Here’s how you can LOWER your prices WITHOUT lowering profits. No kidding.
The concept is easy to explain. Let’s go…
To lower prices you must increase the amount of field workers generating billable services relevant to your company overhead.
One example would be that you add a crew to your company.
But here’s the hard part. DON’T ADD ADDITIONAL OVERHEAD PERSONNEL! You must grow the field without adding new managers.
This allows you to spread your company overhead costs over an increased number of billable hours.
We will take a look at two companies to illustrate. Here’s the math behind this proven business strategy.
Company A
- Annual overhead is $300,000
- 3 crews with 2 people Per crew
- 6 people working 2000 per year generates 12,000 field hours
- If they work at a rate of 75% efficiency you will bill out 9,000 hours.
- To recover your overhead of $300,000 with 9000 billable hours, you’ll need to recover $33.33 of overhead per billable hour.
- If your goal is to generate $1,000,000 in revenue, you’ll need to bill out each man hour at $111.11 (9,000 hours x $111.11)
Company B
- Annual overhead is $330,000
- Overhead increases a small amount for additional insurance, software licenses, small tools and office supplies to support the additional crew.
- 4 crews with 2 people per crew
- 8 people working 2000 hours per year generates 16,000 field hours
- If they equal the efficiency rate of 75% of clock hours are billable hours, you will be able to bill out 12,000 hours
- To recover your overhead of $330,000 with 12,000 hours you will need to recover $27.50 of overhead per billable hour.
That’s $5.83/billable hour lower than company A. This lower billable rate can be passed on to the customer. Instead of $111.11 per hour, company B can sell work at $105.28/hour.
Company B can generate $1,263,360 (12,000 hours x $105.28/hour) while selling work at a lower hourly rate than Company A!
If you find yourself scratching your head regarding the “big company competitor” prices, this concept applies.
We continue to see an absurd amount of mergers, acquisitions and venture capital roll ups in our industry.
Each “deal” is consummated with an expectation that the larger company (post merger) will obtain a price advantage by spreading overhead over more field hours.
Our experience shows that price advantages based on consolidation has its limits.
We had a powerful conversation with an account manager over at one of the big venture capital backed consolidators a few days ago.
Here’s what he said, “Since these big guys came in here, they have increased the number of accounts I have to manage. I can no longer get around to each property and check on the customer. Our complaints are going up. And I don’t think I can stay here in this environment.”
So this account manager sees the growing problem up close and personal.
In the examples above with Company A and Company B, we shared an example of how increasing the size of the field crew could allow you to lower prices.
But…
At some point in time, you WILL have to add overhead personnel. And when you add overhead personnel, your overhead grows instantly…effective next payroll. It will take some time for sales to catch up to support the new level of overhead.
This illustration below shows you the relationship between overhead, sales and time.
We want you to know the following:
- Your job is to find your sweet spot where you maximize income in relation to your overhead
- Your job is to have the courage to park your company at that optimum sweet spot size. Stay there for two, three or four years while you build cash equal to one year of overhead.
- Do not be tempted to match prices with big companies that price work below cost. They will self-destruct when the market goes into a recession.
- Focus your energy on keeping customers happy
- Learn how to increase efficiency through mechanization, software and 5-S principles
You don’t have to have a mega-company to be a success in landscaping. But you must know your numbers!
If you get stuck or feel like your company could get better, but you’re not sure what to do…
Hit reply and tell us what’s going on.
We are standing by and ready to help!
Tony Bass, founder
866.923.0027
PS – If you’d like to spend some time with me on the phone really getting into your company numbers and challenges, you can book a 1 hour phone consult right here! I will send you a 9 page questionnaire to work through before we meet and that way, we will waste no time with introductions or explanations on the call… just working on your business together!
