Setting Your Prices: A Guide for New Tree Care and Landscape Businesses
February 22, 2022
We work in this space because we love it. I don’t know anyone who got into the Green Industry to “get rich quick.” But you have bills to pay. How do you make sure you’re setting prices for your services correctly? You want to meet obligations and earn an income for yourself, but where to start?
How to Start
There are a few steps you can take to start figuring out what to charge for your services. Some will be easier than others. I will make this note: you can (and should!) do something to establish a coherent pricing strategy before you start advertising your services. Rolling up to a job and “eyeballing it” is a great way to make sure you don’t earn money.
Here are some ideas for getting a start on your pricing strategy. This isn’t an exhaustive list by any means, but if you’re just getting a foot in the door, these ideas are a great place to start.
Ask Other Companies
One of the most wonderful things about working in the Green Industry is that people are willing to help. This industry isn’t as competitive as finance, software, or insurance. People generally want others to succeed. Getting some guidance on setting prices won’t be an exception.
Not everyone you call will be willing to help. But there are a lot of owners and companies who would be willing to share their time and insights with you. Call and ask until you get some that are willing to give you a few minutes.
Ideally, you’ll find some companies in your region that aren’t direct competitors. They either offer adjacent services (they fertilize and you mow, for example), or they cater to a different client.
For example, if your target client is the hurried homeowner who “Just wants it done,” you’re targeting a different clientele than the high-end residential landscaping company. Ask them for some insights on how to set up pricing, and adjust those for your model.
Leverage Social Media for Setting Prices
Hear me out before you roll your eyes and hit the “back” button on your internet browser. I promise this one makes sense.
There are large communities for Lawn Care, Landscaping, and Arborists on Reddit. There are Facebook Groups for all of these industries as well. LinkedIn is flooded with Certified Horticulturists and folks holding ISA Credentials who would love to help. There are also niche sites like TreeBuzz (free) or Tree Check Up Pro (paid subscription where you can earn CEUs). These two sites are specific to arborists, but you get the idea.
The point is that these communities exist, and there are people on them who would LOVE to help. Not everyone is a true “expert” in these forums, but they’re a great starting place when you don’t have anything to work with.
Get Competitive Quotes
This one is a bit woollier, and it definitely has the potential to blow up in your face, so I’d use this as a “last resort” option.
Ask your spouse, partner, friend, or neighbor to get quotes from multiple companies for work. If you know how many man-hours will go into an edging and mulching job, get the quotes and try to reverse-engineer the labor rate.
Don’t get greedy with this; only ask for a couple of quotes. It’s also not a good idea to ask for quotes from companies who will be your direct competitors. Just like the example above, ask for quotes from companies who are catering to a different customer than you’re targeting.
There’s some basic decency involved in how you go about this; you wouldn’t want someone wasting your time with a quote they’re not serious about, so don’t drag this out. Sit on it for a day or so and then call the company back and tell them you went in a different direction. Don’t let some poor salesperson call you 50 times about a quote you were never going to buy.
If you get “caught” doing this, just be honest. Call the owner directly and tell them you’re trying to do research on setting prices for your new business and offer to buy the salesperson lunch. Do something to make amends; this Industry is way too small to burn bridges as a new business owner.
How to Account for Costs
Your company’s expenses break down into two general categories: direct costs (something for a specific job) and overhead costs (those needed to run the business but not tied to a specific job).
Examples of direct costs are anything that you can say, “We used ‘X’ amount of this on the Johnson job,” (soil, mulch, pavers, etc.). Another helpful way to identify them is that you may be able to break them down by square footage (i.e. fertilizers or pavers).
Overhead costs are things you need but can’t assign to a specific job. Examples would be your rent on your facility, phones, software, and any non-billable labor (manager’s salaries, etc.).
Some things don’t quite fit either direct costs or overhead. For example, you have to use gasoline for direct costs (travel, running equipment, etc.). However, it’s a massive undertaking to calculate. How much gas are you consuming per mile on each truck? What about the hourly consumption on your chain saws? It’s easiest to lump it in with your overhead costs for simplicity’s sake. The key is that it has to be accounted for somewhere.
Policastro says: “Everything that you spend for the business must be accounted for. Overhead costs are the most overlooked for most landscapers.”
Direct costs are fixed, so they’re easier to track. You know how much to charge Mrs. Johnson for the four yards of mulch you used. But it’s a lot more difficult to track that overhead, and that’s where a lot of companies go wrong when setting prices.
