Beyond ‘what the market will bear’

November 30, 2016 -  By

Photo: ©istock.com/BartekSzewczykA landscape company exec takes us back to the basics of cost-based estimating.

In my two decades in the green industry, I’ve worked within local landscape companies of various sizes and national operations with multiple locations. I’ve made a living working in the field; I’ve done sales and account management; I’ve been a manager and an owner. I’ve seen success, and I’ve also witnessed seemingly good companies go out of business. What I’ve learned is that landscapers are a dime a dozen, but business professionals in this industry are few and far between.

A good landscaper knows when and where to use a honey locust instead of a red maple, whereas a good business professional knows exactly how much it costs to install a honey locust. A good landscaper knows the going rate for mulch installation in metro-Detroit is $45 per yard, whereas a good business professional knows exactly what it costs him to install said mulch, and then he charges accordingly after adding the necessary margin to accomplish overhead recovery and desired profit.

Can’t a good landscaper also be a good business professional? Of course; however, if sustainable success in business is your goal, let me suggest becoming a great business professional who happens to also be a darn good landscaper.

Sustainable success comes from knowing your numbers. Beautiful landscapes are installed and well maintained by soon to be bankrupt landscapers every single day. Don’t be one of those guys.

‘Know your numbers’

A good business professional must have a clear understanding of his costs. First, his direct costs, then his overhead costs, and, finally, his desired profit. When the topic of “knowing your numbers” comes up, landscapers are quick to spout-off their price per man-hour or their price per yard of mulch installed. Having a defined price you charge is not the same as knowing your numbers, unless of course the prices you charge have been reached by cost-based calculations.

You might be saying to yourself, “This is common sense.” But what’s common sense is rarely common practice. Nearly every landscaper knows his prices, but a surprising few have a real understanding of their costs. This is backwards. How can a price be established and given to a client without first knowing the true cost to perform the service? It can’t.

I’ve heard flawed logic such as charging X per man-hour because “it’s the going rate in this area” or charging X per yard of mulch installed with no explanation about how they came to the numbers, other than they’re “what the market will bare.”

Pricing should be based on true costs, not what the client is willing to pay. What the client is willing to pay is not a mathematical equation we can use to maintain positive cash flow or calculate our return on investment.

Now, I know it’s important to understand the market in which you operate, which of course includes competitive price points. If you need to adjust your costs to arrive near a desired price point, so be it. But it’s your exact costs that determine the price of a project.

No two companies do their accounting exactly the same, and there are endless ways of doing a cost-based estimate. I’ve seen landscape construction companies job cost so specifically that each vehicle and piece of equipment is costed to the job by the number of hours it’s estimated to be used, in addition to their materials and labor. While this approach is certainly doable, and even necessary in some cases, it requires knowing vehicle and equipment costs per hour of operation. It can get tricky if you don’t know how long a vehicle or piece of equipment will remain in service before being replaced, or how many billable hours will be sold for that vehicle or piece of equipment each year. How detailed you get when preparing your cost-based estimates is a matter of necessity and preference, and it’s company specific. What’s important is that we’re arriving at our prices based on our actual costs—however specific and detailed those may be.

Photo: ©istock.com/BartekSzewczyk

About the Author:

Voories is the COO at Brilar, a Detroit-based landscape maintenance and snow removal firm. He can be reached at mvoories@brilar.net.

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