Profit markup lesson from an outdoor power equipment dealer.

We are always having great lawn care business discussions in the Gopher Lawn Care Business Forum and to miss a day of the latest posts is to miss a chance at reading some real quality information. This discussion started off on the topic of dealing with customers. From that it morphed into a profit markup lesson that I just had to pass on to you.

Let’s jump into the discussion mid-stream. You can read the entire lawn care business discussion here.

Lawn Care Business Profit Markup Lesson

Lawn Care Business Profit Markup Lesson

We initially were talking about using craigslist.com as a way to attract lawn care customers and I had said “I think this is something that many lawn care business owners on the forum have found. Craigslist is full of tire kicker customers and cheap customers. However it is a good way to get your feet wet and get the gears of your business spinning. Once you get yourself going, you should constantly be on the look out for newer better customers that you can either add to your current customer base or replace an older customer.

I think you may find that 10% of your clients take up 90% of your time. Ultimately, it’s my view, these are the customers that need to be replaced. You should enjoy your business and if you are finding yourself getting ground down by unhappy people that are also your customers, look to replacing them with others who aren’t so nit-picky.”

Eli: “I think I have to concur with you. I personally feel like there are certain customers that “the competition” can have. Years ago, when I was just a kid, a young guy from our community decided to open a outdoor power equipment shop. This person happened to be from a kind of “uppity” family. I recall his dad standing in our shop and telling my dad that we were charging to much on a perticular item. I knew for a fact that for the $70-80 item he was talking about my dad had marked up no more than 10% from actual cost. Just for the record, there is no way to operate on a 10% overall mark up. The minimum to “survive” is about 25% due to a number of reasons.

Anyway, when this guy started his shop he made it clear that he intended to put my dad out of business in less than a year. My dad said, first of all, there is enough work for both of us, and second, he will attract others like him who will be looking for a “cheap deal”. We started sending those type customers to him. He shortly told my dad that he just can not afford to stay in business. Meanwhile, my dad has never had to advertise and has never suffered from a lack of work, even now, over 10 years later……

So I guess the moral of the story is, you kinda get what you pay for. You may be able to get some good customers on craigslist but be aware they are “bargain hunting”, “tire kicking”, “cheap” customers just like Steve said. As a business, always be looking to keep customers as happy as possible but don’t cry if the cheap ones move along to your competitor….. There comes a time when a customer costs you more than they are worth. But still, you just want them to go away, not go away mad……”

Steve: “Do you feel there is a national average on markups at power equipment dealerships? If so, what would the range be? And what reasons do you have to shoot for 25%.

I bet a lot of these reasons apply to a lawn care business as well.”

Eli: “Actually I meant to say 20% but for the sake of the conversation lets go with 25% like I said. I find myself charging more like an average of 30-40% mark up. The quick answer is to help with lost labor costs and overhead expenses (electricity, tools, thousands of dollars in parts investment, etc.). I am a small shop and estimate a tool investment, both special tools and non-specials tools, of about $500-750. This is one set of tools, mostly Craftsman or second hand tools.

I have come up with some generic figures and examples that I remember off the top of my head.

The reasons for a minimum of 25% mark up are multiple:

1) I purchase a product today for $2, stock it for 2 years and sell it for a 25% mark up at $2.67. Now I go to restock and find myself paying $2.35 for the same product. I have now made $0.32 on a 2 year investment. A $0.35 rise in product cost can easily take place every year, but again, this is for the sake of conversation. We need to look at the parts as interest bearing investments.

2) I have had to take the time to order the product, stock, enter in computer inventory, pull from shelves, and invoice for the sale. Let’s say the average dealer in the US only charges $30 per hour labor rate (average is above $60). If this take even takes me only 3 minutes to complete (order, stock, enter in computer inventory, pull from shelves, and invoice for the sale) I am doing good. Now figure up the labor cost associated with this: $1.50. I have now lost $1.12.

