June 1, 2011

Recovery pricing

The recent recession has shaken up landscape construction business models across Canada.
How have pricing, marketing and business management strategies changed in the recovery?


Audrey Partridge
"It has been an interesting couple of years," says Audrey Partridge of Toronto design/build contractor Juergen Partridge Ltd. The company is a high profile, high-end design/build contractor in the Toronto area.

Has Partridge held its prices? Audrey Partridge honestly says no, particularly design fees. She says today's client requires more handholding, and today's contractor must focus on what the client needs, and be sure to spell everything out. She believes the contracting industry had become lazy over the prosperous years. Today, "We have to sell, to use good salesmanship and marketing techniques." Clients are more sophisticated when it comes to communications. "You must keep them informed at every step; never skip this, or it will bite you."

The market has changed; Partridge used to focus on large, upper-end jobs. Now it's going after a mix of prices, styles and client demographics. This switch brought an unexpected bonus: it has helped designers on staff grow and mature, as they lead clients through upgrading the landscapes of their first and subsequent homes.

With the changing price points, make sure clients understand they are getting good value, Partridge cautions. She felt a tangible, vindictive backlash in client attitudes over the last two years, an unstated observation: "It's about time prices came down, contractors have been ripping us off for years." She takes the challenge in stride, noting that more wary customers, demanding more details, is a good thing.

Partridge observes it is more common now to break projects down into phases — not her favourite thing to do, but necessary to make the work affordable. While it takes more effort and time, it is critically important to explain the alternatives, so the client can make realistic choices. "Be true to your clients' budgets," she says.

The company's business management strategy has been to control cost creep, and take a fresh look at all costs, even revisiting line items such as phone service. Watch for hidden costs, such as deliveries or dumping fees. Know how to negotiate with suppliers. Do the work right the first time, to prevent costly warranty work. She is open that tight times have forced the contractor to shave ROI and margins, taking it down sometimes to breakeven, in order to continue working.

Meanwhile, the company kept a close eye on capital investments. "Must we replace this? What are the alternatives and trade-offs? What are the opportunities?"

Partridge says processes are important. "Analyze the hiccups, build your company into an efficient wheel. A good on-site foreman is not enough, you must have a bigger method and management system. Give clear directions, and never panic."

She also keeps a very close eye on sub trades. "They must be well supervised and do good work, or else the contractor is holding the bag."

Partridge, who has been through three recessions, seems to take a long, thoughtful look at how the recession challenge has affected her fellow business owners. If facing depleted resources, she says it's time to look at lifestyle changes, maybe it's time to go back to your roots. To ask the question, what is important in my life? She observes that Canadians seem to live to work, while Europeans work to live. She urges her fellow green industry pros to watch for burnout, and not beat yourself up too much over mistakes, or it will affect your current business.

The bottom line, according to Audrey Partridge, is to prosper through integrity and good business skills. Otherwise, your business is a charity.

Productivity rules
Jean Paul Lamarche

Jean Paul Lamarche says the key to success is not glamorous, it's good old-fashioned productivity. Lamarche has been a green industry business management consultant for over 25 years, based in Toronto but serving businesses across the continent. He is an evangelist for understanding true business costs, including return on investment, and setting prices for profit.

The spring of 2011 finds Lamarche still cautious about the green industry's economic prospects. Customers are not showing urgency to book jobs, and advising them to book before the trade gets busy is not working. Rising food and utility costs are pinching households. The HST in many areas of Canada is also still a significant depressing factor.

According to Lamarche, holding prices is not necessarily the objective in today's recovery climate. Rather, contractors must have a firm grasp of their material and labour costs to then "buy" a job if necessary to reach breakeven — if it's a matter of keeping the company afloat. "Once you achieve your breakeven for the year, you can feel better, and then go for profit." Holding prices simply for the sake of holding prices could cause contractors to miss the boat.

Lamarche says to work cheaper, smaller, quicker — more efficiently — and if you are nervous, simply aim for breakeven.
"In these tough times, if playing with your margins is not enough, you can play with the return on investment you have, hopefully, built into your pricing. This strategy allows you to keep people over the short term, but be aware that you are depleting your equity to stay alive.

"As an owner/manager, you should get into your accounting software every day. You should eat numbers for breakfast." Productivity is key; Lamarche recommends showing $3,000 in sales per working day to support a crew. Labour burden should be 25 per cent or less.

Lamarche recommends asking employees to be a better team. Low pay rates are not the answer. He has seen real-life success with hourly pay rates as high as $40; the key is a pay structure to reward efficiency, and refusal to accept mediocrity.

For sales success, Lamarche says use the old-fashioned telephone. Phone up the quotes you did last year that did not sell. Ask if the customer did the job, and if not, ask, "May I requote? We have made  some changes that have given us some cost efficiencies." He says it is surprising how many customers welcome the follow-up, and how many sales this strategy can generate.

Seasonal cash flow management is also critical. Lamarche believes contractors are hurting themselves by not promoting credit card payment. First, it helps overcome affordability objections from customers. But more importantly for the contractor, upfront cash combined with zero collection cost is well worth the merchant points that Visa charges. And he finds that Canadians are point-crazy anyway, they want to pay by credit card.

Enhance your cash flow by asking for 50 per cent the day you start a job, which assists in buying materials. As an industry, Lamarche says contractors need to be more aggressive in asking for advance payment — after all, Home Depot operates by asking for 100 per cent advance payment on its installation work.

