Cost of Goods + Desired Profit Margin = Price

Discussion in 'Business Operations' started by Casey, Mar 30, 2003.

  1. Casey

    Casey LawnSite Member
    Messages: 142

    Does anyone figure the cost of each yard and what profit they want to make for the price they charge the customer. I see so many threads with comments like this is my minimum or if you don't charge this amount you are a scrub. So I am really curious, most businesses that I have been involved with figure the cost of goods sold and what profit they want to make to come up with their pricing. The March issue of Landscape Management Magazine (page 86) mentions a Texas A&M study that reflects a total cost for mowing a 8k yard including employee wages is 10.60, if this is true charging $20.00 for this yard would give you a 89% markup or 47% profit margin, yet most of the posts I have read would lead one to believe that 8K/$20= lowballin scrub
  2. LoneStarLawn

    LoneStarLawn LawnSite Bronze Member
    Messages: 1,415

    Your salary is also considered a cost.
  3. Casey

    Casey LawnSite Member
    Messages: 142

    According to the article that was included, it supposedly included all equipment costs, wages, benefits, administrative costs, and supervisory costs, truck and trailer costs, and depreciation, technically your wages would come out of the supervisory or administrative costs.
  4. John Allin

    John Allin LawnSite Bronze Member
    Messages: 1,488

    A 47% gross profit margin really isn't enough to cover the G&A on a decent sized business. It should be closer to 65% to be viable. And, always work as if you're a decent sized business.

    For a smaller business, some here will argue (intelligently and reasonably) that even 65% isn't enough. At a smaller gross revenue stature, gross margins can be as high as 125% since overhead can be much, much lower.

    Don't short yourself simply because of a formula.
  5. adrianvbarrera

    adrianvbarrera LawnSite Member
    Messages: 163

    where can I get a copy of this study.

    Does someone have a copy they could send to me?

    I would like to know the specifics of the study and see if the study actually applies to the real world.

  6. wacamaster

    wacamaster LawnSite Member
    from MI
    Messages: 198

    Did that include drive time?
  7. LawnLad

    LawnLad LawnSite Senior Member
    Messages: 738

    If you want a cost study that will give you great industry information check out ALCA's cost study. They use percentages as opposed to dollars across all the accounts in your chart of accounts for various sized companies.

    The way we determine how much to charge for lawn service is to figure out an average amount of time that it will take to service the property through the year on a weekly basis. Spring may take longer but summer we'll whip through properties. We then multiple the time required to service the property by an hourly rate that we have determined to cover all costs including over head and our profit.

    Here is our method - I'm sure others can offer their suggestions. These are made up numbers for the example - use your own numbers.

    1) Labor rate: 3 men x avg wage of $15.00 per hour loaded cost = $45.00/hr
    2) Equipment Cost: $30.00/hr
    3) Over head: multiply by 1.45 for 45% over head recovery
    4) Profit: 15% (divide by reciprocal = .85)

    Taking these numbers we get $127.94/hour. Round up to $130.00 per hour for a three man crew. Always round up.

    But here's the problem... how do you recover drive time?

    Build the costs up for the day. Assume an average 9 hour day for this example, or a 45 hr week.

    9 hrs x $45 per hour = $405.00
    9 hrs x 30 = $270.00

    Sub total = $675.00
    x 1.45 OH = $978.75
    Divide by .85 = $1151.47

    Now this is a 9 hour day. Determine how many hours you are billable. Take total payroll and deduct drive time, loading, unloading, fuelling, equipment maintenance etc. As a percentage multiple this times the hours in a day. Let's assume you're 80% billable. 9 hours x 80% is 7.2 billable hours in a day.

    $1151.47 divided by 7.2 billable hours in an average day = $159.92 or $160.00 per hour. The $30.00 per hour difference from the first formula and this one represents the non-billable dollars you're recovering for drive time, etc.

    These are arbitrary numbers as you must determine your own labor, equipment and overhead costs. But once you have these costs you can figure out how much to charge while on a property. Using this formula a 30 min property should be bid at $80.00 per visit.

    This is where minimum price comes in. What is the minimum you're willing to take for a property that requires as much paperwork as everyone else, the same liability and takes at least 10 to 15 minutes to service by the time you drop your gate and load back up and complete paperwork. These numbers might chnage if you get 10 in a row and can stamp them out, but that's up to you to determine if $20.00 is enough.

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