How to Account for Overhead
Fortunately, some simple math does the trick. (Note: if you’re a brand new company in your first year, you won’t have this data.)
Divide all overhead costs for the past year by the total number of hours spent on a job site (direct labor). This gives you the Hourly Overhead Rate to charge.
Total annual overhead $$ / number of hours on job sites = Hourly Overhead Rate
For example, if my total overhead for the previous year was $500,000 and I had 12,500 hours of direct labor (on a job site), I would do the following equation:
$500,000 / 12,500 = $40
I add that $40 to each hour I’m quoting for labor, and I’ll cover my expenses. This is the cardinal rule for setting prices – cover your overhead!
Perils When Setting Prices
Avoid these common mistakes to prevent loss of profitability. Ignore these, and your bottom line will take a significant hit.
Charge for Training
Don’t fail to account for training. Training is field labor time – full stop. Account for a crew leader or supervisor’s time as a billable. You wouldn’t withhold their pay, would you? Also, they’re working on the property next to that new hire.
The same goes for the new hire themselves. They may be learning “on the job,” but that doesn’t mean they aren’t completing work on the client’s property. If they’re working, even at a slower pace due to instruction, be sure to bill for their time on-site as well.
Many companies fail to bill this time as labor. They think it’s “unfair” to bill for time spent training or a new coworker’s learning curve. This is a bad assumption. If the supervisor or crew leader knows your standards, the job will still get done to your satisfaction. If you’re sending a crew with many new hires, maybe throw a few hours extra into the quote to make sure it gets done to standard. No matter what, account for that time in the quote.
Management’s Time Should Be Included when Setting Prices
The second issue is similar – owners and managers. If you’re an owner or manager and still perform field labor, you must account for your time. If not, you’ll find yourself at the end of the year thinking you’ve been incredibly profitable only to realize you didn’t pay yourself appropriately.
Just like with training time, you should bill as hourly labor. Again, there’s work being done on the customer’s property. You don’t need to charge extra for it; that might be “shady.” But you do need to charge your normal hourly rate.
Don’t Forget the Unexpected
The last thing many companies overlook is a bit of “padding” in their pricing. Giving yourself just a small buffer ensures you remain profitable if something unexpected should happen.
It can be small (5% should work) but helps cover unexpected costs. For example, if your job runs over on hours, material, or needs a callback, you’ve got a small cushion. The cumulative impact of all the other jobs you run having this padding keeps you profitable.
Calculating Your Prices
Now that you’ve figured out your Hourly Overhead Rate, there are only two things left to work out. The first one is to calculate your revenue per employee, per hour. How much money does one employee generate? Doing this properly is critical when setting prices.
Break this up by service line. A lawn care technician doesn’t generate the same revenue per hour as a maintenance crew. Your best bet is to separate things according to the department. By doing this, you avoid underpricing more labor-intensive work like design/build or overpricing higher-margin work like lawn care.
The last thing before you actually figure out pricing is to account for your profitability targets. If you’re a newer, younger business, Policastro suggested 20% net profit as a good target. Keep that number in mind; you’ll need it as you calculate proposals!
The Actual Math
For example, if I know:
- Materials for an edging and mulching job are $700,
- Hourly Overhead Rate is $40,
- The job will take 24 hours (full day for a three-person crew),
- Labor Burden (These are your costs associated with an employee. Think payroll taxes, health insurance, and other benefits.) The Labor Burden is typically around 25% of average wages, but obviously use your own numbers here!
- I’m paying my field labor $20/hour per person,
- I’m building in a 5% contingency fund, and
- I want to achieve 20% net profit, my equation would look like this:
|Materials + tax||$700|
|Labor (16 hours x $20 average hourly wage including possible overtime factor)||$480|
|Labor burden (25% of average hourly wage)||$120|
|Total direct costs||$1,300|
|Overhead (16 hours x $12 overhead per hour)||$960|
|Total costs (Direct & Overhead costs)||$2,260|
|Contingency factor (All costs + 5%)||$2,373|
|Price of the job with 20% profit markup||$2,847.60|
Don’t forget to add applicable sales tax for your state, but that’s pretty much it!
If your hours were correctly estimated, and your Hourly Overhead Rate was correct, you should make a 20% profit on this job. Use that formula and maintain profitability year-round.
Re-evaluate your pricing each year. It should be based on your overhead expenses and your desired percent of profitability for that season. Then, change the numbers around and you’re good to go!
If this was helpful, check out some of our other content. We’ve got a free Guide to Employee Recruiting & Retention for the Green Industry and a free Green Industry Marketing Guide.