Maxing Margins

Building service contractors sometimes joke that they’re not in the cleaning business for the profits. True, profit margins for janitorial companies are pretty lean — but the foremost need of all businesses is to make money.

And it’s a tough market for BSCs. Many customers consider cleaning to be a commodity, so contractors struggle to differentiate themselves while keeping prices low enough to attract and retain customers. Employment and fuel costs are rising and the economy is sluggish, making prices competitive as ever, so maximizing profit margins is crucial to success, now more than ever.

BSCs need not be afraid to raise prices, but they know there can be a fine line between raising prices and losing customers. Walking that line requires good communication skills, partnerships with customers, a willingness to compromise while knowing one’s limits and investigations into internal processes that can increase efficiencies.

A number of factors influence the price a BSC charges, but the main reason prices are so low in most markets is that the number of contractors who will do a job for cheap is high, says Dr. Michael Berry, research professor at the University of North Carolina at Chapel Hill.

“Anybody can start a cleaning business and a lot of people do, so you’ve got this tremendous supply. You’ve got constant demand. Prices aren’t going to go up, they’re going to go down, everything being equal,” Berry says.

Prices would go up if entry into the industry was made more difficult by high standards, Berry says. Until that happens, however, there will always be BSCs selling their services at rock-bottom prices.

In fact, in some markets, contractors are charging little more than they did years ago.

“Sure, the profit levels aren’t what they used to be,” says Bob Stone, owner of Porter Industries, Loveland, Colo. “In some cases we’re bidding things today the same cost we were bidding them 10 years ago. There’s something not exactly right about that — but we’re also in a competitive environment where sometimes the dollar rules and if we want the job then we have to find a way to do it a lot more competitively.”

In order for BSCs to thrive, they must always be working to maximize margins, by raising prices, cutting costs and adding value to services.

Shaping value perceptions

Being competitive means keeping pace with the market, staying operationally sound, being as productive as possible and having a dedication to educating customers — and sometimes that includes letting them make their own mistakes.

John Hybridge, president of Thrifty Janitorial Services in Seattle, recalls losing a government contract that he’d held for three years to another contractor that had out-bid him.

“I told the facility manager, ‘What they’re bidding on, there’s no way that they could do it,’” Hybridge says.

After a month of complaints and poor service from the other company, Thrifty was asked to return. It’s OK to let a customer learn the hard way that you get what you pay for — or what you don’t pay for, he says. That can have a positive effect on perceived value.

Between the break-even price, or the price it costs a BSC to provide service, and the objective value, or the most a contractor would charge, is the perceived value. BSCs do have some control over perceived value if they have influence on customer opinions about the importance of cleaning and thus on their willingness to pay more, as illustrated in Hybridge’s example.

The industry goes in cycles, with the rises and falls of the economy, as far as how important the cheapest price is to customers, says Jack Morris, president of Advanced Floor Care in Kearney, Neb.

“Our attitude here is, the people who always want the cheapest price are really not stable customers because somebody will come along and offer them a cheaper price but there’s no loyalty there, so I guess we’re not terribly worried about it,” Morris says.

A BSC has the power to shape expectations and create a more discerning customer through education, communication and service. Taking the time to get to know the decision-makers, on their time and during the day if possible, and what they value from a contractor, is key to creating a lasting partnership.

“Once you provide an outstanding service, they don’t mind paying a little bit more,” Hybridge says. “If we’re doing a really good job and responding to their complaints, and keeping complaints to the minimum if we do have them, then they see the value for the price they pay.”

BSCs agree that the best way to increase perceived value is to add value to their services. Value can be added by simply being a good business partner to customers.

“If you have nice programs that really add value if you take control of the service, you control the service and are proactive about how you deliver it, I think you can start to make the case that we’re not the same as everybody else,” says Paul Senecal, president of United Services of America, Stamford, Conn.

