing to take some risks and start marketing now, it’s not that far off. You’re going to get to a million bucks without an outsiders help.

How Much Profit Should You Charge For Lawn Care and Landscaping Work?

 

The question is, “How much should I charge for lawn care and landscape services to make a profit? I am charging $25 per man hour but, a lot of people in my market are charging $20. Should I mark my prices up to $31.25 to compensate for taxes and credit card fees and such? Can I get away with that?”

I don’t know all the details to be able to really answer the question, so I’m going to cover what I can.

First of all, if we’re talking about $25, we’re talking about small, residential properties. We have to be. If a bunch of guys in your marketplace, are charging $20, I’d completely ignore them. There are a lot of guys that price that don’t have a clue what they’re doing. They’re generally individuals. Then there are some companies that are pricing low that have no clue what they’re doing. Just ignore those people. They’re irrelevant. They’ll cause you a little pain here and there and you’ll lose some business to them here or there. I wouldn’t get too caught up in that stuff.

Using our $25 example, if you are wanting to charge $25 but are now concerned about paying taxes and credit card fees on that, then what you’re telling me is that the $25 was a rate that you came to by just looking at the marketplace to see what everyone else was charging.
I may be wrong, but that’s what I’m wondering when you tell me that you now need to add taxes and credit card fees into this. Here’s the deal. If you’re requiring credit cards of all your clients, it’s going to cost you money. If all of your clients use credit cards, it will cost you roughly 3% of your gross sales.

Now, what I would argue is that you’re not going to see a massive run up in cost. Yes, you’re paying 3% of gross revenue, but you’re going to see additional efficiencies. You will have better cash flow. You will pay less money in interest on credit cards or lines of credit. You will get paid faster and have fewer collection issues. You will also get better quality clients that won’t nickel and dime you and that will stay with you longer. A lot of that stuff offsets this 3% you’re paying.

Sales tax, honestly, is outside of a pricing equation. It to me is a separate issue and gets passed back to your client. Federal tax is based on your income and how much profit you take out of your business.

There’s an entire tax game that’s going to take place at some point in your business where you’re trying to delay taxes and trying to minimize the amount of taxes you pay, where you’re buying vehicles and equipment and straight line depreciating them in one calendar year. I even take taxes out of the equation for pricing.

While you’re thinking about pricing, look for the guys in the marketplace that are pricing average to high. Look for the guys that are pricing in the top 40% of the market and start there. Then, you start to learn your numbers and do all those things I’ve talked about when you job cost.

Start tracking how long it takes you to do the job compared to the square footage. Start getting a feel for that, so that you can then adjust your pricing accordingly. When you’re first getting started, you’re making a number up. The only way to make up a number is to look at what the other higher priced guys are charging and match them.

Ignore all the lower priced guys. Don’t worry about credit card fees and federal taxes when determining your pricing. I budget things like payroll, equipment, trucks, office space…all that is part of overhead…when determining my pricing.

If you need more information, just send us another question and be a little more specific. Let me know exactly what you’re looking for, and we’ll be happy to answer it again. Thanks a lot.