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Grow your Green: Why anchoring weighs down the profitability of your business

August 22, 2022 -  By
(Photo: Dmytro Lastovych/iStock / Getty Images Plus/Getty Images)

(Photo: Dmytro Lastovych/iStock / Getty Images Plus/Getty Images)

Although we may not like to admit it, we are all prone to cognitive biases. What is a cognitive bias? Simply irrational thinking.

In the landscape business, a cognitive bias called anchoring can hold us back on our path to increasing our profit margin (profit divided by revenue). In turn, anchoring can also affect our life margin. Life margin is the excess time and energy an owner no longer needs to invest in the company to make it successful.

Anchoring happens when one data point influences our decisions. Nobel Prize winner Daniel Kahneman details this phenomenon in his book “Thinking, Fast and Slow.” If you consider how much you should pay for a house, he explains, the asking price will influence your decision. Anchoring occurs even if you try to resist the influence of this number.

Anchoring and pricing

Let’s consider how anchoring may affect a landscaping business, starting with pricing.

How many times have you had account managers say, “We can’t charge that much!” when discussing client price increases? No doubt, they suffer from the anchor effect.

My hypothesis is, many of us anchor to prices from our twenties. If you are a business owner in your forties or fifties, how good are your instincts on pricing? My guess is they are outdated. I have observed that the longer people have been in the business, the lower their anchor prices.

The weight of money

The anchoring effect also may affect your approach to salaries and technology expenses. It is not uncommon to hear owners say, “I can’t pay $100,000 for an account manager!” They are used to paying less and cannot fathom wages have increased so much, even if they understand the economics of the situation.

Another common thing we hear in the landscape industry is, “I can’t spend $50,000 a year on software!” People are accustomed to spending just a few thousand dollars a year on QuickBooks and Microsoft Office. This anchor for software is low. Would you spend more if you could make more?

Outsmart the anchor

So, how can you overcome the anchoring effect?

1. Recognize anchoring exists and discuss it with your team.

Talk about inflation and price increases with your account managers and business developers. Refer to things they experience in their daily lives — the price of gas is the most obvious. Extend the discussion to fertilizer, chemical prices and the shortage of field labor.

Help them overcome the psychological hurdle of raising prices. For example, allow them to take small steps, like increasing prices for a few clients to gauge reaction or, as we have frequently found, the lack of reaction. Small steps increase their confidence to raise prices on the remaining portfolio of properties.

2. Don’t price your services by instinct alone.

What you have in your head as “a $10,000 job” is not the same as it used to be. It was never a good idea to price jobs by eyeballing them and it is even worse in today’s inflationary environment. Your profitability will suffer if you continue to price this way going forward.

3. Use data to inform your decisions.

If you have a robust landscape business management software system, you have great data on the profitability of your maintenance contracts, snow removal and ice management contracts and the performance of your business developers, account managers and production managers. The Herring Group’s Annual Landscape Industry Peer Benchmark Report provides information on the profitability of more than 100 landscape companies. Finally, you can get salary data from several places, including peer groups and associations.

It can be uncomfortable to raise prices or pay more than we are used to for salaries or business tools. However, recognizing the anchor to old information is the right move.

This article is tagged with , , and posted in 0822, Business, From the Magazine
Greg Herring

About the Author:

Greg Herring has served as a CFO of both public and private companies. Herring is the CEO of The Herring Group, an operational and strategic finance consultancy. He has significant experience in the landscape industry, where he serves business owners challenged by growth by installing financial dashboards and systems that provide more margin for their businesses and their lives. Reach him at greg.herring@herring-group.com.

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