The Perception of Value

I think most small-business owner/ operators in this trade would agree that residential tree work, for most customers, usually comes down to price. Money is tight, and price is what matters most. That said, trying to differentiate yourself based on price is a race to the bottom, and, as Seth Godin says, “The problem with running a race to the bottom is that you just might win.” So in this article, I want to explore some aspects of how we price our services, and differentiate our businesses, in this industry.

“Pricing is a riddle, wrapped in a mystery, inside an enigma.” Winston Churchill (paraphrased)

Pricing is serious business, seriously! The truth is, the biggest companies in the world struggle with pricing. Because this is a very complex topic and there is a lot of disagreement out there, I want to start off by saying I am no expert. I haven’t “figured it all out.” But I do have some thoughts.

There are two main ways that businesses price their goods and services, and you are probably a lot more familiar with one way than the other.

Cost-plus pricing

The first pricing model is based on time and is usually calculated using a method known as “cost-plus.” This is how most businesses, especially small businesses, operate. In this model, to determine how much to charge for a service, you simply add up all of the fixed and variable costs of doing business, then add a desired amount of “profit” to that base cost and – voila! You now have determined the price, which is easiest to express in terms of an hourly or daily rate.

Anyone who has ever gone through this exercise knows firsthand just how many problems there are with the cost-plus model of pricing. First of all, it is really difficult to accurately determine your costs ahead of time. Unforeseen things happen. Stuff breaks down. You end up working longer hours than you thought you would. And, even if you are able to guesstimate your costs accurately for a month in advance, the chances that the following month and the month after that are going to match that same estimate are pretty much zero.

Cost-Plus Pricing

Another big problem is the idea that an hour of tree work is interchangeable with any other hour of tree work. This idea that “an hour, is an hour, is an hour” just doesn’t make sense. An hour of trimming is not the same as an hour on a huge removal. These are different things, involving different levels of difficulty and equipment. To lump everything together into one neat little hourly or daily rate makes no sense.

The real problem, however, with the cost-plus model of charging by the hour is the fact that your income is capped. You artificially impose a ceiling on your income, and the only way to make more money is to work more hours. It’s a vicious cycle, and one that is very difficult to break away from. And do you ever really come out ahead?

Value-based pricing

The second pricing model, as opposed to time based, is called value-based pricing. But before we talk about that, I want to talk about commodities.

Technically speaking, a commodity is a raw material that is sold in the market to be used in the creation of a finished product. For example, iron ore or cereal grains are commodities. One of the most basic characteristics of commodities is the idea of interchangeability. This concept refers to the fact that the market treats commodities as equivalent, or nearly so, with no regard to who produced them. If I’m in the market to buy wheat, I don’t care which exact farm it came from, and, just as important, I can’t even tell which farm it came from. It’s all the same, and I just want the cheapest price! That’s a commodity.

Similarly, in tree work, any individual portion of a job can be seen as a commodity. If the customer says, “Remove that big limb going toward the neighbor’s house,” the actual getting up there and doing that work is a commodity. It doesn’t matter who does it, because the end result is the same. The customer just wants it done, and they want to pay as little as possible for it.

In big industry, you can make money selling commodities, but you have to move a lot of product. The companies that make the actual money, however, are the ones that purchase the commodities cheaply and then add value, producing a finished product that is more than just the sum of its parts.

So, what is the value of your work? The value is not the physical exertion of actually climbing, cutting, dragging brush, hauling wood and raking up afterward. That is not the value. Those things are commodities. Those things can be done by anyone. When you are operating in a commodity market, when the things you offer are commodities, don’t be surprised when people want to pay as little as possible for them. That’s what commodities are, that’s how they operate. Make sense?

Instead of acting like trusted advisors to our clients and leveraging our specialized knowledge about plants and trees and landscape management, we have commoditized ourselves and our work, and we go around trying to fit everything into nice little boxes. “You want me to deadwood that maple? That will be x amount, sir.” “Raise the canopy on those three birch out front? That will be this much, ma’am.”

Instead of competing on price, we need to differentiate ourselves based on value. We are professionals. We have detailed knowledge about trees and landscapes that a homeowner doesn’t have. So when they call us in, it shouldn’t be them telling us what to do and asking how much it’s going to cost. It should be the other way around! It should start with a good exploratory conversation about their long-term goals for the property in question. What are they trying to achieve 5, 10, 15 years down the road? Once you have had that conversation, you can start making recommendations to achieve those goals. You tell them what they need, because you are the tree doctor! Right? You know far, far more about trees than they do. You should be the one telling them what they need, not the other way around.

Now, I know what you’re thinking – “But what about everyone else in my area who goes around undercutting my prices? How do I compete with those guys?” The short answer is – don’t compete. The success of your business depends on your ability to differentiate yourself in the market. You have to become a category of one. Remember, if everyone else is running around trying to sell the same old cucumbers, you need to sell “secret-recipe pickles.”

