January 23, 2017
May 2016 - Pricing for profit
PROSPERITY PARTNERS
Pricing for profit
By Jacki Hart CLP
Prosperity Partners program manager
Every generation has its champions, leaders, mentors, trail blazers and icons. One of ours, Charles Vander Kooi, passed away in March. Vander Kooi inspired and enabled sweeping improvements to the profitability of hundreds, if not thousands, of construction and landscape-based businesses. A guru from the ‘80s and ‘90s on recovering overhead, creating incentive systems, and budgeting for profit, his system changed lives. Vander Kooi left a legacy of success and helped to elevate the success of our industry. It’s with respect for his legacy, and of several others who have dedicated their careers to helping us be profitable, that I chose to write about profit this month.
May is the month when everyone in industry ramps up. Regardless of sector, it’s also the time when those who sell are pressured to give a better deal and be tempted to compete largely on price. Here is a short list of phrases I’ve heard from business owners I work with when it comes to their logic for pricing strategies and overhead recovery:
1. I just double my cost on materials or products and charge that amount back to the customer.
2. My wife does the books so I don’t have the added expense of paying an office person.
3. I run my business from my home (garage or farm), so I don’t have to set up a commercial or rental facility.
4. My truck is paid for so I don’t have to charge for it.
5. I charge the same hourly rate as my competitors do.
These arguments for pricing strategy are all red flags from a profit management perspective. I would even dare to hazard a guess that Vander Kooi (and possibly our infamous Ontario pricing gurus JP Lamarche and Mark Bradley) would agree with each of my responses below:
1. If you don’t know at what price you will break even, how can you be sure that doubling your material or product purchase cost will ensure either overhead recovery or profit? By pricing this way, you might be leaving money on the table (i.e. not charging enough), or worse, throwing spaghetti at the wall with your price, and not realizing you’re losing profit potential — or perhaps not recovering a suitable amount of overhead on products sold.
2. This will ensure that your business will never have the cost of hiring an outside bookkeeper in the budget, and in all honesty, it might benefit more from having an unbiased, professionally-trained bookkeeper or office assistant.
3. (Similar to 2) By doing this, you are neglecting to establish that the business can support an independent location, should you ever decide you want to sell the business and/or move it away from your home location (i.e. you outgrow your space). Your current overhead recovery and pricing strategy doesn’t include a place of business.
4. If you don’t build into your price a return on your investment for vehicles and equipment, you’ll never have the profit set aside to replace those things when they wear out. Your vehicles and equipment costs including ROI (either per hour or per day, or as a part of a single overhead recovery percentage) should all be included in the calculation you use to set your price.
5. Your competitors may pay their employees differently and may have different labour burdens to recoup (i.e. WSIB rate, down-time budgets, benefits, etc.) so this strategy does not ensure you are recovering overhead or payroll costs properly, let alone including profit on labour.
For some of you reading this column, everything you just read makes sense. You’re using a pricing and overhead recovery system and I just confirmed you’re following best practices; paying attention to the details that relate to generating profit and funding growth. For others, it may make no sense at all, and is just more white noise people keep talking about in seminars about creating budgets and pricing from a system. Some of you may be somewhere in the middle — using a pricing system or quoting software, plugging in numbers, and trusting the resulting price will make you money. I was there too. And, it didn’t always work.
What I’ve learned over the years from working one-on-one with business owners who are using various pricing systems and software, is that few truly understand how the numbers all relate to one another. Alarmingly, few know how to read, analyze and manage from their Profit and Loss Statements. Even worse, few follow their budgets monthly, and even fewer adjust on-the-fly throughout the year.
I believe this is where the rubber really hits the road. I equate the trend of trusting software to run our businesses for us, as trusting a four-wheel drive vehicle to get us through any obstacle. By assuming you have all of the right information, no matter what transpires, and forging boldy ahead without checking for accurate facts, you might be successful and soldier through the deep mud (or snow), and, well, you might get stuck too. Stuck without cash flow and without profit.
So, as you work your way through the next critical few months of your season, I suggest a proactive approach — making sure you know how your company is REALLY performing financially. Many set a budget early in the year, then work well into the year, coming up for air in late fall when it’s too late to make any appreciable adjustments to overhead recovery or profitability. Please set aside the time for your most IMPORTANT meeting every month: the meeting where you meet with yourself, review your numbers and ensure you’re on the right track.
