Resolve to raise prices

February 22, 2018 -  By
Graph: Labor Burdens

Click to enlarge Graph: Labor Burdens

Everything is going up: the stock market, gross national product, the cost of labor, your overhead expenses. Yes, everything is going up except your pricing.

Resolve that this year, you will raise your prices. This simple act doesn’t require a big announcement with balloons and confetti and letters to customers. You don’t have to raise prices everywhere and all at once. But, resolve to increase them slowly and consistently throughout the year, job by job.

When you consider that the most recent inflation numbers suggest a 2-3 percent annual rate of cost increases, it’s likely your overhead is increasing more than this rate.

You need to increase your prices to guarantee—at a minimum—no erosion in your profits.

How do you do this? Pricing is one part “psychology” and one part “financial.”

Pricing psychology

What does a price increase communicate to customers and prospects? And what will “the market” bear? These are two essential questions to address.

First, done correctly (with a sales effort), a price increase can communicate strength to customers and prospects. It can say, “We are growing, and we are busy,” and by extension, “Many people want us because we deliver.”

Second, “what the market can bear” isn’t determined by the low-priced provider; it’s determined by the higher-priced provider. Yes, it does require courage to price lead, but can you think of anything you purchase now that’s not going up in price? Why should landscape or snow pricing stay the same?

The financial aspect

You must cover your overhead cost increases in your pricing. Resolve to review your burden rates this year. At least that way, should you decide not to raise your prices, you will know how much profit you’re sacrificing. (Yes, that was sarcasm.)

Here’s how you check your labor burden rates. (Also see the sidebar, “Labor burden calculations.”)

1. Start with a budget. Identify labor, material and overhead costs. Yes, these may not be exactly precise, but they are close enough to use as a plan. This is what a budget is for.

2. Calculate burden rates. Determine where to recover overhead between labor and material. Since you’re in a labor-based business, I suggest that the majority of overhead gets recovered on labor. In my example, 90 percent is recovered on labor. In a construction business, materials may cover a higher percentage.

3. Calculate prices. Apply the burden rate and the profit margin to the base labor and material costs. Use the average wage rate as the labor base and $1 as the material base to arrive at unit pricing.

In life, you either lead or follow, react to events or create events. It’s the same in pricing. Sure, it takes courage to lead, but the alternative isn’t good for anyone—not for you, your people or, ultimately, your customers. Price management is the key to the success of market leaders. Happy New Year!

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About the Author:

Kevin Kehoe, a longtime landscape industry consultant, is managing partner at Aspire Software.

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