September 1, 2012

Find the sweet spot in pricing snow


I could be wrong, but I believe we’re in for a buyer’s market when it comes to pricing snow and ice work. The economy is filled with questions, we’ve had a few light winters in a row (at least in the Toronto area) and snow companies by and large suffered last year, which means they’ll be hungrier this year. It’s likely we’ll see a very competitive market for snow this year, where customers will enjoy a stronger position during price negotiations.

For your snow business, this means a few things:
  • You must absolutely know your costs and be confident on your costs, breakeven, and profit. This confidence will come across during negotiations and help you win more jobs.
  • You must also ensure your prices are competitive, but that you can earn a profit at these prices.
  • It’s the second point that I want to expand on, and for this you need to understand a very handy number and what it means for your business.
Gross Profit is the selling price of the work minus the costs to get the work done. That’s all. Overhead and profit are what’s left over, but they aren’t counted in gross profit. Gross profit, for snow work, is the price you want to sell the contract, minus the cost of the labour needed, minus the cost of equipment needed, minus the cost of salt/de-icing materials needed, and minus the cost of subcontractors needed.

The Gross Profit Margin is gross profit divided by the selling price, then multiplied by 100 to get a percentage.
Let’s look at a simple example. You have a snow contract that you want to sell for $10,000. The estimated costs (per season) are as follows:
  • Labour costs (plow operators, shovellers): $2,000
  • Equipment costs (trucks, plows, salters): $2,000
  • Material costs (rock salt): $2,000
  • Total estimated costs: $6,000
To figure out the estimated gross profit on the job, you simply subtract the estimated costs of the job ($6,000) from the estimated Selling Price ($10,000). That would leave you with a gross profit of $4,000. That’s not your actual profit — you still have company overhead to cover, but that’s gross profit.

Now to calculate gross profit margin, you simply divide gross profit ($4,000) by the estimated selling price ($10,000) to get a gross profit margin of 40 per cent.

Meaningful number?
You might be asking yourself, “What is so useful about this number? If it doesn’t tell me my overhead, and it’s not really my take-home profit, then why do I care?”

It’s important because gross profit can be one of the best benchmarking numbers for your business and can help you ensure you’re competitively priced — especially on bids and tenders where you don’t get a second chance to revise your pricing.

Look at it this way … let’s say 10 contractors priced the job we did in the example above. All 10 contractors are going to have different overhead and different profit expectations — sometimes very different. However, all 10 contractors will have similar, not exact, but similar, costs to do the work.

There are differences in what we pay our people, but they’re not huge differences. Usually they range a few dollars per hour. The people who are paid more also work faster (more experience, more motivated) so even when there are differences in pay, the difference in productivity (time spent on the job) can often erase the difference in total labour costs.

As contractors, we all pay similar prices for our trucks, plows, and snow equipment. Bigger companies might negotiate better pricing on new equipment, but smaller companies tend to get longer life out of used equipment. Fuel, insurance and parts and repair costs don’t differ significantly from company to company. Equipment costs only differ significantly based on utilization – the more hours we can bill for our equipment, the lower our cost per hour.

Salt prices also have only minor differences. Bigger companies can negotiate better pricing (bulk discounts) and may be able to stage salt at the yard. You can’t ignore the cost difference — and it’s often why large companies can enjoy a cost advantage — but between contractors of similar size, this difference is negligible.

So costs to clear snow will be different from company to company, but rarely will they be very different. Assuming 10 contractors are pricing the job using similar equipment, and are paying a fair wage with proper government reporting, the costs to do the work will be quite similar.

If we all estimate using similar (not exact, but similar) costs to do the job, then looking at the Gross Profit of your bids, and even your competitors’ (you’ll have to estimate their GPM using your costs, but you can look at their prices on winning bids) will show you where your market is pricing work, ignoring the differences in overhead and profit between companies.

If you’re pricing work at a 40 per cent gross profit margin (as in the example above) and not winning any work, it’s likely that you aren’t pricing competitively. Perhaps your overhead and/or profit is too high to be competitive. Drop your next few bids down to 38 per cent or 35 per cent gross profit (assuming you can do this and still cover overhead and profit!) to get more competitive.

Keep track of the gross profit margin on your winning and your losing bids. Look for a pattern, or a gross profit margin where your hit rate goes up. This is the gross profit that is competitive in your market. Since snow contractors have similar costs, knowing the average gross profit margin in your market at which losing bids turn to winning bids will help you identify the sweet spot in your market.

Value over time
Gross profit margins will also help you see trends. When gross profit margins start to increase, contractors have the upper hand and prices in your market are rising. When gross profit margins decline, it’s the customers that have the advantage and price competition between contractors is getting tougher. Knowing which way the market is moving can keep you out in front of shifting economies, and selling work while others bang their heads against the wall wondering where their sales have gone.

As valuable as gross profit margin is, it’s very important to remember all of this is useful if, and only if:
  • You know, accurately, the costs of doing the work. You need to know what it costs per hour for your staff, your equipment, and what your material and subcontractor costs are.
  • You know your company’s overhead and net profit.
If you don’t know what it costs to run a pickup and a plow per hour, you can’t possibly calculate your gross profit accurately and therefore, gross profit won’t be a meaningful benchmark for you. Even worse, if you don’t know your company or your snow division’s overhead and net profit, your gross profit might be competitive, but you’re waking up at 2:00 a.m. and plowing snow just to lose money on the work you did win.
Mark Bradley is president of The Beach Gardener and the Landscape Management Network (LMN), based in Ontario.