Price or Overhead

When a quarter goes slow, most owners do the same thing first. They go looking for costs to cut.

It's the move fully in your control. You don't have to ask a customer for anything. You just cancel things.

Here's an example with made-up numbers.

A landscaping company in Waipahu brings in $600,000 a year. It spends $90,000 on overhead. That's what it costs to keep the business open whether or not a single yard gets mowed: the lease on the base yard, insurance, office pay, software and phones.

After a slow quarter, the owner spends a weekend going through all of it. Two software subscriptions nobody opens get canceled. The insurance gets shopped. The phone plans get switched. The office hours get trimmed. By Sunday night, overhead is down 10 percent.

That's $9,000 a year.

Now the other choice. Raise prices 3 percent.

On $600,000 of sales, 3 percent is $18,000 a year. That's twice what the weekend found, without canceling anything or cutting anyone's hours.

Why the small price rise wins

Three percent of $600,000 is more than ten percent of $90,000. Sales are almost always much bigger than overhead, so a small change in price moves more money than a big change in costs.

To get $18,000 from cutting alone, this owner would have to take overhead down 20 percent. At that point you're cutting things the business needs to run.

And you can only cancel a subscription once. Next year, finding another 10 percent is harder, because the easy cuts are already gone.

But what if customers leave?

Say this company's job costs, the crew pay, fuel, plants and dump fees, run 60 percent of sales. Before any change, the owner makes $150,000 a year. With a 3 percent rise and every customer staying, that goes to $168,000.

The owner could lose about 7 percent of the work, roughly one customer in fifteen, and still make the same $150,000 as before, with fewer jobs to do.

In Not Every Sale Is a Good Sale, I did this math for one service. It works the same way across the whole business.

The question I'd ask first

When did you last raise your prices?

For a lot of owners, the honest answer is the year they started. Almost everything you pay for has gone up since then. If your prices haven't, every customer has been getting a discount you never decided to give.

Cutting waste is still worth doing. Just don't let it be the only thing you try.

Try It: Price or Cost

1. I built a free calculator for this: Price or Overhead. It runs on your own screen and collects nothing. Run a Profit and Loss for the last 12 months and put in your total sales and your overhead. Overhead is rent, insurance, software and office pay, not what a job costs you to do. A good answer is knowing, in dollars, which change is worth more to your business.
2. Go down your overhead lines and mark each one that could really come down 10 percent without hurting the work. A good answer is a short list with dollar amounts next to each line, or the honest answer that there isn't much there. Either one tells you where the money is.
3. Write down the date of your last price increase. If it was more than a year ago, pick a date and a percent for the next one, and put it on your calendar. A good answer is a date and a percent you've written down.

The calculator assumes every customer stays. You know your customers better than any calculator does. How many you could afford to lose depends on how much of each sale your job costs eat. The more you keep from each job, the fewer customers you can lose before the rise stops paying.