Landscapers see the word “profit” and immediately associate it with money in their pocket. Sure, profit is profit, but are you making the most profit your landscape business possibly can off of a job? Is your landscape business leaving more money on the table with weak estimates? Properly pricing landscaping services is a simple concept that most landscape business owners think they have perfected to a science. More often than not, there are metrics not being accounted for that leave less money for you and your crew to take home after a job is done. Landscape business owners should learn the difference between net profit margin and net profit markup since one word can make a huge difference.
It might seem like semantics, but profit markups and margins are drastically different formulas. We’ll check out how your business should price work by showing the key differences between calculating net profit margins and net profit markups.
The final component to your prices in landscaping estimates is a profit margin. You need to price your work using an expected profit margin. If you’ve built an operating budget, your Net Profit Margin, as shown on your forecast profit and loss statement is a good start, but your margin doesn’t have to match that number. Your margin can be lower or higher, depending on the situation.
When you are thinking about profit, remember that every job or service needs careful attention to this factor. Competitive jobs with many bidders typically have lower profit margins than custom design-build work. You will often find yourself pricing some work at one profit margin, and other work at a different profit margin.
There are two easy steps to add a net profit margin.
The formula to add a net profit margin to a bid looks like this:
Total Cost ($) / (1 – Desired net profit margin (%)) = Price to customer ($)
Remember: When you are lowering your prices, you are lowering your profit. You need to be firm on the costs as defined in your landscaping estimate. Don’t be tempted to mentally ‘beat’ your estimates while at the negotiating table. 9 times out of 10, your job will finish as estimated (or worse!), and the profit you thought you’d earn by beating the estimate will remain in your customer’s pocket, not yours!
Let’s look at a simple example. We have a job where the total costs of the job, including all job costs and our overhead cost recovery markups, totals $18,000. We want to make a 10% net profit margin. The formula to calculate the price we need to charge our customer looks like this:
Start by filling in the information you know. The total costs go on the top of the equation. The profit margin you desire goes on the bottom of the equation (don’t forget to express profit margin in the form of a decimal)
$18,000 / (1 – 0.10)
Before you divide your numbers, calculate the bottom of your equation. 1 – 0.1 = .9. Now you’re ready to divide.
$18,000 / 0.9 = $20,000
And it’s that simple. To earn 10% profit on $18,000, you need to charge your customer $20,000 for the work.
When we calculated markups, we simply multiplied the cost by 1 + the markup percentage. So then why are we dividing to calculate a profit margin?
The answer is because there is a difference between a markup and a margin. A markup is specific to the cost of the item. A margin is specific to the price of the item. Let’s look at what would happen to our example above if we tried to use the multiplication formula:
Our costs were $18,000 and we wanted a 10% profit margin. $18,000 x 1.1 = $19,800.
Notice the difference? When we calculated the profit margin using the margin formula (divide by 1 – desired profit margin) our price was $20,000.
The formula to calculate a profit margin is:
(Selling Price – Cost) / Selling Price
($20,000 – $18,000) / $20,000 = 0.1 or 10%
We can see by this equation that our formula for profit margin (using division) and our formula for a markup (using multiplication) came up a bit short.
Why did this happen? Because the markup formula calculates 10% of the cost and adds it to the total costs. To calculate a profit margin, you want to add 10% of the eventual selling price to the cost. The margin formula enables you to do this.
Now that you know the difference between profit markups and profit margins, you need to start applying them to your landscaping estimates. LMN Pro has estimating tools that let you set your profit margins and profit margins to estimating templates. Send quick and accurate estimates knowing that your landscaping business never leaves money on the negotiating table.
Request a LMN Free account to get a feel for powerful estimating software for your landscape business.