The Right Price to De-Ice

Every year, thousands of people make the decision to throw their stocking caps into the ring and enter the snow and ice removal business. Armed with a basic knowledge of the necessary services and a healthy dose of entrepreneurial spirit, these soon-to-be winter warriors enter a market with seemingly endless potential.

How could they fail? With society’s ever-growing litigious nature, business owners, property managers and even some homeowners are willing to do whatever it takes to lessen their liability with slip-and-fall accidents during the cold-weather months. Furthermore, the tools for success are so simple — a reliable pickup with a plow on front and a sand and/or salt spreader on back — and you are ready to start signing maintenance contracts.

There’s a popular saying, “If something sounds too good to be true, it probably is,” and these wise words definitely apply to the snow and ice removal industry. As surprising as it may sound, nearly half of all new contractors lose money or go out of business after that first year.

How can the failure rate be so high for an industry with such demand and earning potential? The answer is simple: Most contractors just don’t know how to charge correctly for their services. Fortunately, determining the right price to cover costs and achieve profits is easier than one might think.

We All Make Mistakes…Just Don’t Make These

Before tackling the basic factors that go into a good, solid price, one should first review some of the most common mistakes that many contractors make when deciding what to charge for their services.

One trait of failing contractors is they get hung up on their company size or inexperience when determining price. Since many new contractors see themselves as “small,” they figure this also means that they should be charging less than larger, established contractors. But even though they may be smaller than others in the market, the fact remains that they’re usually delivering the same or comparable services. Furthermore, any fledgling contractor should bear in mind that, regardless of company size, the primary expenses remain relatively the same.

Another common mistake is not setting a pricing system at all. Based on no particularly specific rationale, the contractor charges what he or she feels is adequate based on how badly work is needed — perhaps lowering prices when business is booming and raising prices when times are tight. This is sometimes referred to as the “dartboard method,” because throwing a dart to determine pricing would be just as logical.

Regardless of how one works this pricing wizardry, the main problem with such a method is the contractor is not factoring any of the logical criteria that should go into pricing. The number he or she pulls out of the air may cover expenses and include a reasonable profit margin, but likely it does not. Additionally, this pricing “system” will eventually lose the customers’ confidence. They would much rather employ the services of someone with a predictable pricing system than be surprised when receiving the bill. The key is for contractors to look at this business as a long-term proposition. A variable pricing system may produce profitable results in the short term, but having to re-establish a client base every season is counterproductive at best.

Just as illogical as the dartboard method, letting the customer dictate price is another common mistake that contractors make. Some go into the business with the mindset that they’ll do whatever it takes to get a client’s business. Certainly allowing the client to name their own price will help generate business, but how likely will it be that they’ll choose a price that matches the actual value of the service?

The fallacy held by these contractors is that they’ll use this approach to establish their business and then raise prices to a more reasonable rate after achieving a solid stable of clients. But just as with the dartboard method, this abrupt change in prices will lead to a loss in customer confidence. Additionally, by allowing the customer to dictate price, some clients will be “generated” by that low price — meaning that the unrealistic bargain-basement rate drew them into the market for a snow and ice removal service, but at realistic prices they would simply go without, do it themselves or search for another bargain-basement contractor.

Always remember, there’s a good reason to be in this business, but it’s not for the sake of business alone. The reason is profits — great profits — and establishing a pricing system that is fair and logical should allow for ample business while securing what is most important. When it comes down to it, business owners owe it to themselves, their families, their employees — even their customers — to make a profit, because it allows a business to deliver the quality service a customer deserves.

Finally, of all the mistakes that contractors make, perhaps the most common is basing rates on what the competition is charging. Sure, this method is far more logical than those previously mentioned, but the results can be just as devastating. Competition-based pricing relies on the assumption that other companies in the market know what they’re doing. But the competition is not always right. If it were, the failure rate in this industry wouldn’t be so high. How does one know that the competition he or she is emulating isn’t practicing one of the aforementioned common pricing mistakes?

Even if the competitive company is doing everything right, it doesn’t mean one can simply plug in operating procedures from another company and expect the same results. Like the snowflakes they are paid to maintain, all companies are different, and their individual pricing formulas should be as well.

Covering Costs

There is a common trait among the typical pricing mistakes made by contractors and that’s a lack of planning. No matter how price is derived, failing to consider the actual costs associated with doing business is a huge step in the wrong direction.

So how does one determine a logical price? A good first step is to develop a cost recovery system.

Think about a successful company such as McDonald’s. The price of a Big Mac, or any item on the menu, is no accident. Though the price may seem simple enough, it’s actually based on a very sophisticated cost recovery system that factors in everything from the price of lettuce and sesame seed buns to shipping and labor costs, all the way down to the cost of packaging. And when it’s all said and done, McDonald’s knows exactly what it has to charge for each item to not only cover costs, but also turn a profit.

So what does a $20 billion company have to do with the success of an upstart snow and ice maintenance contractor? When it comes to proper pricing — everything.

