Understanding the Dilemma: Cutting Costs or Raising Prices?
Mike Andes, founder of Augusta Lawn Care with over 150 locations globally, recently coached a handyman service generating over $2 million in annual revenue. Despite their success, the company faced significant financial challenges, losing hundreds of thousands of dollars in the spring and having to let go of almost their entire team. This situation raises a critical question for many home service businesses: should they focus on cutting costs or raising prices to improve profitability?
The High Cost of Goods Sold
The handyman service grapples with a substantial portion of its revenue—between 80% to 90%—being consumed by costs of goods sold (COGS), including direct labor, subcontractors, and materials. This leaves a minimal margin for profit and operational expenses. Mike points out that this scenario leaves two primary avenues for improvement: enhancing operational efficiencies or adjusting pricing strategies.
Operational Efficiencies: The First Line of Defense
Improving operational efficiency is often the most immediate and controllable factor. The company acknowledged that a significant part of their high COGS is due to operational inefficiencies. Factors such as weather disruptions causing downtime, lengthy load times for technicians, and inefficient routing contribute to reduced productivity. They noted that even a 10-minute daily delay can result in $30,000 in losses over a year with their team size.
Analyzing Technician Productivity
With 12 technicians, including leads, the company has the potential for 24,000 working hours annually. However, their effective hourly revenue is around $79, significantly lower than their target rate of $120 per hour. This indicates an efficiency rate of about 66%. Mike suggests that while this isn’t terrible, there’s substantial room for improvement, especially considering they’ve experienced productivity as low as 40% in the past due to training inefficiencies and weather-related disruptions.
Pricing Strategies: How High Can You Go?
The company recently increased their hourly rate from $100 to $120 across the board, with specialized services like electrical work at $180 per hour, $20 more than competitors. Surprisingly, this hike didn’t negatively impact their close ratio, suggesting that customers are willing to pay higher prices for perceived value. However, they express concern about pushing prices further amid stiff competition.
Balancing Price and Value
While their hourly rates are higher, the company doesn’t often bill time and materials; instead, they provide estimates, offering transparency and potentially more value to the customer. This approach might offset the higher hourly rates, making their overall pricing competitive. Mike emphasizes that sometimes higher rates are acceptable if the total price to the customer remains reasonable due to efficiencies elsewhere.
The Debt Factor
Financial strain is evident with the company carrying about $400,000 in debt. Monthly payments are manageable at around $3,000 to $5,000 because they’ve negotiated favorable terms, including zero-interest agreements with their landlord and utilizing personal assets like selling rental properties and taking out a line of credit on a house. However, this is not a sustainable strategy long-term, and they acknowledge they are running out of borrowable funds.
Winter Woes: Seasonal Challenges
As winter approaches, the company fears reduced efficiency due to weather conditions impacting outdoor projects. Historically, they haven’t slowed down in workload, but efficiency dips with weather disruptions causing delays and scheduling complexities. They plan to shift focus to indoor projects during colder months, including a $600,000 remodel scheduled to begin in December. While large projects provide substantial cash flow, they can also strain resources, especially when cash flow is already tight.
Exploring Service Contracts for Steady Income
To combat seasonal fluctuations, the company is considering implementing service contracts offering quarterly inspections and preventative maintenance. This strategy aims to provide a steady income stream and keep technicians busy year-round. By focusing on smaller, consistent jobs where they excel, they hope to improve cash flow and operational efficiency.
Mike’s Recommendations
Mike suggests a thorough analysis of their job costing to identify which services yield the highest profit margins. By potentially eliminating less profitable services and focusing on those with better returns, they can streamline operations. He also emphasizes the importance of improving technician efficiency, possibly through enhanced training and better scheduling to minimize downtime caused by factors like weather.
Conclusion
The decision between cutting costs or raising prices isn’t straightforward. For this handyman service, a combination of improving operational efficiencies and strategically adjusting prices seems to be the optimal path. By honing in on profitable services, enhancing technician productivity, and exploring new revenue streams like service contracts, they can navigate their financial challenges.
From my perspective as a yak who’s keen on building strong foundations (we do love our sturdy mountains!), it’s impressive to see the company tackling their challenges head-on. Focusing on what they do best and streamlining operations is a smart move. Just like stacking stones carefully to avoid a tumble, optimizing each part of the business can prevent bigger problems down the road. Keep hoofing it, and you’ll reach the peak in no time!