Value-Based Pricing

Hopefully if you’ve made it this far, you’re on board with the basic premise that our pricing for tree work needs to be based on value rather than time. The next logical question is, how do you determine your price for a tree job? Simply put, your price needs to be based on your customer’s perception of how much value your work will bring to them. Getting back to those commodities we talked about earlier, the price of a pair of Nikes is not based on the cost of the raw materials. Yes, they need to know their costs and charge enough to cover those costs. What I’m saying is that Nike does not simply figure out how much it costs them to make a pair of sneakers and then add an arbitrary amount of “profit” to arrive at the retail price. If they did, they would still be a small, struggling shoe company, or they would have gone out of business long ago. Instead, Nike charges premium prices for something that you perceive to be a premium product.

You are willing to pay the prices they charge because they have positioned themselves as a leader in a crowded industry, and their marketing has created a story in your head that says their sneakers are stylish, well made, comfortable and exactly what you are looking for.

So the perception of value comes from the stories marketers tell us – and that we then tell ourselves – about the relative value of things in the marketplace. Your goal, as a business owner, is to convey the story to your customers that you are the arborist for them. Not because you can run a saw better or drag brush better than your competitors, but because you have your customers’ best interests at heart. You have the knowledge, expertise and vision that is going to help them get the most out of their property and their landscape, that is going to bring them the most value.

Once you establish that story in your customers’ minds and show them it would be a mistake to hire anyone else but you to take care of their trees, then you can raise your prices. Stop thinking about how long the job is going to take and instead think about how much value you can provide to that customer. The work, is the work, is the work. It doesn’t matter if the hotshot climber gets it done in one hour or the young, rookie climber takes three hours to do it, the value of that work to your client doesn’t change.

If you really are a premium service provider and you really are worth top dollar, then you have to be unapologetic about your prices. You are not in business to make payroll. You are in business to provide real value for people with your expertise and services. And to be able to continue providing that value for years to come, you need to charge enough so you’re not always just scraping by.

The point is this: If a homeowner knows what they want done, and they decide to get three quotes and you happen to be one of them, please don’t do what the other guys do, which is show up, take a quick look at the job, rattle off a price and leave. Differentiate yourself. Ask good questions. Be opinionated. Come up with alternative options and solutions. Expend the emotional labor to actually understand them and their situation. Bring actual value instead of just quoting standard commodity prices. And then, don’t be afraid to charge top dollar for your services. Your customers will know very clearly that when they compare your price to the price of the other guys, they are not comparing apples to apples.

Think of it this way – if you need a house torn down, you don’t care who does it, because the end result is the same. Wrecking ball, excavator, dump truck – done. Tearing down houses is a commodity. Building houses, on the other hand, is art. If you want to have a house designed and built, you’re going to care deeply about who does the work. You don’t just hire some person off the street with a hammer and a tool belt. You hire a craftsperson, someone who convinces you they have the knowledge, skills and vision to see your project – your project – through to completion.

This is one reason I recommend most arborists focus on tree care and trimming. Tree removal is, in many ways, commoditized. The end result is the same no matter who does the work (as long as nothing gets damaged, of course). But this is not true with trimming. In trimming and pruning work, there is a lot of room for interpretation and nuance, not to mention the fact you can only remove a tree once, but if you form a good relationship with a customer, you can trim the same tree many times over the years.

Keep in mind that not every customer is going to appreciate your value-based pricing approach, just as you cannot expect to land every job you get called on to quote. If you get called to price the removal of a lonely spruce tree in a backyard – the only tree on the property, for instance – that job is going to be perceived as a commodity by most customers. They don’t care who does the work, “Just take down my tree!”

You could, however, as I myself have done, try and talk them out of taking down the tree, arguing in favor of its stoic character, its appeal, in an otherwise bleak landscape. You also could offer suggestions for planting other trees on the property, helping to give that homeowner a long-term vision for the future. Of course, you may do all that extra work and then they still end up hiring the cheapest guy with a pickup truck and a chain saw to cut it down. That’s fine. Move on. You can’t sell the unsellable.

Here’s the bottom line. If you run a tree service or tree care company, you need to wrap your head around this concept; our business – our actual business – is providing solutions to homeowners and property owners, and those solutions come in the form of tree work. Tree work is a byproduct of our actual business. The actual business is communicating one-on-one with homeowners and property owners, establishing relationships and providing value and long-term solutions to help them achieve their goals. That is our business. That’s what we do. Tree work you know – trimming, removals, planting, fertilizing; these things are just a by-product of that business.

So I am here to encourage you to stop seeing yourself as a punch card. You are not a collection of hours. You are the accumulation of all your skills, experience and expertise. This is a fundamental mindset shift. You have to forget selling time. Once you start thinking in terms of solutions and value, you can finally move beyond the self-imposed limitations that have held you back. Keep in mind, this is a radical mindset shift for most businesses. Don’t expect it to happen overnight. But trust me, when you finally make the shift, it changes everything.

Patrick Masterson is an arborist, writer and podcaster at EducatedClimber.com , as well as owner of ConservaTree, Inc. in London, Ontario, Canada.

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