Price a service without losing money

lcmgoblinPricing service is the single most deceptive part of running a lawn care business. It is difficult because what seems like a profitable job on the surface occasionally becomes a loss. Overhead costs are too often overlooked. Not pricing services properly can be the downfall of a business and there is no worse feeling than making sales, working long hard days only to find out that in the end you’re losing money, or put more simply paying your customers to do work for them.

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Reasons number #1 and #4 on NY Times writer Jay Goltz list of “Top ten reasons small businesses fail”  relate directly to improper pricing.

To price a service without losing money does not take difficult accounting methods to prevent losses and protect profits, pricing services only requires diligence in considering every expense accrued throughout the year. You never have to take that mysterious loss in the end, if you know what the overhead is and how to divide that expense amongst customers.

What is overhead?

Overhead is the cost of doing business that does not relate to any job in particular. When you price a service, let’s just use a seeding job as an example, you would look at your seed cost, fuel to get there, your time spent on the job, and maybe shredded hay or machine time etc. Let’s say all of that totalled $600 and you charged $900 for the service, well then “woohoo congratulations, you just made 300 bucks”, right? Well, did you consider the cost of lighting the shop or the cost of an employee flushing the toilet when deciding your margin? If the answer is no then you are not alone, many of us don’t, but it doesn’t have to be that way.

So, how does a business figure out what to tack on to a jobs direct costs to determine the real cost, also called “the loaded cost”, of any particular job. It starts with figuring out what it costs you, for any given amount of time, to run your business, before ever setting foot on a job. In the example below I figure out what some overhead for one year might look like ( don’t get hung up on the numbers its just a quick example).

Example:

Expense Annual Cost
Rent 7200
Electricity 900
Insurance 2400
Truck Payment 3500
Machine Payment 1500
Total 15500

Next knowing that the total overhead, or the unseen cost is $15,500 for the year we need to decide how to disperse the cost evenly among our customers. The easiest way is using an hourly costing model. To do this first figure out how many man hours you expect to work, for the entire season.

In this example we will say that this is a young business, just an owner with no employees. This year the owner is positive he can fill about thirty hours per week with his existing customer base. He will start the season in April and work to thanksgiving for a total of 34 weeks. With some quick multiplication,

30 hours per week X 34 weeks = 1020 hours this year.

With these two numbers in hand the business owner can calculate what the extra hourly charge must be to pay all of his expenses and not lose money. The math is (Total annual expenses divided by total hours worked) or in this example:

$15,500(annual overhead) / 1020 (hours worked in one season) = $15.20 per hour.

By charging an additional $15.20 per hour the owner can cover his costs, but and there is a HUGE but, if either of these numbers fluctuate the owner can end up losing money. So to help prevent that from happening you need to consider every possible scenario for instance, what if 25% of your customers cancel? What happens if your truck dies and your new payment is $200 dollars more per month?

Because any number of things can change you need to be conservative in your calculations and return to this number often to update and adjust your overhead charge. Perhaps once per quarter or twice a year, it depends on your business and how rapidly it is changing. Remember it’s a balancing act, if you charge too much you’ll never land work, too little and you could lose money.

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Review

Step 1) Determine every possible cost that is not related to any particular job ( rent, insurance, water bill, electricity…)

Step 2) Total the expenses from Step 1 for one year.

Step 3) Figure out how many man hours to expect for the entire year

Step 4) Divide the expenses from step 2 by the hours worked from step 3

Step 5) The result is your hourly overhead charge. Add that cost to any job price you propose, to protect your business from hidden losses.

Hourly Overhead Charge = Expenses/Man Hours

I hope this article can help bring some clarity to your overhead. Remember it is a constant work in progress that needs to change and grow with your business. Check back on your math frequently and you will help ensure a healthy profit margin.

As always thank you for reading, please comment below with any suggestions, tips, and tricks!