"Don't panic. Don't get greedy. Look at how deep you are into your credit line; it may not be as bad as on this date a year ago. Understand your numbers. And believe in your value." According to Lamarche, there is nothing like confidence.

True to himself
Bruce Hunter

Bruce Hunter, of Hunter Landscape Design in Surrey, B.C., stood out in reporting little recessionary pressure on his pricing; instead, his company has responded by changing its product mix. He finds customers are more interested in looking at a range of alternatives, rather than automatically going for the higher end. Projects are smaller-scale. In the past, customers were eager to start right away, now they want to think before committing, and they want to break work into phases.

He says 2010 was a tough year for him, his sales were down 20 per cent, but his labour costs were the highest ever. To meet the new reality, Hunter puts more effort into fine-tuning supervisor training, spends more time in the field streamlining efficiency, making best use of resources. Working smarter and more efficiently carried him through, he said.

Another move helped Hunter weather the recession, almost by accident. The company diversified into nursery production, which gave unlooked-for material and labour flexibility.

Hunter believes that, "staying true to who I am," helped him weather tougher times. He has always been a one-crew company, never believing that more volume meant more money.

Hunter can sympathize with new companies starting out, from his own experience. He started in commercial contracting, where the low bid meant everything. He called it, "a real rat race, push-push, go-go, for not much reward." His own journey to better prosperity began by joining BCLNA, where he met landscape contractors that seemed happier and more relaxed. "Gee, I really liked that." Hunter moved to residential landscape contracting, and kept refining his business. "We are about reputation," says Hunter; while his company is selling fewer barbecue surrounds this year, Hunter's business foundation is solid.

Master strategist
Glenn Curtis

"First, we sell value. We did have to lower pricing over the last two years, but I do not want my company perceived as Walmart. So we lowered the price, then threw in an extra service for added value," says Glenn Curtis of Plantenance, a residential design/build and maintenance contractor in Montreal.

Curtis is another numbers guy, keen on knowing costs and watching his bottom line. He understands and uses breakeven in managing his business, typically attaining it in late October.

He urges fellow industry members to be very cautious about lowering prices, as you can belittle your brand. He sees scores of competitors using unit pricing, rather than knowing their true costs — and believes these guys are not making any money, and have put themselves into a slow going-out-of-business sale. He believes the industry will become more successful when players regard themselves as businesspeople first, rather than craftsmen.

Curtis is unusual, in that he does not make site visits to sell jobs. Rather, he invites potential clients to his office. It a great pre-qualification tool, and it gives him much better control of his sales message. Prospective clients get a presentation on Plantenance, information on the company's certification credentials — Curtis calls this powerful, even if the client is not familiar with green industry designations — and details on landscape construction specs required by the Quebec Bureau of Normalization. Curtis's sales success rate with this technique runs 75-80 per cent, though it has been somewhat lower during the downturn.

A strategy that worked for Curtis was to book jobs with a very small deposit, called a service order or booking fee, only $1,500 or $2,000 — the amount reverts to him if the job is cancelled. He found it effective to confirm $60,000 jobs.

Curtis also allows installment payments, which made the difference in affordability for clients. His first step is to break the quote into phases, allowing the client to pay the last 15-20 per cent with three post-dated cheques, at no interest; possible, because he already built in two per cent at the top.

Stepping up marketing during a recession is classic advice; Curtis says he actually did it. He seems to have a jealous regard for the value of his brand, and uses marketing to enhance it strategically. Curtis singles out two suppliers, Laniel Prodamex and Pépinière Pierrefonds, who have joined his effort to help educate consumers on the value of quality.

Curtis has a couple of industry friends who are struggling, and advises them and others to stick to their prices as much as they can. From his own experience, he says when he and his wife founded Plantenance, they set prices too low, and it took years to dig out of that hole.

"When the pressure is just too much, as with the recent downturn, add on extra services rather than lower your prices. Especially with higher-margin softscape, the happier customer costs you less."

The American take

Canadians generally recognize the recession has been even more challenging south of the border. When asked for his take, American green industry consultant Charles Vander Kooi says contractors there can be in control and working, but knowing and controlling costs is more important than ever.
Charles Vander Kooi
He thinks contractors have reacted out of panic, assuming their overheads are the problem. If a company's overhead is at 25 per cent, profit margin is at five, and costs make up 70 per cent, Vander Kooi says shaving costs is the intelligent place to start. He stated confidently that cost cuts of five-15 per cent are achievable by most contractors.

The effort spent on cutting costs also yields the competitive bids necessary to get work in today's environment. He says to shop smart with suppliers, tighten up your equipment expenses, and work to get more value from your production hours. The time it takes a crew to load up, get coffee and arrive at the jobsite is just one opportunity to reduce costs — Vander Kooi is seeing contractors assign just one person to leave from the shop; the other crew members report direct to the job site, and start getting paid the minute work begins.

What about the contractor bidding to survive based on costs and overhead — forget profit margin — that still gets beat? Vander Kooi cautions, do not assume your competitor is bidding below cost, because nobody is that stupid. Instead, he suggests, what if you competitor bid the job assuming his crew worked at 110 per cent efficiency? Your competitor gets the job, goes to his crew, and asks, "Are you glad to be working today? If you are, you need to know I had to bid this job based on everybody speeding up." Bottom line, the competitor's crew understands the situation, and steps up the pace accordingly.

"The boom days are gone forever, this has affected the economic psyche of North America wide, deep and far," Vander Kooi says. Yet he feels the changes have been good for the industry. He said he gets nervous when things are too good, and young guys get themselves into situations where they can't recover. "I feel better when things are tight."