Pricing for risk

January 13, 2016 -  By

riskThe profit you earn on each of your services is driven by a few factors: The marketplace, how it’s priced and sold, how efficiently it’s produced and how much overheard you must recover. However, the profit you earn should ultimately reflect the risk associated with each service. The higher the risk, the higher the profit you should aim for.

It’s with this thought that you should begin your budgeting process. Start with the profit you want to earn on each service and work backward, developing a plan to hit your profit goals.

In the past, I would guide my clients when budgeting to aim—at a minimum—for 10 percent overall profit (after basic salary and depreciation.) However, the risk in the landscape industry has increased over the years (people risk, weather risk, government risk, etc.). Therefore, the return on your risk should increase. If you drill down by division, you can develop better budgets and strategies to earn higher returns in 2016.

Division by division

For example, maintenance aims for a minimum 10 percent net profit. The risk is lower in maintenance because it’s more predictable and relatively stable year to year; plus, this side of your company is easier to sell when you want to exit the business. The maintenance business is predictable, so you have the greatest opportunity to gain efficiency. Throw the adage “you don’t make money on maintenance” out the window.

Caveat: If you’re trying to corner the market in your area, in any service, the market forces may start to corner you. The more you can serve a niche, the more likely you are to get your rates.

In design/build and enhancements, aim for a minimum 15-20 percent net profit. The risk is much higher in design/build; plus, this type of business is much more difficult to sell because there is no recurring revenue. This means you, as a business owner, need be able to extract some of the profits (value) every year and put them into an outside investment. Depending on your market area and type of work, you should price it for 15 percent profit and 20 percent net profit if you’re working on higher risk projects, with more variations and disciplines involved. Some of my clients earn even more. There are so many factors that influence the final profit of a design/build job; therefore, the more you can streamline your design/build operations, processes and material choices, the more likely you are to achieve more consistent profits. Engaging your crews with focused incentives to increase weekly production will greatly help, as well.

For example, one contractor I work with who does half bid/build and half design/build found that he could make more money in bid/build because of the consistent, streamlined nature of the work. The lesson: Remove the variations of your design/build work and create a more predictable bottom line.

With snow services, aim for 25 percent net profit at a minimum. The risk in snow is even greater; you are providing an emergency service for your clients. There is weather risk, people burnout risk, performance risk and equipment risk. And snow plowing has hidden equipment costs that can affect your year-end profit. Moreover, one out of every few years may be a dud, so it’s triply important you make good profits in the good winters. Some contractors I work with make substantially more net profit than 25 percent and others do far worse. Depending on where you stand, it may be time to rethink your approach to snow.

Budgeting for ROI

Some business owners believe the market sets the price and controls the profit. This may be true for order-taking and low-bid work. But seasoned business owners realize they must earn a proper ROI to stay in business long term and make it worthwhile. To do so, start your budgeting with a profit in mind and work backward. If you don’t plan to make good money, then after risk takes its toll, you will be disappointed with what remains.

Final thought: I recently spent the day with Mike Bogan, CEO of LandCare. He observed companies in their first 10 years of business seem to be most profitable. If your business is older, slower and lacking profit, it may be time to reinvigorate it with a fresh, new strategy.

Photo: ©istock.com/Oko_SwanOmurphy

About the Author:

Jeffrey Scott, MBA, author, specializes in growth and profit maximization in the Green Industry. His expertise is rooted in his personal success, growing his own company into a $10 million enterprise. Now, he facilitates the Leader’s Edge peer group for landscape business owners—members achieve a 27 percent profit increase in their first year. To learn more visit www.GetTheLeadersEdge.com.

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