There were two landscapers in the town of Work Opportunity. They were Fred Grows and Joe Smart and they had each built a sizable Landscaping company. The gross sales for each company were right at $1,000,000. That means that they were in the upper 3% of all landscape companies in the nation.
They liked to get together from time to time and talk business, goals, problems and solutions. This particular January morning they met at Dina’s Cafe, their usual spot, and started talking about the plans for this year.
“Well”, said Fred after they had their first cup of coffee, “we did pretty well last year, in looking over both of our financials I see that we both made a 10% profit after salaries and expenses. That is better than the industry average of just 6-7%. I would say that we both deserve a pat on the back for a job well done!”
“I agree”, said Joe, “but I really feel like I could do better. I am not complaining, $100K is a good profit, but I feel that I am missing something, something that could really push my company to the next level.”
“You know, I agree, I think that we should challenge each other to grow this year.” Fred said. “We can set a goal and then hold each other to it, what do you think, are you in?”
“Sure, I am in, but I am not convinced that growth is what I need, I have an idea and I would like to make the challenge based on profit after salaries. That way, it will be up to each of us to figure out the best way to go about attaining this, what do you think?” asked Joe.
“You got it! Let’s set a goal of at least increasing 10% in our profit, let’s go for $110,000 in profit. We can mark this day and get back next year at this time and see who wins. Whoever has more profit will have to pay for the Breakfast!” answered Fred.
So, they both left with a spring in their step and got their management teams together to figure out how to increase their profit by at least 10%.
Fred looked at his company, they had 10 crews, each crew produced about 100K in sales. Of these sales, he kept 10% in profit or $10,000 so it follows that he could add another crew and get the 10% additional profit he wanted. He set the process in motion.
With a staff of 22 production workers, he needed to hire another 2 production employees plus a part time employee to take on the work. In addition, he needed to get some marketing out there, maybe offer some discounts and underbid some of the other landscapers in the area. He would have to purchase another set of equipment and train the new guys….. He had a lot of work to do!
Fred and his staff got to work, got the new customers, new staff, new equipment and put everything in place.
By the end of the year, he had grown 10% and his bottom line was a healthy 10% higher….. He couldn’t wait to tell Joe and he didn’t even mind paying for breakfast!
Meanwhile, back at Joe Smart’s company…….
Joe left the meeting thinking about the challenge and wondering if his idea would work. He had heard a seminar in which the speaker had showed the audience that roughly ⅓ of their client base actually cost them money instead of making money. Joe had implemented CLIP, a software package that tracks every employee on every job and reports back what the dollars per hour are for each property/customer on a per visit and yearly basis. He decided to take a look at the Job Costing report that the company was constantly talking about, maybe that could change his business…… who knows?
Once he ran the report, he was astounded to see that over ⅓ of his customers were costing him money. In doing the math for his company, he knew he had to get at least $38 for each Man Hour of work that he put out there. Of his 300 customers, 110 of them were making him less than $38/hour. Another 100 customers were making him $39-43/hour and the other 90 were actually above $43/hour. The highest was grossing him $64/hour!
It took him the better part of the week to digest this information. What he was planning on doing was pretty radical but all of the math pointed to the fact that it would be a great move. He was going to raise prices on all of the lower 110 customers and if they did not accept the price, he would be happy to walk away from them. This was a bit frightening because his whole career had been about growing the company. What he was about to do could easily shrink the company. He expected to lose some of customers, but what good did it do him to keep ones that he was actually “paying” them to do the work?
Joe gathered his management team together and showed him the Job Costing report out of CLIP. “Do you see these properties that are under $38/man hour? We are going to raise their price until we know that they will produce $40/hour. So, get your calculator out and lets send them a new proposal.”
Dan, his operations guy, protested, “Do you realize that we will be doubling some of these prices? That is insane! How do we expect to grow if we do this to our customers?”
Joe had his answer ready because he had asked himself the very same question. “Yes, we will probably lose most of these, but we have to realize that they are not the ones that are paying our company. They are the not the ones that are paying our salaries, the truck payments, the rent, the benefits….. They are actually costing us money. It is as if we are going over to their property and leaving money there for them each and every time we are there. On top of that, the other customers are subsidizing them, we are taking money from the customers that are priced right and giving it to the customers that are under-priced. Is that fair?”
Dan had to concede that it did not seem fair to the “good” customers or the employees or the company for some of the customers to be getting a “free ride” on the backs of the other interested parties. “Yes, it seems like this is something we need to do. Just seems a little scary.”, Dan said.
