Jim Huston Certified Professional Landscape Estimator, J.R. Huston Enterprises, Inc.

Adapting Your Pricing to the Marketplace

Markets are dynamic. They are always changing due to the various forces that influence them. Contractors tend not to realize or be aware of these subtle (and sometimes not-too-subtle) changes. The ebb and flow of market forces escapes them. Profits and margins erode while market opportunities slip by.

Sailors have tools to help them navigate the waters upon which they sail. In like manner, there are objective, quantifiable reference points to help the contractor along as he navigates the marketplace. But, like a sailor, before they become masters of the courses they chart, they must first become students of the sea—or marketplace—and the forces that influence it.

Market adaptation assumes prerequisites. The first prerequisite is that you have a clear vision of what to adapt to (a definite “port” in mind, so to speak). Second, this destination must be one worth going to for you and your company—there must be a payoff for your trip (Increased market share? Better margins by expanding into a new market?). Third, you must have measuring devices and tools to help you stay on course.

Markets have become predisposed. Even though markets are dynamic, trends can usually be identified within them. So, sharpen your estimating skills. Let’s assume prices for a particular service in your market are between $8 and $10 per hour. If you’re going to charge $15, you’d better have a pretty good reason (or be a terrific salesperson to win the job). On the other hand, if you can reduce costs and make a profit charging $6, why do that when the market will allow you to get $8 or $10? That’s using market predisposition to your advantage.

Track your gross profit margins (GPM) religiously. You’ll be able to monitor your market by seeing how GPM (sales price minus direct costs) reacts to market forces and you can set your prices accordingly. You should be able to see what GPM you can achieve on jobs being competitively bid and how much more GPM you can get on negotiated jobs that do not go out to bid. You can adapt your pricing accordingly.

Study trends in your area of business. For commercial lawn maintenance, the primary indicator of predisposition takes the format of unit price: the man-hour rate (divide the billing price of a job by total man-hours required). This number averages $22-27 around the U.S. However, some major metro area markets see $30-35, while the intense competition, low labor rates, and 12-month season cause Southern California to see only $13-16.

As for residential landscape installation work, I consistently see this segment realizing 30-40% GPM across the country. And, in the area of municipal lawn maintenance, man-hour rates and GPMs have both fallen in recent years.

Know your costs before bidding. It is imperative that contractors be able to identify direct and indirect costs as well as profit margins in the bidding process. Doing so will help you identify your particular market’s trends. It will also help you identify what I call a bidding envelope or range (e.g., 25-35% GPM) within which you can safely bid. You need to know how high can you go with your GPM and still get the job. You also need to know how low you can go with the GPM and not hurt yourself. How high is the easy part. If you are too high, the market will tell you to take your price and get lost. How low to bid is the challenge. As a general rule, you want to bid above your break-even point (the total of your direct costs plus the overhead to be recovered on a job).

Adapting to the marketplace requires that you be able to measure it. It is necessary to have the right tools and methods in order to do so. Once you do, you can measure and adapt to just about any marketplace. However, the crucial question to ask is, “Does this job add to your bottom line and does it fit into your bidding envelope?”

Or, more directly: “Can you play this game and win?”

Jim Huston is president of J.R. Huston Enterprises, Inc., which specializes in construction and services management consulting to the Green Industry. Mr. Huston is a regular speaker at Hunter events.