Remember, if you’re aiming at NOTHING, you will hit it with HUGE accuracy.
Pricing for profit
By Jacki Hart CLP
Prosperity Partners program manager
Every generation has its champions, leaders, mentors, trail blazers and icons. One of ours, Charles Vander Kooi, passed away in March. Vander Kooi inspired and enabled sweeping improvements to the profitability of hundreds, if not thousands, of construction and landscape-based businesses. A guru from the ‘80s and ‘90s on recovering overhead, creating incentive systems, and budgeting for profit, his system changed lives. Vander Kooi left a legacy of success and helped to elevate the success of our industry. It’s with respect for his legacy, and of several others who have dedicated their careers to helping us be profitable, that I chose to write about profit this month.
May is the month when everyone in industry ramps up. Regardless of sector, it’s also the time when those who sell are pressured to give a better deal and be tempted to compete largely on price. Here is a short list of phrases I’ve heard from business owners I work with when it comes to their logic for pricing strategies and overhead recovery:
1. I just double my cost on materials or products and charge that amount back to the customer.
2. My wife does the books so I don’t have the added expense of paying an office person.
3. I run my business from my home (garage or farm), so I don’t have to set up a commercial or rental facility.
4. My truck is paid for so I don’t have to charge for it.
5. I charge the same hourly rate as my competitors do.
These arguments for pricing strategy are all red flags from a profit management perspective. I would even dare to hazard a guess that Vander Kooi (and possibly our infamous Ontario pricing gurus JP Lamarche and Mark Bradley) would agree with each of my responses below:
1. If you don’t know at what price you will break even, how can you be sure that doubling your material or product purchase cost will ensure either overhead recovery or profit? By pricing this way, you might be leaving money on the table (i.e. not charging enough), or worse, throwing spaghetti at the wall with your price, and not realizing you’re losing profit potential — or perhaps not recovering a suitable amount of overhead on products sold.
2. This will ensure that your business will never have the cost of hiring an outside bookkeeper in the budget, and in all honesty, it might benefit more from having an unbiased, professionally-trained bookkeeper or office assistant.
3. (Similar to 2) By doing this, you are neglecting to establish that the business can support an independent location, should you ever decide you want to sell the business and/or move it away from your home location (i.e. you outgrow your space). Your current overhead recovery and pricing strategy doesn’t include a place of business.
4. If you don’t build into your price a return on your investment for vehicles and equipment, you’ll never have the profit set aside to replace those things when they wear out. Your vehicles and equipment costs including ROI (either per hour or per day, or as a part of a single overhead recovery percentage) should all be included in the calculation you use to set your price.
5. Your competitors may pay their employees differently and may have different labour burdens to recoup (i.e. WSIB rate, down-time budgets, benefits, etc.) so this strategy does not ensure you are recovering overhead or payroll costs properly, let alone including profit on labour.
For some of you reading this column, everything you just read makes sense. You’re using a pricing and overhead recovery system and I just confirmed you’re following best practices; paying attention to the details that relate to generating profit and funding growth. For others, it may make no sense at all, and is just more white noise people keep talking about in seminars about creating budgets and pricing from a system. Some of you may be somewhere in the middle — using a pricing system or quoting software, plugging in numbers, and trusting the resulting price will make you money. I was there too. And, it didn’t always work.
What I’ve learned over the years from working one-on-one with business owners who are using various pricing systems and software, is that few truly understand how the numbers all relate to one another. Alarmingly, few know how to read, analyze and manage from their Profit and Loss Statements. Even worse, few follow their budgets monthly, and even fewer adjust on-the-fly throughout the year.
I believe this is where the rubber really hits the road. I equate the trend of trusting software to run our businesses for us, as trusting a four-wheel drive vehicle to get us through any obstacle. By assuming you have all of the right information, no matter what transpires, and forging boldy ahead without checking for accurate facts, you might be successful and soldier through the deep mud (or snow), and, well, you might get stuck too. Stuck without cash flow and without profit.
So, as you work your way through the next critical few months of your season, I suggest a proactive approach — making sure you know how your company is REALLY performing financially. Many set a budget early in the year, then work well into the year, coming up for air in late fall when it’s too late to make any appreciable adjustments to overhead recovery or profitability. Please set aside the time for your most IMPORTANT meeting every month: the meeting where you meet with yourself, review your numbers and ensure you’re on the right track.
Remember, if you’re aiming at NOTHING, you will hit it with HUGE accuracy.