Service Industry Markups

Jamin_Mayer

Jamin_Mayer

Location
Longmont, CO
I'm going to be volunterable with this topic, so don't kick me when I'm down (Ed.)
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I'm wondering what should be a fair markup value for us tree service businesses? I have been nervous with marking up my rates (for many years now), but I think if I continue to not mark up my rates, I'll continue to slide backwards (financially). I'm sick of not having money set aside for the unexpected repairs that create a setback.

For the longest time, I have been bidding work pretty much at cost. Sure, I have good closure rates, but as a business owner, I'm not convinced I can survive doing business this way all the time.

Another thing about bidding at cost is that you must do a high volume of work to sustain the expenses. I'm finally coming to the point where I think I need to markup my rates...

So, the simple question is; what percentage of my cost should I mark up? What is fair? I don't want to "stick it to" my customers either.

Opinions/experiences advised!
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I understand your situation. I don't have an answer because in general when I try to mark up I lose business and longtime customers. When I say mark up I mean not pricing ridiculously cheap, especially on big removals where risk and equipment wear and tear are more than average. For example: big take down 2 day job at least, 3 men, bucket truck, chipper truck, all the tools, experience, insurance and licensing, take all wood, grin huge stump and take away excess stump grindings. 2500 tax included. With 2 good ground guys we work as fast as your average 3 man tree crew. Customer, who I had done work for in the past got it done for around 1600. Often I've been the knucklehead underbidding big jobs like that which is why I look at a tree and know how long it's gonna take. This happens literally every time I try to fairly bid these bigger jobs. I look forward to reading more responses to this thread because I need advice too.
 
In the traditional sense "markup" is added to the price of goods purchased for resale to cover business expenses and profit margin.

I'm assuming, though, that you are referring to setting your prices to include a decent profit margin and are not talking about resale products.

Best advice I can offer is work your Break Even numbers so that you have them fine tuned. Those BE numbers should include your Salary! Your profit margin is not to be confused with your salary!

You should also include any non-optional capital fund replenishment dollars you wish to accumulate annually as well as other "capital" fund items in your BE analysis.

Then when you have your BE all figured out you can add in what you consider a reasonable profit margin. I've seen it run from anywhere between 2% and 25%.

All told, 9%-10% profit margin is considered "normal" for any business, whatever that means.

When working your BE numbers don't forget to factor in the taxes on your salary and on your profits otherwise you may find you still have a "markup" only to find you are losing ground.


If you find your BE numbers or your "markup" numbers to be impossible to sell to your customers then you need to rethink your budget, figure out how to get more billable hours or improve your productivity.

You should review these numbers every month and adjust accordingly.

Hope this helps!
 
Hey Jamin:

Here's something fairly simple, AFTER you do the heavy lifting (no pun intended).

Take last year's costs of doing business - wages, insurance, gas, chains, vehicle payments - everything. Then divide it by the number of days you worked. This is your basic costs of doing business.You can then divide it by the hour or worker or both to figure what you should be charging to clear your costs.

Check this against what your profit was last year. Then see what percentage above your costs it was.

Now the fun part. Start with whatever percentage profit you figure you made per day. Check this with what you think you need to make and see how much more per hour/day it really is. Is it too much, or about right? Do you think you could do a little more? You can always adjust this depending on the job throughout the year.

I had to start doing more of this when my boss would call me and say "WTF happened? That's a looser job!" I would then explain that it's not a looser yet, it's just not as profitable as we thought it was. But I couldn't do that without knowing a bit of the costs of doing business.

Also the bummer is that whatever you charge there's some folks who will complain anyway. I usually let my clients know that if you liked our work before, we have the same guys and for some reason they wanted raises. They usually understand, but not everyone does when there are lowballers around.
 
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Hope this helps!

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Good words Rick.

I'm experimenting (lately with) tagging on 10%. I figured this extra 10% will be set aside for the oh $h!t repairs and winter slow periods. Those two things hurt me the most...

What kills me is the companies who sell jobs 3-4 times my rates. I know their expenses aren't 3-4 times the proportion to my expenses. Or, at least I think so.
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Pricing is a tricky thing. You should look at comparable companies in the area (those that provide about the same level of service) and price similarly. Costs don't necessarily dictate pricing...

Beware getting into a moral debate about pricing...consumers can determine what something is worth on their own.

If you are uncomfortable about making profits, you can always make more donations to non-profits in your area...or, create a new job at your company. Profits are not evil, they are simply the difference between what comes into your company and what goes out.
 
All equipment has an hourly life, and maintenance. I consider both to be asset recovery, and calculate that into my hourly rate. So when I need to replace or maintenance that equipment the cash should be on hand. jm2c
 
It is ok for your prices to be higher than others, even if yours is the highest price......as long as you can give the customer their money's worth in extra VALUE. That value can be promptly returned phone calls, or extra expertise, or punctuality, or full insurance coverage, or no oil spots on their fancy drive, or exceptional clean-up. The thing is, you have to be able to get that information to the customer, so they know they are not comparing apples to apples anymore. I HATE to be the lowest bidder on any job, even if I am bidding against the most expensive companies in town. We do most of our work for people that only got one bid, or are using us despite our bid being higher. 10% profit is good, especially if you have just been breaking even. Raise your prices, and be prepared to inform prospective customers why you are worth the extra money in a confident, but not cocky way. Do your research in your books from last year, so you are not shooting in the dark. You HAVE to know what your breakeven is.
 
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