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A Question of Scale

Discussion in 'Commercial Snow Removal' started by Precedence, Oct 9, 2011.

  1. Precedence

    Precedence Senior Member
    Messages: 120

    Ok, so i have no problem generating leads or doing estimates or setting my prices. The problem i have is i can't seem to land bigger accounts, anything over about 1-1.5 acres. I do just fine with stuff under that size, i'm able to convert about a 20-25% or so of those leads into customers, but i get basically none of the big stuff.

    I know my prices are right around the upper middle end of the market. For estimating I use the basic model of a truck plowing 1 acre in 1 hour and i price accordingly.

    My question is do people actually drop there prices on bigger lots (1 acre plus)? Or is there an economy of scale i'm not seeing?
  2. buckwheat_la

    buckwheat_la 2000 Club Member
    Messages: 2,254

    yeah, less travel costs, more work located in one place. The larger the account, the more they will shop around for deals
  3. vamootsman

    vamootsman Senior Member
    Messages: 322

    You hit the nail on the head. Say you turn 14 acres into 19 with a 1 minute drive between them. The business opening times are different too. All you have to do is add 1 piece of equipment, and you will probably get it all done in the same amount of time or less if you have a good crew. Travel time and fuel are dropped from the equation, so you don't need to charge as much for the new lots. As long as you know your cost of doing business you should be able to come out ahead. But don't assume that your profits are always going to grow at the same rate.
    I think sometimes we forget that every time we add to our business that we are not going to see our profits go up by leaps and bounds. There is definitely economy of scale, and it can and will be accompanied by diminishing returns, to an extent.
  4. Longae29

    Longae29 PlowSite.com Addict
    Messages: 1,953

    Figure each job out in terms of seasonal hours, even if you aren't bidding it that way. The more hours you can "use" for the year the less each one should have to cover your overhead. Example: adding one job isn't going to make you have to buy or lease another building, add a phone line, etc. This was something I had never really thought of until I attended the SIMA Symposium this year, and it has definitely changed the way I bid.
  5. Precedence

    Precedence Senior Member
    Messages: 120

    I'm not sure i follow you, i think i kind of know what your saying but tell me if i'm wrong. Right now when i am budgeting i figure out how many hours of production i want from each piece of equipment per plowing and when i bid a lot i know it will take X hours of production to do (for an average storm) so i set my seasonal goal for contracts to whatever number of hours times the number of pieces of equipment i have. Then when i have that number i multiply that by how many plowings we get on average (-10% since i error on the side of a dry winter) to give me total production hours for the year. I do pretty much the same thing for salting but it's a little more complicated since i have to figure in average material usage/cost. Anyway after i've figured all that out i divide my fixed costs by the number of hours and add to that my operating costs per hour. I then multiply by my desired profit margin and voila there is my price.

    Is that sort of what your talking about?

    So typing it out kind of cleared things up in my mind, basically what your saying is adding one piece of equipment adds to the number of hours without increasing fixed costs by the same amount. Like for example one truck adds 3% to fixed costs but increases production by 25% lowering your overall price by X% depending on operating expenses.
  6. Precedence

    Precedence Senior Member
    Messages: 120

    Yeah i think i might need to be more flexible with my profit margin, up till now i've been pretty firm.
  7. merrimacmill

    merrimacmill PlowSite.com Addict
    from MA
    Messages: 1,823

    Essentially you are selling man/equipment hours. Whether you are pricing seasonal, per push, per event, per application or whatever it might be, you are basing it all off production rates and equipment/man hours.

    The snow division of your company has a seasonal hour capacity that you can schedule your equipment to handle in a given season. This would be based off your maximum route time. This is the maximum time it takes for a piece of equipment to get from the first lot, to the last, and be back at the first. Multiply how many hours your average route time is by the number of trucks/equipment that will be on routes, figure in seasonal shoveling hours using your crew's capacity, you will end up with the total numbers of hours your company can schedule/work in a season. Also, I dumb down my route times down to only 80% efficiency to give myself room for breakdowns/bad storms and liberal drive time should always be included.

    With that hourly information you can determine approx labor costs, fuel costs, maintenance costs, even an approx salt budget using time and capacity of your salt trucks. Just like you said, divide all this into your overhead costs and you can get your overhead percentage. Make sure that if you have an employee that isn't there to directly perform billable work all the time, factor that into your overhead. This would be anyone who does mechanic work, supervising, site checks, etc. Also, all costs associated with actually getting the work. Everything from the gas in your vehicle that it took to drive to and from the site for visits/meetings, to the paper and postage for the proposal and contract. Its all got to come from somewhere.

    When you apply this overhead you can do it in a few ways. What I do is add it in different amounts to different services/products. For example only, material might have 15%, subcontracting 30%, equipment 20%, and the rest on your labor. This allows you to adjust where your overhead is coming from, which can help you be flexible if your forced to negotiate prices. The other ways are to just add the same percentage to everything, or to use it as an hourly overhead cost and put that onto each of your equipments hourly rates

    I did get a bit off topic, but I hope it answered your question.
    Last edited: Oct 12, 2011