Chapter 4 - Your Prices Are Too Low ( Total Business Turnaround Book )

Hey, it's Mike Andes here.

I'm reading to you chapter four of the total business turnaround.

Today we're going to be talking about pricing.

And honestly, if you fix this one thing, it fixes like 90% of problems in your small business if you can get your prices high enough.

And one of the things that I.

Found to help make sure that I'm actually charging what I'm worth is having a great website because it allows the customer to see the value of your service and show reviews and pictures and your branding, et cetera. So I really recommend if, if this speaks to you and you've already learned so much, go check out homeservicewebdesign.com or lawncarewebdesign.com it's really how we pay the bills to get this message out, get this book out for free and share it with as many people as possible. And really what makes the turnaround show possible on YouTube. So I really do appreciate the support. I know it'll help your business more than anything. And so go check it out. And until then, let's check out chapter four, your prices are too low.

Chapter four, your prices are too low. Why you don't have a $1 million business. Reason number four, your prices are too low. May Landscaping operated in Augusta, Georgia. When I showed up for a turnaround, the owner, Brandon, had $30,000 in credit card debt. He also had a $50,000 business loan and owed over $100,000 for his equipment and trucks. He only had $5,000 in the bank and was generating $800,000 in annual revenue. When we arrived, he confided that he'd stayed up the night before crying. He, like many struggling business owners, felt hopeless. Here's what happened. One year earlier, he had got 75 customers from another company. They were all recurring mowing jobs. To many lawn service providers, this may sound ideal. What's not to like about a high six figure revenue and a big list of free customers? But Brandon had a problem. His business had grown too fast. All the new customers were underpriced. He had to quickly buy trucks and equipment to take them on. Before, he'd operated with a team of five employees. Now he had to double his staff in a matter of weeks. The resulting debt forced Brandon to sell his family's house. He wanted to get out from under $6,000 per month in debt payments. He had not raised his prices for five years. During that time, the starting wage had increased by 50%. It rose from $12 per hour to $18 per hour. On average for entry level workers. He hated the thought of raising his prices. He already worried that some of his customers were being overcharged. Wouldn't raising his rates drive customers away? What would they say? When I arrived for the turnaround episode, the business was making $16,000 per month on mowing jobs. My suggestion was to focus only on selling the recurring work such as mowing services. Do this during the spring rush. This would allow him to fill the schedule for both mowing trucks. He would focus on maxing out his capacity. This would raise his recurring mowing revenue to more than $30,000 per month. Then he could raise prices by 20% across the board on all mowing customers. This would generate $6,000 per month in pure profit. This move alone would cover the debt payments he owed each month.