Let’s say the product costs me $60.00, shipping included. Now my profits are $20.00 minus my costs to order, stock, enter in computer inventory, pull from shelves, and invoice for the sale. Now my profits have fallen to $18.50. Unfortunately we can not mark up this much on every product but on other products we can do more. Every shop has at least one or more items that literally costs them money to sell.

3) Parts profits help defray $$$ lost in labor. The actual national “billable labor” average is currently believed to be 60% or lower. What this means is if I employ Joe as a mechanic and pay him for 8 hours per day, I will only be able to bill 60% of the 8 hours (36 minutes out of every 60 minutes) to my customers. If I pay Joe $10 per hour with no benefits, he has cost me $80 for the day. If I can charge 60% of his time to my customers today, I have had an “above average day” and should be able to charge $144 in labor. That makes me $66 for the day while Joe made $80 today. And I have all the headache of the shop and he goes home after 8 hours while I continue to slave away over paperwork.

So this is where that extra $18.50 for profit helps. If I charged only a 10% mark up on that product the figures would look like this:

Product cost: $60 + Mark up: $6.67 = $66.67 - costs: $1.50 = Profit: $5.17

Now I would have made $5.17 on a $60 investment. Not too bad if it comes in and I handed right over to the customer who installs the product. But if my shop installs it and it takes 30 minutes to install, I have probably lost money.

So you ask, where do the other 24 minutes of the hour go? Consider this scenario:

Bill the homeowner brings in his riding mower. It has a flat tire and off the bead because it was sitting like that all winter, does not start, has a hydro tranny, needs tuned up, and checked over. Joe grabs the clip board, gatheres Bill’s info, the mower and Engine info, Bill tells Joe what he wants done with the mower and Joe notes this info on the Work Order. This takes 4 minutes. 20 minutes left. Joe gets ready to unload the mower. Since the tire is flat and off the bead it will have to be lifted or dragged off the truck or trailer. It has a hydro tranny so it does not roll when in neutral. Now I have to help Joe unload and move it into the shop. 5 minutes later we have it unloaded and in the shop, read to work on it. 5 minutes x 2 = 10 minutes. Only 10 minutes left. During the next 5 minutes Joe takes the engine and mower info, looks up and picks the parts required for the tuneup and repair. 5 minutes left. Tire is fixed, mower is tuned up, and Joe starts the mower and takes it for a test drive. takes 1 minute. Joe returns to the shop and completes the invoice and calls Bill to tell him the mower is done. Bill lives 2 miles away and is at the shop by the time Joe completes the invoice Bill has arrived. 5 minutes have been used up. They load the mower, Bill looks the mower over and decides he likes the way the engine starts and is happy with the service. Bill and Joe go back to the shop and Bill pays Joe. Bill asks Joe a question about Bill’s old chain saw and string trimmer. They decide the saw and trimmer are not worth spending money on. They have taken 10 minutes to do all this. Now we have robbed 10 minutes from the next hour……. Oh and we have forgotten to figure in the 3 minutes it took me to order, stock, etc. the part……

How does this apply to a landscaper? I’ll let a landscaper give us a scenario on an “average job”, say a mow job, on that.

Remember all your overhead expense of running your truck/trailer, buying gas, cost of maintenance, drive time, unload/load time, time spent signing contract, obtaining payment for services, etc. You also have to figure in the original cost of your equipment, anticipated repairs needed (i.e. hitting something in the yard and needing to replace a bearing assy and blade, etc.). I am sure there is some type of equation available to determine the estimated repair/maintenance cost of a machine.

I suppose if you expect that a mow job takes you 30 minutes you need to be able to charge around 1 hour labor. I have not paid any attention how your estimators work but I suppose you have figured all this in.”

This is a fantastic insight into the operations of an outdoor power equipment dealership but it also applies to a lawn care business. As Eli said, you have to account for everything if you are looking to make a profit and be in business for the long haul.

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