Donna, the office manager, piped up, “Well, I get the idea of raising the prices on all of the customers that are costing us, but what are we going to do with the ones that are paying us very well?”
“That is a great question and I have been thinking about it. First off, if we sent them a ‘We are going to raise your price by 5%’ letter, they would probably start getting bids from other companies in the area, so the first thing we will do is not send them a new proposal, that would be a killer to what we are trying to do. If they are satisfied with our quality and we are satisfied with what we charge, let’s just keep this relationship going.” Joe continued, “the next thing we need to figure out is ‘Why?’; why are we making good profit on these? Is it because they are close? Is it because the properties match our equipment? Is it because we have a good relationship with them? Once we identify why they are our best customers, we can go out and find more like them, can’t we?”
Everyone in the room started getting the vision for what had been going through Joe’s mind over the last few months.
“So…”, Donna said, “if we identify our best customers, then we can figure out how to find more like them….. That makes a lot of sense! It seems like we have been ‘floating’ through business up until now, we just took everything we could and hoped for the best. Now, we will start to be pro-active about becoming the company we want to be! That is exciting! I can’t wait to start on this!”
Joe continued, “Yes, it is, and it has been bouncing around in my head now for a while. The next step that I was thinking about was actually contacting our best customers and sending them a little basket or at least calling them to tell them that we appreciate them. It seems that we need to be a little more appreciative to the customers that help us the most. We can do that, now that we have the information at our fingertips. Donna, can you get that done?”
Donna was full of excitement now, “Yes, Boss! I will get something done for them, won’t they be surprised! I am starting to love this job!” and she started to look up gift baskets on line to see what would be appropriate.
“Dan, let’s work on these proposals for the lower tier of customers and get them out as soon as possible. If they don’t want to pay the new price, we want them to have plenty of time to find a provider.”, said Joe.
Once the meeting was over, Joe and Dan started working on the new proposals. Joe was right, almost 2/3rds of the lower tier customers decided to go elsewhere. That left only 32 customers out of the original 110 that accepted the new pricing structure, but they were all set at the $40/hour mark.
The next step was to raise every customer that was under the $40/hour mark to at least $40/hour. For most of the 60 customers that they raised, the increased amount was not significant enough to cause them to change providers so Joe now had only 232 customers out of the original 300. He got a sinking feeling in his gut when he realized that the gross sales for this year would be under $1M, in fact, it looked like his sales for the year would be $775,000.
“Well”, he thought, “at least we will be profitable on every job. Also, it will be easier to run a company at 775K.” Joe continued his thoughts, “In fact, I can cut one whole team out of the company, that will give me extra equipment to use as a spare. Also, I can get rid of the lower tier of my labor, the ones that were kind of a headache to manage….. Now that I think about it, this year might end up being a bit less stressful….. Maybe I can get out on that vacation with my family, be back earlier in the afternoons….. Take a day off, here and there and enjoy that boat that I bought to take up room in my garage! Maybe I can enjoy life a little more…..”
He thought back to that seminar, he wanted to do the math to see what might happen with profit….. Here is what he wrote out:
If my costs are $38/hour which includes a 10% profit……
My lowest customer account now makes me $40/hour….. That adds $2.00 of profit to every hour.
My average for all of my customers is $45/hour, that would give me $7.00/hour in profit.
Using his CLIP program, Joe figured out that he had 23,000 production hours to fulfill for the season. This would mean that he would have an additional $161,700 in profit. This would be added to what he was making before, (10% on Sales), so that would be another $77,500. So, together his profit should end up being $239,200 with less work and stress on himself, his family and his company.
“Would it really be possible?”, Joe mused…. He had done the math, he had heard the lessons from the seminar, he had implemented the software, “Why not?!” was his thought. He dived in.
When the season was over, he looked at his books and his heart sunk! Look at all the taxes he was going to have to pay! He ended his year with $255,000 in profit because in not doing the “losers”, his costs had gone down considerably, his employees were happier which made his whole company run more efficiently. On top of this he was able to give them all a sizable end of year bonus. “Next year”, he thought, “we will grow, but only with customers that fit our company. Now that we have the profit under control a little growth will go a long way!”
He had enjoyed the free time he had and everything seemed to be going much better than before, “Why did I wait so long to implement this?!”, he asked himself.
As he walked into Dina’s cafe, he thought about how happy he would be to pay for breakfast, maybe even steak and eggs! Approaching Fred’s table, he remembered that that same conference speaker had spoken about using Piecework to motivate your employees, maybe he needed to look into that a bit closer…