Originally Posted by Sean Adams
You do not price or bid based on where you are "headed", you bid based on where you are. I have owned and operated 7 figure lawn & landscape businesses and I work closely with business owners who generate as little as $100,000 per year and several who generate over $5,000,000 per year.
If you would like to discuss this point by point, I'm game. This is nearly 25 years of doing.... and doing successfully I might add.
If you take a scenario like I described, a business owner with little overhead and expense (either by luck, circumstance or choice), the absolute BEST move he or she can make is to take advantage of that scenario, penetrate a market and as the business grows (and expenses and debt service), so do their prices.
I did not suggest that a market bearing $42 per hour means that this business owner should charge $20 per hour. I stated that he is able to come in at $35 an hour and grab those customers because his rate is lower.
You mistakenly assume that his quality of work is lower or that he is a lowballing-here-today-gone-tomorrow novice who hasn't taken into account that his equipment and trucks are paid for. In fact, a portion of his $35 per man hour rate does recover his money out of pocket, and in one year I might add.
You stated that my advice is why there is failure on this site and in this industry. In fact, the advice I give is what ultimately separates the winners who succeed from the guys who are always whining about not being able to grow their business or make any money.
You can turn your nose up at work if you don't get your price because you think there is a certain way to do business. THAT is why many do not succeed. There are so many variables that go into determining a price, things I did not even discuss, but if you want to we certainly can.
If you understood business or math you would quickly be able to determine that his pricing model gives him significant room for growth without tipping the scales.
And please @coolluv, keep in mind, I am talking about a real business here, not one where you pass out a bunch of flyers in March, cross your fingers and then add up what happened at the end of the year.
So, at $35 per man per hour, this business owner is marketing and advertising year round, working on his business, not in his business. Consistently seeking out new opportunities and new clients for his business.
He successfully bids out at $35 per hour per man. This is a simple example.... Taking an average middle income residential northeast property where he provides 28-30 mowings, mulch, fertilizing, clean-ups and shrub maintenance, with only 2 employees servicing this property the entire year (excluding COGS at an average 25% mark-up), there will be a total of 40 hours spent on ths property, or 80 man hours, totaling $2,835.00 in revenue.
But let's just say that BOOM-POW, as @coolluv suggests, his business suddenly is exploding and now he has to finance trucks, finance equipment, hire more people and rent a facility to work out of for the following season.
Oh no!!! Now what? Well, let's see....
This business owner has several options:
1.) Continue running a real business where he is soliciting new work year round and as the business grows, so does his price point for NEW clients....hmmm
2.) Determine what these new expenses will cost his business and determine how he can recover these new expenses and still profit which will not be difficult or costly.
Follow me here @coolluv....
He has to finance 2 new trucks at $500 a month each, a new facility he has to rent at $800 a month, and new equipment that he has to finance at $800 a month - total additional expense is $31,200 per year.
Since he has 215 working days and has determined that he has 9 billable hours per day to sell for the season, he knows he has $1,935 hours to sell. With 4 employees at his rate of $35 per hour per man that means he was in the ballpark of generating $271,000 in revenue.
Now for the sake of math and to make this easy (again without considering the multitude of variables that matter such as efficiency, organization, AR recovery, etc...) let's say that all is remaining exactly the same as the previous year in regard to clients, work, etc...
If said business owner was generating $271,000 in revenue based on $35 per man per hour and now just to COVER the new expenses of trucks, equipment, facility that adds on another $31,200 in cost, that means he would need to now generate $302,200 in revenue.
So he has two choices:
1.) Being that he determined the previous year he needed $24 an hour per man to cover expenses, overhead, etc... and he was billing out 4 employees at $35 per hour, that means that pre-tax he was generating $44 per hour in profit for the 1,935 hours sold. He profited $85,140. So now he can keep all the same and take the hit of losing profit of $31,200 due to expansion or...
2.) He can determine what he now needs to charge per hour per man to stay at the same profit level and cover these new expenses. Keep in mind he was charging $35 per hour per man. Doing the math (again, assuming he has secured NO NEW CLIENTS), he would need to generate $302,200 in revenue instead of $271,000. He has 1,935 hours to sell for 4 employees. That means $302,200 divided by 1,935 hours or $$156 per hour total (for 4 guys) or $39 per hour now per man.
Guess what, looking good so far.
Now he has 2 new trucks, a facility, new equipment and in order to maintain his profit fro the previous year he only needs to bill out at $39 per hour per man now. What was the going rate in his market?
$42 per man per hour.
Not only has he grown his business (in terms of new equipment, trucks, etc...) but he is still a less expensive alternative to his competition.
But let's be real here.... This guy is running a REAL BUSINESS. He is not going to incur these expenses unless warranted, which means he was out marketing and advertising and getting new clients, which means even more revenue than before.
So ya see @coolluv, my advice is not incorrect, in fact, it is spot on. It is a matter of how one runs their business, follows their numbers, becomes lean and mean when and where necessary and grows based upon new opportunity and revenue, not based on wanting a shiny new truck.
Before anyone goes poking holes in my examples above, I was using elementary examples and numbers to prove a point. I am well aware of losing customers to raising prices, the economy, lowballers, competition, etc... But my point is, when you run your business the right way - being organized, constantly advertising, taking care of your clients, finding/training/motivating quality employees, knowing your numbers and understanding you should be operating a blue-collar business in a white-collar fashion, success is imminent.