Would all his customers stay on? Probably not. The goal would be to replace the ones that left with better paying customers. This would happen during spring rush when new leads poured in. Spoiler alert. In reality, fewer people would leave than anticipated. Raising the prices would help the business shed its worst and lowest paying customers. It would solve their cash problems. They'd have more cash flow. They could use it to raise wages and benefits. This would help them attract better applicants during the hiring process. These are the trickle down effects of increasing profitability. One cannot overstate the impact of raising prices. Keep in mind that price is one of the greatest levers in the business. A lever is anything that gives your business leverage. Leverage is defined as having greater output than the input given one small email or text to your customers. Raising prices can have a massive impact on your profit margin. Look at it this way. Raising prices is simple. You can do it through a text message, an email or even a phone call. The impact can dramatically improve your profitability. Simple input, tremendous output. Another way to look at it, you raised your price by 20%. Last year's profit margin was 10%. So you tripled your profits to 30%. Many business owners hold themselves back by not knowing when to raise prices. When I first started Augusta Lawn Care, I would always try to time my price increases for the season. What was the weather like that week? Did I have a good feeling that day? Was it my lucky weekend? I didn't know there was a precise system to follow. It would ensure customers would not leave. Of course, some do leave. But when a price increase is done well, you don't care. It's all about knowing what to do when the demand for your services exceeds the supply of labor. In other words, when you have too much work for your Current crew. At this point, you have two options. You could hire more employees, invest in more equipment and buy more trucks. This will increase your supply of labor and keep up with the soaring demand. This will of course, increase your revenue, but it can have unintended consequences. One of them is that you may wind up in a cash crunch. Growth sucks cash. Throughout growth mode, you aren't raising prices. You are trying to maximize close ratio. Raising your prices decreases your close ratio. You can avoid buying more trucks and equipment to increase capacity. Instead, you can raise your prices. You might not get many new customers, but you don't care. You can't do more work without buying more equipment and hiring more people. To make this decision, you need to be able to tell when you are in growth mode and when you are in profit mode. Your most profitable revenue lies between what you earn now and your max capacity. Max capacity is when you are using all your trucks and employees every day. The technical term for this is asset utilization, maximizing the frequency of using a truck or piece of equipment. You can produce $60,000 per month in revenue with your equipment and employees. But you are only making $40,000. So you should not raise prices. You haven't hit capacity yet. The best way to maximize asset utilization is to grow by $20,000 in monthly revenue and grow to capacity. That's where your profits are hiding. I'm often surprised to meet business owners who have three trucks but only use one at a time most of the week. It's a classic case of excess capacity. They can either sell the trucks to lower their capacity profit mode, or they can get more customers until they fill the three trucks with work full time growth mode. Remember, you're paying for all your trucks and equipment all the time. Your trucks and equipment are only making you money when they are being used. Pushing yourself toward these capacities is great. You need to do it without losing your marbles. I call this your personal capacity. Pay attention to your physical, mental, spiritual and emotional limits. You may be able to push your business past its capacities in the short term. Long term, it's a recipe for disaster for both yourself and your employees. Once you max out capacity, then raise your prices. You'll increase revenue and profits. You'll lose some customers, and you'll improve your work life. Balance all with one single move. Often when a business fails, it's because the owner gets so wrapped up in growth that they fail to make any profit. Their personal life begins to fall apart under the weight and pressure of financial stress. Eventually, the business collapses. Understanding your personal limitations is Key. It's another great reference point. Use it when deciding if it's time to slow growth or and enter profit mode. How do you enter profit mode? Next time you hit capacity and have more work than you can handle, raise prices. Don't hire more people or buy more stuff. In the short term, pushing trucks, equipment and employees too hard will yield better results. Yes, pushing employees to work weekends, holidays and evenings will increase your profits. But in the long term, it will increase turnover and you will lose great employees. Even your equipment won't respond well to being pushed past its limits forever. In the short term, it will help you increase revenue. Long term, it may come at the cost of cleaning and preventative maintenance. Your equipment might break down or wear out prematurely. The impact of a truck breakdown is much greater. If you are over depending on and overusing each truck, then you have personal capacity. Pushing your body to the max will boost your business. But it means cutting family time and personal and spiritual exercise. But it will catch up with you. It's always better to hit the brakes before you crash. When you begin to bump up against your personal labor or asset capacities, it's time to raise prices. Don't overthink it. I used to. I used to think the weather must be right for a price increase. It's Is this the perfect time of year to raise my rates? Keep it simple. When you can't take more customers and you are in profit mode, raise prices. Note that you can do this without turning away leads. When you raise prices, some