By Phil Harwood, CSP
It’s an interesting time to be a snow contractor. Prices for services are falling to inconceivable levels, and many are scratching their heads in disbelief, wondering what is happening and hoping they’ll wake up from a bad dream and it will be 1995. It’s hard to imagine that a job worth $20,000 15 years ago is going for $10,000 today when the cost of doing business has increased.
There was a day when the snow industry was very profitable. In some niche market segments and regions this is still true, but I think we can agree that industry profitability is at an all-time low. How did this happen? There are many reasons, and it’s worth exploring them.
Competition. Profitable industries attract new competitors because there’s “gold in them there hills.” As competition increases and the industry matures, profits drop. This is an economic reality that can occur in any industry. Unless there is a radical shift in the industry—a revolution—the industry is likely to continue to become less profitable.
The “gold” was the excess profits that many snow contractors enjoyed for years. These excess profits presented many opportunities for financial gain. The development of national contracts was a logical result, fueled by a global trend in outsourcing. National and regional contractors now control major segments of the industry.
As industry profits fall, business owners are faced with a decision: They must either decide to remain invested in a less-attractive industry or exit the industry. Those choosing to remain invested will seek out niche market segments that are still profitable. Discovering these pockets of profitability requires outstanding market awareness and the execution of a great strategic plan.
Recession ramifications. Another reason for falling prices is the meltdown in the real estate market and subsequent recession, causing less demand for services. In many markets, demand remains very soft, and the outlook for recovery is not great. Weak demand precipitates falling prices where price elasticity is high. This is why price is the most important purchase criterion in many market segments.
Streamlined operations. Another factor is the reduction in labor content of snow work. Innovation, new technologies and process improvements have increased efficiency and reduced waste. The gains in productivity over the last decade have been substantial. In a highly competitive industry, these
efficiencies result in lower prices because aggressive competitors pass on savings to their customers instead of increasing profits; and firms quickly adopt new technology and process improvements, which levels the playing field.
Educated consumers. A final reason why prices are falling is that purchasers (property owners/managers) are becoming more educated. This occurs in maturing industries, resulting in a shift of power from the seller to the buyer. Today’s purchasers are more educated than some of the sellers. Contracts written by corporate legal teams favor purchasers and reduce the seller’s ability to negotiate.
The reduction in salt usage is an example of the impact of education. Despite warnings of environmental damage, many snow contractors overapplied salt for years to appease their customers’ desire for “wet and black” pavement before the salt truck left the property. Because of an increase in education, salt usage per acre is a fraction of what it was a few years ago. This reduction in cost translates to reduced prices in a competitive environment.
What’s next?
So, what are snow contractors to do? What steps can they take to weather the storm? Or is the storm not a storm at all, but a new reality that is here to stay? These are tough questions. I don’t claim to have all of the answers, but I will share my thoughts with you regarding these tough questions.
As I read the tea leaves, lower prices are here to stay … maybe not forever, but for a long time. Most purchasers are not likely to accept the huge price increases that would be required to get prices back to where they were 10 years ago.
Economic factors that would drive prices higher are: increased demand as a result of a stronger real estate market; less competition stemming from the exit of a large number of snow contractors from the industry; or less competitive rivalry in the industry. I hope I’m wrong, but I don’t see any of these things happening anytime soon.
Staying in the game
If this is true, what is the snow contractor to do if he or she wants to be a viable presence in the industry?
Know your costs. Contractors need to know the costs of overhead, labor, materials and equipment; but many don’t. They should not assume that market prices are too high or too low. They should know exactly what their prices need to be to achieve their profit objectives, based on their business model and associated costs. Understanding these costs and developing a pricing model requires financial analysis, a financial plan and a process for executing it.
With a pricing model in place, snow contractors can approach the market with confidence and knowledge. Negotiating prices may be done with a clear understanding of the impact on profitability. In some cases, it may be desirable to accept a job at a lower profit margin. In other cases, it may not be. Without a strategic and financial plan in place, the snow contractor will not be able to make this determination.
If market prices are too low, the contractor will be forced to accept lower profit margins, or seek new areas of opportunity where there’s less competition and higher profits. These areas of opportunity exist, but you have to work to identify them.
Embrace innovation and better processes. Snow contractors need to continue to seek out new technologies and process improvements. Staying ahead of the pack is a proven strategy, especially when operating in niche market segments where price is not the most important purchase criterion.
New technology not only includes equipment (which contractors are quick to incorporate), but also business software and management systems (which contractors are often hesitant to embrace). Leading contractors invest in whatever is needed to keep them ahead of their competitors.
Process improvements have the potential to make significant impacts on profitability. One example is the sales process. After decades of taking orders, companies are now faced with the cold reality of having to sell, and they may realize that their sales processes are underdeveloped or nonexistent.
A key part of the sales process for snow contractors is estimating. In my experience, the typical estimating process is very inefficient, time-consuming and error-prone. In other words, it’s expensive.
Develop a strategic plan and execute it. Most firms, regardless of industry, struggle with strategic planning and execution. This is probably the single greatest opportunity for snow contractors to leap ahead of their competitors. By developing a solid strategy and implementing a system for executing the plan, they will have a process in place to identify market opportunities and take advantage of them.
The final option for snow contractors is to exit the industry. But, in my opinion, it’s still an attractive industry and deserves continued investment. There are challenges, no doubt, but this is true in any industry. I believe the best option is to reinvest, continue to improve systems, and develop a great strategic plan that will deliver profitability.
Phil Harwood is president & CEO of Pro-Motion Consulting, and the recipient of the first Snow Industry Commitment Award at the 2010 SIMA Symposium. Our mission is to help create healthy, profitable and sustainable businesses. Visit us at www.pro-motionconsultingllc.com.
