June 2, 2023
Jacki Hart Many of you may remember Jean Paul Lamarche (JPL) — the North American landscape industry guru on overhead recovery. JPL was a passionate landscape designer and contractor, a brilliant math genius, and one of our professions’ all-time top mentors on business profitability, production rates, pricing and retail success. JPL passed away several years ago. He was my mentor and my good friend.

Every winter, I spend most of my time coaching business owners on how to improve profit and deploy JPL’s formulae on a weekly (if not daily) basis. It’s simple math and it’s actually not that painful. Most of you have probably settled on your 2023 pricing (hourly charge out rates, equipment day rates, wages and staff salaries) and sent out contracts already, there is also going to be a lot of new business that comes your way this year. My question to you is: Will you price your newly acquired work the same as the work you’ve already sold now?

There are many different ways to determine what to charge, and what to pay staff. Some business owners use what I refer to as the ‘dartboard method.’ This involves a mixture of guess work, intuition and knowing how to stay priced below the competition. Others use budgeting software — which can be either a very valuable tool to support profitable pricing, or a weapon to destroy it if not properly used. ‘Pie in the sky’ budgeting can be more disastrous than no budget at all, because it gives a false sense of success that never materializes. Some business owners use spreadsheets that track recent and projected sales, cost of goods sold and overhead, line by line to determine best predictions on profit margins.

It always amazes me how much variation there is to these methodologies, and related success. Unfortunately for many, figuring out how important proper budgeting and overhead recovery methods comes too late, and the business closes down. I am amazed every year at how hard working many business owners are, yet they fail to earn a decent profit or return on their investment. For this reason, I thought it best to share a few classic JPL ‘aha’ moments for you to consider for your pricing strategy.

Let’s start with an example on markup. Let’s say you have materials and labour on a small project that costs you $1,000. Labour, labour burden, materials, Cost of Goods Sold (COGS), plus overhead recovery, and you want a 20 per cent profit. You would likely mark up the job by 20 per cent.

If I handed you a calculator, and asked you to add 20 per cent profit to those costs, most would enter $1,000 x 1.2 = $1,200 as the price to the customer. Right? Does that give you a 20 per cent profit? Nope.

It only gives you 16.7 per cent profit. $1,000/$1,200 = 0.833 (as the cost of the materials) which means 0.167 x 100 or 16.7 per cent is profit.

You just left 3.3 per cent profit on the table. When most landscape companies average two to three per cent profit (as reported by LMN), that’s a problem. The proper way to calculate profit added to Costs of Goods Sold is this:

$1,000/0.8 = $1,250 as the price to the customer. $1,000/$1,250 = 20 per cent. Why divide by 0.8? Well, 100 per cent minus the 20 per cent desired profit = 80 per cent. So if you divide by 80 per cent, what’s left is the 20 per cent you’re seeking. Look at the numbers here: 1,000 is 80 per cent of 1,250. Right? Right!
So if you use a multiplier of 1.2 to get a markup of 20 per cent on a $1,000 COGS job, you left $50 on the table. If it’s a $10,000 COGS job, that’s $500 you missed out on. If it’s a $100,000 COGS job, that’s $5,000 profit not realized by using a multiplier of 1.2.

For 10 per cent profit, divide your $1,000 project costs (including overhead) by 0.90, which equals an $1,111 price to the customer.

For 15 per cent profit, divide your $1,000 project costs (including overhead) by 0.85, which equals an $1,176 price to the customer.

For 25 per cent profit, divide your $1,000 project costs (including overhead) by 0.75, which equals an $1,333 price to the customer.

While the difference may seem small, it certainly makes a difference the larger your sales are. This simple math could be the difference between managing disappointment at the end of season.

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Jacki Hart CLM
Prosperity Partners Program Manager