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June 21, 2011

The Three Landscapers – A Study in Quoting

By tpryor June 21, 2011

Does your company create daily price quotes for customers to make a sale? If yes, which one of these landscapers most closely resembles your quote process?

Image of a Sales Quote

Sales Quote Form

Assume you want to contract landscaping for your home. You’ve found three companies that can do the work. You ask each to quote your job.

  1. The first landscaper returns a price of $1,000.
  2. The second returns a price of $1,200.
  3. The third returns a price of $950.

Instead of accepting the low bid, a wise move is to ask each how they arrived at their pricing.

  1. The first explains he uses the same method Michael Dell used when he was starting his computer business; he doubles his material cost. His material cost him $500 so his price is $1,000.
  2. The second landscaper explains that his material cost is $500 and he needs 5 people for the day and he anticipates it will be one day’s worth of work for 5 laborers, at a cost of $350 and there is also an overhead cost for his trucks, loader, gasoline, maintenance and other equipment that he has assessed at $150 and the remaining $200 is used towards his profit and sales and marketing efforts.
  3. The moment the third is asked how he arrived at his pricing, he throws his hands up and screams at you. He explains that he doesn’t do business with people who are so nosey and what he has in his cost is none of your business. He further retorts that if he is the lowest bid he should be awarded the business and its irrelevant how his bid is created.

Which one do you give your business and why?

Here’s what I would do? I’d tell each vendor that I might not be able to do the entire project and ask each one to rebid my job on a line-by-line basis.

  1. Based on his methodology, I know Landscaper #1, the “material-doubler”, is going to overcharge me for most things that are easy to install (or plant); like $3 bags of mulch or stones where it plans to charge me $3 to simply rip open and dump each bag. On the other hand, the same methodology will result in it giving me a bargain for most things that are more difficult to install; like a $50 tree whose planting will not only require a lot of labor, but will require special capital equipment as well.
  2. Because Landscaper #2’s methodology more closely links actual costs with the work being performed, the landscaper with a more rational quoting method will undoubtedly come up with a higher price for items like the tree and a lower price for items like the mulch and stones.
  3. The third landscaper will come up with whatever its quoting method generates.

I would then ‘cherry pick’ and see if by doing so I can come up with a total cost of less than the third landscaper’s original $950 bid. If I can come up with a lower total price, the “material-doubler” landscaper will undoubtedly lose money on what he sells me, the more rational one will at least turn a profit on the items he does sell me, and the third may or may not turn a profit on its portion of the sale.

If you don’t have a system similar to landscaper #2, customers will cherry pick you. They’ll buy things from you that are under-priced, e.g. you are losing money on them but you don’t know it. And you won’t sell the things you’ve overpriced that would be profitable at a lower, more competitive price.

I’ve seen scores of manufacturers with invalid cost models win major contracts on which it was impossible to earn a profit this way – some of which won enough of these contracts to put the company out of business.

Which landscaper pricing method does your company most closely resemble?

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