U.S. inflation hit a 30-year high in October, according to the Bureau of Labor Statistics. Couple this with the need to raise employees’ wages to stay competitive and your gross profit margins have probably been shrinking for a while now.
While talking to customers about your increased rates may be daunting, it is an absolute must if your lawn care or landscape company still wants to make a profit and stay in business. Greg Herring, owner of The Herring Group, says not raising your prices is one of the fundamental reasons why landscape companies have poor profitability.
“Landscapers need to raise prices because employees’ wages have been increasing significantly for several years,” Herring says. “More recently, the cost of materials and fuel have increased significantly. The USA has experienced very low inflation since 1983. That means that people younger than 38 have never lived in an inflationary economy. It’s not only important for landscapers to raise prices; it is also important for them to explain why they are raising their prices.”
How Often Should You Raise Your Rates
Kevin Kehoe, founder of Aspire, says you should train your customers to expect that like every other service and product they purchase, landscape services are subject to the laws of inflation and they pay for that. He adds that if owners haven’t been doing it already, they should be raising their rates yearly.
“Yes, there are multiyear contracts, but they too should have escalators based on inflation and in some cases purchase history – as in the more extras they buy the lower the inflation rate might be,” Kehoe says.
Meanwhile, Herring suggests only raising rates in the years when workers will expect a raise. When you calculate how much to raise your rates by, Herring says they should be raised by the same percentage that crew wages are increasing.
Kehoe says you should take into account the average wage rate per hour, the average percentage of overtime paid to crews and overhead as a percent of total hours sold.
Communicating New Rates
Once you’ve calculated your new rates, there’s the task of letting your customers know. You may be concerned that you’ll lose a lot of your clients by raising your rates and this may be what has prevented you from doing so in the past.
Kehoe says it’s likely you won’t lose a lot of customers, and there are a number of woefully unprofitable clients that you should lose.
“There is no reason for landscapers to serve customers with really low gross margins,” Herring says. “The price increases for these customers should be done all at once. For customers with low gross margins, it would be better to lose them if they do not agree to the new price.”
Kehoe says it is important to take into account the total customer ‘book of business’ profitability as there may be one or two properties that are low margin in a portfolio.
Herring says the messaging should be relevant to the customer type and you should link the price increase to what they have experienced personally.
“There is a lot of coverage of inflation in the media,” Herring says. “People experience inflation when they go to the grocery store and gas station. Landscapers should tie their price increases to what their customers are likely experiencing.”
Kehoe says the message should convey how you deliver great work to loyal customers, but quality is priceless in a sense and like everyone else, prices go up.
An example of a landscape professional who had to put this in practice is Loriena Harrington, owner of Beautiful Blooms, LLC, based in Menomonee Falls, Wisconsin.
Harrington typically communicates with her clients in a causal newsletter about how the season is going so in the spring they were already aware of Beautiful Blooms’ labor situation. In July, she had to send out a mass email to 240 clients about adding an 8.5 percent surcharge to their invoice for the remainder of the season.
This was to account for the mid-season wage increase she was giving her existing staff and to attract more applicants. Also, materials and delivery fees needed to be compensated for as they were all on the rise. Harrington explained this in the letter and ended it with this:
“You made a choice and hired us for a reason – you believe that Beautiful Blooms provides great service and excellence in horticulture. We deliver on what we say we will do, and we do not cut corners to save on expense. We promise to continue to do just that. Your Beautiful Blooms Team is working incredibly hard for you right now and we appreciate your loyalty.”
Harrington also drafted a pre-written response in case of pushback, where she elaborated on the reasons driving the decision and clarified the surcharge was not a ‘money grab’ in any way.
Out of the 240 clients, two individuals canceled their contract while around 15-20 sent responses of understanding. Three clients even sent actually thank you letters, thanking Harrington for being responsible and doing what she felt was necessary to maintain a quality workforce and grow it.
The bottom line is, there is no ‘easy’ time to raise prices. However, it is necessary and now with the supply chain shortages and labor challenges, price increases are expected and understood more readily by customers.