customers will fall away. You can then replace them with higher paying customers from your incoming leads. I am always confused. When businesses turn away new customers because they are too busy, raise prices. Some customers will leave. This will make room for new, more profitable customers. Don't let emotions cloud your judgment. You probably know many of your customers personally. It's hard to imagine driving them away. But this is a business decision. If you lack data showing which accounts are underpriced, raise rates for all accounts by at least 15%. Yes, it is better to know which accounts need more increase based on the analytics. But if you don't have these numbers, raise prices for everyone. Don't let analysis paralysis grip you. The approach is simple when it comes to raising your rates with new customers. Just do it. Higher rates may slow your customer acquisition, but that's okay. Right now, you're already at max capacity. Add new customers only if they will pay higher prices. If they are new, they won't even know about the price increase. When it comes to raising rates with existing customers, it's important to rip off the band aid. A politely worded two to three sentence explanation will suffice. This is the best part of the home service industry. Assuming you do a good job, most of your customers will stay. Why? Because they don't want to go out and find a new vendor. They don't want to begin soliciting for more estimates. I once spoke to a wealthy person about this problem. They broke down the cost of leaving the office for 30 minutes to talk to a service provider at their house. It would cost them more than a year of service. Do you think they would leave their existing house cleaner if they raised prices by 20%? Not a chance. We as business owners fear a mass exodus. How many existing customers will leave after this price increase? Don't be afraid. Don't over explain or become apologetic. Just do it. When you exceed capacity and don't raise prices, you reduce the chances of building a million dollar business. Why most businesses run out of money before they hit a million dollars in revenue. Why they kept growing the business without making profits. Why they didn't raise their prices soon enough. Brandon at May Landscaping had a mental breakdown. The year before I met him, he'd entered an unsustainable cycle of stress. He was over capacity with a large list of underpaying customers. Employees were leaving. He kept taking on more debt. Trucks were breaking down. You could see at a glance that they were in disrepair. Dents, dings, dirty interiors. Customers were calling him with complaints. One day he pulled over onto the side of the road and called his wife, Brittany. Fear and anxiety paralyzed Brandon. He couldn't drive anymore and needed her to come pick him up. I recommended slowing down for a year or two before trying to hit a million dollars. In other words, stay in profit mode. Raise prices, grow with better margins. Respecting your mental health is good for business. It means acknowledging your personal capacities and limits. Quitting is the only ultimate failure. Eventually you will quit if you exceed your personal capacity. I think if you make less than $400,000 a year and are profitable, you should expand when you hit your capacity limits. In other words, stay in growth mode. If you're making more than $400,000 in annual revenue, raise your prices until you hit a 20% profit margin. Then you have the option to increase your capacity again and continue growing if you would like. Brandon was at $800,000 in annual revenue. So I suggest that he focus on raising prices and increasing profits. Then he can go back into growth mode to reach the $1 million marker. Understand there are three capacity categories to watch for. The first is labor capacity. That is, each employee can produce a certain amount of labor revenue. You can calculate it. Just figure out how many billable hours an employee works each month. Then multiply that by the average rate you charge your clients per hour. Let's assume an employee works 40 hours per week and completes 30 budgeted or billable hours per week. We can multiply that by 4 and get 120 budget hours per month per employee. Multiply that by the $100 per hour charged the customer. You get $12,000 per month in labor revenue capacity per employee. You then multiply that capacity by the number of employees you have. With three employees, labor capacity reaches $36,000 in monthly revenue. Asset capacity is the amount of revenue you can produce with your trucks, assuming that your crews are full. You can calculate this by multiplying the crew size by the capacity per employee. For example, if we have a $12,000 employee labor capacity and an average crew size of two employees per truck, we can assume a $24,000 per month of labor revenue per truck. If you have three trucks, $72,000 per month is your asset. Personal capacity is the amount of monthly revenue that you can handle without a mental, physical or emotional breakdown. This one is not as math driven. You need self awareness or assessment from others close to you. Mental health is a major cause of business closure. Knowing these capacities and understanding your numbers will give you clarity when it comes to raising prices. I recommend focusing on growth and expansion until you are within 80% of these limits. Using over 80% of your capacity can start to cause undue stress. It affects employees, equipment and your health. Your asset capacity is $72,000. Your labor capacity is $60,000. Your personal capacity is $100,000. So do not grow past the lowest of these numbers without making changes. In this example, targeting $60,000 per month will help you avoid long term damage. If you want to grow your business, focus on increasing the lowest of these three capacities. In this case, you would want to focus on hiring more employees and increasing your labor capacity. Raising your prices shouldn't be a guessing game. You should calculate it based on your capacities. Don't second guess yourself. Raise your prices when you are within 80% of your capacities to avoid burnout and charge what you are worth.