The question of whether it’s the right time to add a new offering to your landscape business or eliminate a service line calls for evaluation of several different factors, including your financial metrics, your staff’s capacity and customer demand.
When to Diversify
Fred Haskett, founder of TrueWinds Consulting, says it’s a good time to consider diversifying if your current offerings face slowing sales after you’ve ensured this isn’t due to poor marketing or sales execution.
“Diversification can be a crutch for growth on occasion, so you want to be careful about that,” Haskett says.
Greg Herring, owner of The Herring Group, adds that a company’s operating profit margin for the trailing 12 months should be consistently above 10% after straight-line depreciation before considering diversifying.
“We believe that the operating profit margin is a measure of customer satisfaction, management effectiveness and operating efficiency,” Herring says. “If a company’s operating profit margin is not at least 10% for the last 12 months, then management’s focus ought to be on becoming more profitable on their existing services.”
Haskett says he’s found at times that bundling services, not necessarily diversifying, has been effective at increasing margins and customer retention as you’re doing more for the client, and they are happier with their overall landscape.
Jack Jostes, president and CEO of Ramblin Jackson Inc., says adding services should only be considered if you have the capacity to do it well.
“One of the biggest risks I see with landscape companies is that they think maintenance will be easy recurring revenue and won’t that be great?” Jostes says. “They may not have the staff or the equipment, and I think most importantly, the managers in place to do it well.”
Haskett agrees you need to have a bench of account managers and production managers who can take on an additional service line.
“You’re increasing opportunities for them to continue to grow themselves, both from a compensation standpoint and a more responsibility standpoint,” Haskett says. “It’s a good thing to develop. It helps you develop your team. It helps you hang on to talent. It helps you attract talent in that regard.”
Aside from diversifying your services, Haskett says you can also consider decentralizing your geography by opening additional branches with new service markets.
Herring notes that landscape companies almost never get more profitable simply by growing revenue.
“Expanding into new services usually creates more complexity, which causes the operating profit margin to decline without strong leadership,” Herring says.
When to Streamline
If staffing a particular service is extremely challenging or if your profit margins are weak, discontinuing certain offerings should be considered.
“If a $2 million plus landscape company has an operating profit margin of less than 5%, then something needs to change,” Herring says. “We have observed that many highly profitable companies have significant subcontract relationships for items like mulch and plant health care. In some cases, the landscape company actually makes a higher profit by subcontracting rather than self-performing these ancillary services.”
Jostes says in one case, a landscape company discontinued their snow removal because they weren’t staffed to do it well and couldn’t price competitively.
“Don’t be afraid to specialize,” Jostes says. “I know a design-build company that is twice as profitable as the rest of my companies that do ‘everything,’ and he has had acquisition offers. There’s a belief that you can only sell your landscape company if you have maintenance and it’s not necessarily true. Don’t be afraid to specialize, and don’t be afraid to stop what isn’t working.”
You may also want to move away from a particular customer base to simplify your processes. Herring notes if your company is reducing services, you need to make sure your total revenue is still going to grow at least 10% per year. If not, you will likely need to reduce overhead expenses.
Metrics to Evaluate
When deciding to add or subtract a service, Haskett says owners shouldn’t be going off a gut feeling. Rather, you need to analyze your data to make an informed decision.
Haskett says you need to create a chart of accounts for your P&L that is based on your revenue streams. This means instead of everything falling under ‘lawn care,’ separate out services like seeding, aeration, fungicides, grub control, etc. into their own lines.
“If you don’t have the ancillary things that you do separated out, then you don’t know where your profits are derived from at the gross margin level if you’re lumping things together,” Haskett says.
Once these are separated out, you can track your direct costs of labor and material associated with each revenue stream. Haskett says this can reveal if you need to improve your pricing or if diversifying really is a good idea.
“You want to ask ‘Why am I doing this? What is my data telling me?” Haskett says. “If your data is very generic, you don’t know what you don’t know. There’s a whole analytical process to understand where we’re strong, where we’re weak, where we’re making our most margins, where we’re making the least. Let’s maybe work on that before we start just adding stuff to the mix.”
Herring agrees that the operating profit margin of each division can tell you where your company is weak, strong and where there are opportunities.
Jostes says you should also consider your ideal customer base, where they are located, what services they want and their typical budget.
“Sometimes it takes looking at profit and loss by customer,” Jostes says. “Looking at your gross profit margin by customer and by route and by zip code can help you figure out, is this area profitable? If it’s not, is it because we don’t have the route density? Do we just need more customers, or is this area just not a good fit for us?”
