The Great Rate Debate: When and How Much to Raise Them

by | Dec 12, 2022 | Blog, featured, Uncategorized | 0 comments

By Jim Westover, President

LandOpt just finished our annual financial planning conference. For three days, our leadership team, coaches and members crunched numbers and cranked out plans for 2023. No surprise, the elephant in the room, or in our case the yard, was inflation. That – and the possibility of a recession – naturally lead to discussion and debate over rates for next year.

Ours is a competitive industry; make no mistake about it. A lot of clients, especially commercial ones, have been trained over the years to go for the low bid. That makes raising prices a challenge. At the same time, customers understand the cost of everything has gone up, and they are willing to accept higher rates. But how much higher? That’s the really tough question to answer.

During our financial planning, we presented members with our recommendations for 2023. The economic outlook is not pretty: overall inflation is running above 8%, raw materials are up 10 % and labor, using the annual social security increase as a guide, will cost close to 9% more. Then there is the potential for recession.

However, we see this as an opportunity for strong contractors to thrive, assuming they have solid financial plans in place and price their work properly. If there is a recession, they will be in a great position to take advantage of opportunities that will arise on the flip side.

The Magic Number is…

We strongly recommended our members increase their 2023 rates by a minimum of 4.4 % to offset rising costs. An 8.8 % rate hike is suggested to achieve recent profit margins. Pushing increases to 10 % or more is advisable when possible.

Predicting a customer’s breaking point is not always easy. We recommend landscapers look closely at contracts that are expiring and adjust rates, factoring in the higher costs of delivering quality service. Once that’s done, it is important to communicate the reasons for the increases with clients as far in advance as possible.

Remember, underestimating costs can be devastating to your bottom line, as it is very difficult to raise prices down the road.

What if a customer balks? While not always easy, it is in your best interest to exit relationships that are not sufficiently profitable or result in substandard service being delivered. Our members understand that approach and benefit from it. In fact, some are already fully booked for next year.

More Ways to Increase Profits in 2023

Inflation is like a thief in the night. Unfortunately, there’s no video alarm system to alert you to your margins quietly being eroded, so monitor your performance monthly and adjust your plans as needed. This could include changing prices midyear, stocking up on materials if prices unexpectedly go down and redirecting marketing to residential clients, using cost-effective digital strategies.

Also consider these actions that may add a few points to your bottom line:

  1. Scrutinize new opportunities carefully. Some are not as profitable as you might first think.
  2. Ask your vendors to help you find efficiencies and savings, including bulk purchases. LandOpt members have access to preferred pricing and special promotions from many of our trusted Channel Partners.
  3. Build cost escalators and fuel surcharges into contracts.
  4. If you are planning capital purchases, look into electric equipment.
  5. Explore using H-2B workers.
  6. Consider taking on more ongoing maintenance work as a safety net, should rising interest rates negatively impact construction projects.

Last, keep in mind that the most successful contractors focus on their margins rather than simply sales volume. Use this approach and you can work less, make more money and enjoy your business more — even when faced with challenging conditions.

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