Before thinking about actual profits, one needs to determine the different costs involved with doing business and factor them into the overall price. This may sound obvious, but many contractors either make assumptions about the amount that will cover their costs or they simply don’t factor enough information into the equation.

There is nothing especially sophisticated about generating a cost recovery system; it just takes a pencil, paper and a lot of patience. This system tracks a businesses’ operating costs by taking every possible expense into consideration, from the price of salt and sand to the monthly cellular phone bill. Be careful not to leave any stones unturned. If there is a cost associated with one’s business, then it should be included in the cost recovery system.

Equipment

Don’t know where to start? First think about the tools needed to accomplish the job. The equipment being used, such as trucks, plows, spreaders, etc., should all be factored into the service price. Even though these are many times thought of as one-time costs, they need to be taken into account on every job performed.

When thinking about the service vehicle, obviously the monthly payment should be considered, but one must also think of wear and tear. Therefore, factor in costs for routine maintenance such as oil changes, tire rotation and brake maintenance. Don’t forget foreseeable fees like licensing and insurance. Even though licensing would factor down to a couple pennies when considered on a per job cost, it’s these often overlooked expenses that can eventually cause long-term cost recovery problems.

Outside of the service vehicle, consider the costs involved with the other tools of the trade such as snowplows and spreaders. These should also be reflected in a cost recovery analysis. Considering the overall price, standard maintenance activities and the expected service life, one should be able to easily break these investments down into a cost-per-use amount.

Bear in mind that these usage rates should vary geographically. Though the purchase price for this equipment will generally be the same no matter where one operates, the equipment will be used more or less frequently depending on the area. For example, company “A” is based in Buffalo, N.Y., where the average snowfall is around 93 in. per year. Conversely, company “B” is located in Louisville, Ky., which receives about 16 in. of snow annually. Using this information, the cost per use of the equipment and vehicles should be significantly higher in Louisville than in Buffalo as there are far less snow events to cover.

Labor

Whereas recouping equipment costs is relatively straightforward, factoring labor into the price is one area where many contractors make mistakes.

Considering labor costs seems easy enough. If an employee costs a company $10 per hour (including taxes, benefits, etc.) and it takes 30 minutes to complete the average job, then $5 should be added as a line item to the cost recovery analysis for per-job labor expenses. This is pretty basic, but where contractors make a mistake is neglecting to consider themselves as employees.

What many one-person operations do is pay themselves with profits. It may seem logical that everything beyond covering costs is pay for the contractor, but this essentially results in undercutting one’s earning potential. The best way to treat this situation is to always factor an employee wage into the cost analysis, regardless if that employee just happens to be the company owner.

External Influences

Sure, determining the cost recovery value for items with set, predictable rates is one thing, but what about those costs that fluctuate due to external influences such as spreading materials and fuel?

Some contractors address this issue through surcharges. When initially setting up a cost recovery system, the contractor will use the current market price for these varying expenses. Then when costs begin to rise, he or she will figure the difference and raise the service price in the form of a surcharge.

The problem with this system goes back to the customer confidence issue. Fuel and material costs are constantly in flux. Therefore, it’s only a matter of time before a contractor has to add some sort of surcharge to the customer’s bill. It may only be a couple of dollars, but it could be enough to give the customer the perception of being nickle’d and dime’d to death. This might seem ludicrous to assume a customer will have a problem with a slight surcharge when the overall service price may be upward of $100, but it’s sometimes the smallest penalties and fees that can turn into a public relations problem.

For instance, consider the typical phone bill. Does anyone ever pay the stated service “price?” In addition to the standard $39 monthly charge, there may be a universal service charge, 911 surcharge, touch-tone phone fee, etc. At the end of the bill, that $39 has somehow turned into $49, and the result is an untrusting customer.

Avoid a customer confidence issue and instead work assumed cost fluctuations into the cost recovery system. This does involve a little guesswork, but it doesn’t require the ability of future sight to work well.

Consider the current tumultuous gas prices. From day to day, it’s seemingly impossible to predict what the price will be. But using a bit of common sense and an understanding of the recent price history, a cost can be generated that should cover unforeseen price hikes.

Assume that it’s the first day of the winter maintenance season and gas prices are $2.75 per gallon. When determining what to factor into the cost recovery system for fuel, the first step is to predict what gas will peak at during the season. Looking at the previous season’s gas price history and considering recent trends, one assumes that the price may peak at $3.25 per gallon. Using this prediction, a wise move is to set fuel cost recovery somewhere in the middle — in this case, $3 per gallon. This is enough to more than cover for current prices, while not throwing customer costs through the roof.