Value can also be added by implementing industry-specific programs and certifications. If a BSC takes itself seriously, and invests in its operations and efficiencies, certain customers will value that.

Porter Industries has invested heavily in green cleaning programs, including attaining the U.S. Green Building Council’s Leadership in Energy and Environmental Design (LEED) certification and having LEED Accredited Professionals on staff.

Another way Porter has added value is by hiring legal, documented workers — and going so far as to work with U.S. Immigration and Customs Enforcement officials to ensure they’re engaging in legal hiring practices.

“We bring this to the table prominently,” Stone says.

When a customer values a BSC’s service, they’re more likely to be amenable to price increases — which can come in the form of a flat percentage increase, incremental hikes or extra charges for special services.

The hike

Whether the reasoning is strictly to keep up with costs, or it’s more profit-motivated, BSCs have to use some finesse to get what they want.

Before approaching a customer with an increase, a contractor needs to make sure they’re providing good service, says Senecal.

“You don’t want to walk in and ask for an increase and then have a list of complaints you don’t know about,” he says.

Senecal meets with his operations team to ascertain any issues at the account, then he meets with accounting to put together a spreadsheet to explain to the customer where the increased costs are coming from. If a customer is satisfied with service and response, they’re more likely to OK a price increase.

Across-the-board increases happen, but the chances of losing customers is greater when they’re given a price ultimatum. That’s why examining increases on a case-by-case basis is the preferred method for many BSCs.

Senecal controls his own costs but has no problem going to customers with increases over costs that he cannot control.

“I think it’s very difficult to raise prices in this environment but as costs go up, especially mandated costs, BSCs need to try to recover them,” Senecal says. “So if the union goes up or minimum wage goes up or if the government imposes a tax on us that doesn’t exist now — anything which affects every contractor in the market — then they need to talk to their customers and say, ‘These are my issues.’”

So with any price hike, reasoning and timing are crucial. Most customers will be reasonable and understanding about increases if they’re told while they’re constructing their budgets for the upcoming year, he adds.

“The wind-up on this is that any cost increase program has to be very carefully orchestrated, very customized for each client and coordinated at the highest levels in a BSC’s organization,” Senecal says.

If a price increase is completely out of the picture, a BSC may have other options, especially if there is a good history with the customer.

“I hear a lot of people complain that there’s no loyalty to the contractor, but I think it has to work the other way, too,” Morris says. “I think the contractor has to be loyal — if I’ve got a guy who’s been loyal to me, pays their bills on time for five years, I’m going to be a lot slower to raise that person than I am somebody who’s a problem customer.”

Also, Senecal points out, there are ways to make the contract more beneficial to a BSC even if the price isn’t being raised, such as implementing a pre-pay system.

Cutting costs

In a tough economic environment in which price increases are hard to ask for, trimming internal expenses is a great way to increase profit margin. Some costs, such as fuel and chemicals and minimum wage and insurance, cannot be avoided.

BSCs must find their own ways to deal with those, whether it’s a price increase or cutting back on the activities that produce those costs.

Other expenses, mainly relating to financial controls and labor efficiencies, can be controlled. Technology and product innovations are helping contractors increase productivity.

“Fortunately, we’re a lot more productive than we used to be in our industry,” Stone says, using the backpack vacuum as an example. “That was an enormous boost in productivity for our industry. The coverage you get for that is just tremendous — if that had not come along I don’t know where we’d be today.”

Morris says that thanks to better equipment and chemicals, he has reduced the time it takes to perform some jobs by as much as 25 percent, meaning he doesn’t always have to raise prices to make a bigger profit.

Most financial problems are not money problems at all, says Morris, but are process-related.

“I’m always looking for a smarter way to do it — how can I do this more efficiently, or do a better job for the same amount of money,” he says.

Lessons in management can be learned by having to cut the fat from budgets, Stone says.

“You learn a lot of good lessons in financial management when you go through a downturn,” he says. “Problem is, you forget those lessons that you learned when things get better.”