Last winter some markets received 30, 40 even 50 percent more snow than what is considered "average." For those charging customers "per push" or "per event," such excessive snowfall can lead to windfall revenues and profits. But for those who had customers paying "per season," the contractors took a huge hit to their margin. Now we enter the 2011-12 quoting season and customers – who got whacked with huge bills last winter – are reticent to go down the same path. And who can blame them? A significant portion of the major U.S. metropolitan centers have now had two huge winters with regard to snowfall accumulation. As a result, customers are clamoring for quotations based upon seasonal numbers. Good snow contractors have moved towards seasonal contract pricing with trepidation knowing the inherent dangers associated with monster winters. Many have instituted caps on the amount of snow they will plow in terms of total season accumulation. This protects the contractor from incurring additional labor and material costs. This is understandable from the contractor's perspective, but problematic for customers who have to foot those costs after the budget has been spent. There is a way to satisfy both parties. Let's suppose you provide a price to the customer for seasonal plowing, with a cap on the snowfall total for the cost provided. Let us assume you are in a market that gets an average of 50 inches of snow each winter. Let's also assume you quote $100,000 for the season for plowing and you have a 50 percent gross margin on your service. $50,000 in expenses, $50,000 in gross profit. This means your "cost" is $1,000 per inch of service supplied. You place the seasonal "cap" at 60 inches – essentially giving the customer 10 inches of additional service at no extra charge. Above 60 inches you quote $2,500 per inch to the customer. This covers your $1,000 cost, $1,000 profit and $500 towards the costs incurred for servicing the 50- to 60-inch range of snow. What if we included one extra Option for consideration? That would be a cost (to the customer) to "release the cap." It must be an Option that is attractive to the customer, and covers the contractor's costs to service the account. The contractor can give away $10,000 of profit to service the account in the 50- to 60-inch range without hurting his business. So, we need to cover the costs of servicing the 60 to 80 inches of accumulation range, because the probability of exceeding 80 inches in a 50-inch market is low and likely not an issue. To purchase a "future" to gain you $20,000 will (if purchased in summer) cost the contractor about $6,000 (depending on variables). So, the contractor quotes the customer a $6,000 one-time cost to "release the cap." A caveat: the customer must stroke the $6,000 check at the time of signing. Also, you must put a timeframe on the customer accepting this deal – say 15 days. After that, the cost of the "future" will likely change as the forecast sharpens. This gives "cost certainty" to the customer – and "profit certainty" to you. Here, everybody wins. And shouldn't that be the ultimate goal? |
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