Projecting this scenario further illustrates how such a system accommodates an unpredictable cost. Let’s say that from November through December, gas prices fluctuate between $2.75 to $2.95 per gallon, but the cost recovery amount for fuel is still fully adequate. Then, in January, the prices jump beyond $3 per gallon and settle in the $3.15 range throughout February. Though the current $3 per gallon cost assumption is no longer adequate, consider that in November and December this contractor was collecting anywhere from an additional 5 to 25 cents per gallon of gas consumed. The idea is that the extra amount collected will compensate for a relatively short-term price hike without having to resort to additional surcharges.

Of course, the system isn’t perfect. If gas prices remain higher than the cost estimate for an extended duration, it may be necessary to raise service prices to accommodate. But in a situation like this, most customers will be more understanding as they too are seeing the difference at the pumps.

With spreading material costs, the same general principle applies. Consider the average costs and charge a higher-than-current rate to accommodate for fluctuations. In some ways, factoring a constant rate for material costs is more important than fuel since customers are rarely personally buying hundreds of pounds of bulk ice melt and are likely to question mysterious surcharges.

There are several other factors that work into a cost recovery system, but the key is to understand the main goal of this process — and that’s to determine the “bottom line,” or the absolute lowest rate a contractor can charge to break even. Add to this a reasonable amount of profit to achieve a final service price that the market will bear. It’s important to keep in mind that a snow and ice removal service allows one the opportunity to sell based on the value of the service and not the actual cost.

How Do You Rate?

Conducting a cost recovery analysis will break a contractor’s expenses down to a per-hour amount that needs to be recouped, but what rate system should one use to charge for individual jobs? Should it be a flat rate, hourly rate or a combination of the two? The best answer lies in the type of customers a contractor serves.

Most often, new contractors gravitate to an hourly rate system to charge for their services. From some contractors’ point of view, this is a more fair system because a customer pays only for the amount of work done. But, with time and experience, an hourly-rate system may undercut a contractor’s profits, as it will likely take less time to service the same customer after becoming more familiar with the job – therefore meaning less billings.

Does this mean a flat-rate system is a better way of charging for services? Well, consider a contractor who is servicing a shopping center parking lot on a flat rate. Typically, it takes three hours to service the entire parking lot. But in cases when excessive amounts of snow falls or other obstacles must be overcome, such as shopping carts that need to be moved, this same job could take up to six hours. In this case, the contractor is doing more work and making less, or perhaps losing money.

The right pricing system choice depends on the type of work a contractor is typically doing. In some cases, the best solution is a combination of the two systems. For smaller jobs that take less than an hour, a flat rate may be employed, whereas an hourly rate is used for larger, less predictable jobs.

Another option that many winter maintenance businesses offer is a seasonal contract. Instead of breaking pricing down to per-application pricing, they instead charge a flat rate to cover the entire season, with no regard for how often a customer must be serviced.

From a contractor’s point of view, the benefit of such a system is going into the season with guaranteed money. Sure, one season may be particularly heavy and the contractor actually loses money when compared with a per-application arrangement, but the next year may be light and the contractor makes out like a bandit. The contractor is basically willing to bet that over a certain period of time – perhaps five years – that the applications will average out, and he or she will have the benefit of going into each season with a set schedule and cash flow.

But there’s a big problem with such a system. It assumes that the customer will still be there five years down the road. Imagine a situation where a customer paid for an entire contract and it ended up being an extraordinarily light season. Knowing that he or she overpaid for the actual services rendered, one will likely become a less-than-satisfied customer. In such a case, the customer may ask for a credit due to the lack of service events, and knowing that the contract could very well be cancelled, many contractors will cave in to such demands. With this scenario, the idea that everything will average out in the end is baseless.

Certainly, there are several other billing methods that could be highlighted. No single article could address them all. But what’s important to remember is that no single pricing method is either right or wrong at face value, but one will be more logical depending upon a company’s clientele. Concentrate on the method that is most effective and profitable in the long run, and the correct choice will be evident.

Sell the Value

Following a thorough assessment of pricing and all the necessary criteria that should be considered, a common retort lies on the tongues of most contractors new to the game: “The market just won’t bear the price.” If that truly is the case, then one either needs to determine how to reduce costs or re-evaluate if being in the snow and ice maintenance business is feasible. However, for the most part, the problem does not lie in the market, but instead in the limitations set by the contractors themselves. Many assume that the market won’t bear a price, but do they really know?

It is true that many potential customers look at price first. This is the portion of the market that causes so many to undervalue their services. Nonetheless, the question most often heard by contractors is not, “How much will this cost?” Instead it’s, “How soon can you get here?” and “How quickly can you finish?” This is a clear indication that a sizable portion of the market is most concerned with the quality of service. These are customers willing to pay a premium price for faster response times, quicker job completion or value-added services, such as sidewalk maintenance and deicing.

It all comes down to recognizing the market for what it is and making a decision as to the type of contractor you want to be: the low-price leader or the premium service provider. One can’t be everything to everyone. But if you can work for clients that value quality over price, allowing you the opportunity to earn more profits in the process, why would you want to be?

Mark Hall is a director of marketing and sales for SnowEx, based in Warren, Mich.