Price is the thing many people tiptoe around and get uncomfortable about when it comes time to deliver to the customer. Price according to Webster’s Dictionary is:

a: the amount of money given or set as consideration for the sale of a specified thing.

b: the quantity of one thing that is exchanged or demanded in barter or sale for another.

c: the cost at which something is obtained.

Notice that there is no mention of the cost to produce the goods or service being exchanged. But, of course, that cost is a factor in determining price; and the price must be high enough to cover not only the cost of production but also the company’s overhead burden. Gross margin is a common measure for the adequacy of a price. Gross margin is the value over direct cost for production (see example #1 below).

If I have a job with this cost structure and I sell it for $400, I have sold that job at a 50% gross margin. To decide if a 50% gross margin is enough to cover overhead and an acceptable net profit contribution, I need to understand my overhead costs.

Good ratios to shoot for in a service business like snow removal are:

• Vehicle and equipment expense (10% to 15%)
• Overhead (10% to 15%)
• Management salaries (25%)

If we use those ratios and target a 15% net profit, a 65% gross margin would be necessary. Data from the SIMA Foundation Industry Benchmark Study shows that 88% of all the participating companies earn 15% net profit or higher, which supports this model (see example #2 below).

Competitive analysis

I am willing to bet that for those who haven’t regularly increased prices year over year, the increases to maintain current gross and net margins will need to be significant.

Look at some of the most formal service businesses in the world. Industries like television, cellular, internet and trash regularly pass on annual increases. Snow and ice management services are equally or more important than these, so our practices for pricing and renewals should at least keep pace. Doing so allows us to keep pace in offering wages and benefits that are competitive with other industries.

Our duty as business owners and leaders is to grow and serve our team through competitive compensation and benefits packages. Make financial planning part of your list of nonnegotiable activities to inform your target sales and renewal margins based on actual costs and job performance. Deliver annual increases to employees for a job well done and to your customers to maintain your business’s scalability, sustainability and profitability.

David Gallagher is principal for Spiritus Business Advisors. He has over 25 years of experience as a senior service-oriented leader on all aspects of property service. Contact him at david@spiritusba.com.