Business Smarts: Setting Contract Minimums - The Edge from the National Association of Landscape Professionals

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Business Smarts: Setting Contract Minimums

The first year Landscape America, based in Wrentham, Massachusetts, implemented contract minimums they were able to reduce their clients from 300 to 180 and increase their revenue at the same time.

“We wish we had done it sooner,” says Doug McDuff, president of Landscape America. “It would have saved a lot of headaches and allowed us to improve our quality sooner for the clients who cared.”

The company implemented a contract minimum for their residential maintenance services in 2014-2015. McDuff says as their business grew in revenue, so did their overhead so they started looking for ways to maximize their account and production managers’ time and improve their overall maintenance portfolio.

“Contract minimums in both dollar value and number of services helped us filter our clients and deliver better service to fewer people,” McDuff says. “We also achieved a higher revenue per client and allowed our managers to focus on serving fewer relationships in more impactful ways.”

Tom Hougnon, COO of Landscapes Unlimited based in St. Paul, Minnesota, says they’ve always been aware of the minimum amount needed to cover the cost of getting a crew out to a site, but they implemented minimums as they’ve looked to grow their commercial maintenance revenue.

“I will not go to a site for less than $1,200 a month,” Hougnon says. “Four times a month, that’s $300 a week. If it’s less than $1,200 a month, there better be a building right next to it. There better be some density or it may be part of a customer portfolio that’s very valuable. We might take a little bit of a hit on one because there better be a good reason we’re not getting that minimum.”

Determining Your Minimum

Obviously, your contract minimum should include your overhead costs. Hougnon says you can’t set your minimums without knowing your true costs and what you need to be profitable.

“We developed our guidelines by focusing on our existing client base and understanding which clients were most profitable, met our core values (one of them being growth) and appreciated the level of service we were delivering,” McDuff says. “Once we understood what our ideal client looked like, we used that as a base (both in contract value and number of services they bought) and looked for new clients who were willing to spend at least that amount.”

Hougnon says you also have to remember how many workers you are bidding for the specific job. If you add another person to the crew that job becomes a nightmare for profitability.

“Once you got the job, you have to know how you bid the job so you’re going to make money,” Hougnon says. “You got to go back and look and say, ‘Well, why did we price it that way? Make sure you’re living up to that estimate throughout the season, month to month.”

He says they’ve had to raise their minimum pricing by 25 to 30% over the last two to three years due to labor costs.

McDuff says they’ve increased their contract value and the minimum number of services clients need to buy. They have continued to refine their portfolio when they realized there was more opportunity to grow with higher value-driven clients.

Pros and Cons of Contract Minimums

Some of the main benefits of having contract minimums include increasing your profitability and speeding up the process of identifying leads who are a good fit for your business.

“I think having minimums and understanding your pricing leads to understanding what your best customer base is,” Hougnon says.

Hougnon adds it provides some guidelines and continuity for your estimators.

“Your estimating stays more consistent on those smaller sites where you can lose your margin really quick,” Hougnon says.

McDuff says their minimums have allowed their sales team to filter through client leads and aid customers who might not be a good fit in the decision process.

“I would say it’s pretty rare to have someone get upset after we explain our process and offer to refer them to another landscaper who might be a better fit,” McDuff says. “More often than not, people appreciate the explanation and referral.”

One of the main cons to having price minimums is losing work to clients who can’t pay that amount. Hougnon advises reviewing your minimum regularly to ensure it’s not too high and a result of poor productivity.

If you are seeking to build route density, you will need to be more flexible with your contract minimums. Hougnon says you also need to consider other sources of revenue that may come from that maintenance client through enhancements or additional properties.

“If your business is focused on lower price and serving as many clients as possible (think Walmart), then maybe contract minimums aren’t necessary,” McDuff says. “If you’re looking to attract clients that are willing to spend money for high-value service and product (think Apple), having contract minimums will lead to more of those pre-value driven clients.”

Jill Odom

Jill Odom is the senior content manager for NALP.