What’s a PMP to do about inflation?

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Inflation is everywhere. The consumer price index (CPI) for February 2022 rose 7.9 percent from a year ago, the highest level since January 1982, according to the U.S. Bureau of Labor Statistics.

The CPI is made up of a basket of consumer goods and services. But what are pest management professionals (PMPs) seeing?

• A surge in labor rates as a result of inflation.
• A shift in the labor pool toward the “gig economy.”
• A shift in other industries, such as warehousing, becoming more attractive to our traditional labor pool.

Compounding our problem is a major uptick in fuel prices as a result of Russia’s invasion of Ukraine. That said, the cost of chemicals and other supplies are up as well. For these reasons, PMPs need to raise prices.

DETERMINING PRICE INCREASES

Dan Gordon, CPA

PMPs who have read my previous columns or viewed my presentations on the subject of price increases know I don’t like to recommend across-the-board price increases by a dollar amount or percentage. Rather, I like to analyze each customer so I can look at the dollar-per-hour received, including callbacks.

Once we calculate that dollar-per-hour, we compare that to the acceptable dollar-per-hour, which we target for all customers. If the actual dollar-per-hour is lower than the acceptable dollar-per-hour, we raise the price in the amount that will make the price yield us the acceptable dollar-per-hour. What this means is that each customer, in a perfect world, will yield us — at a minimum — our acceptable dollar-per-hour.

The reason this is important is that not all customers are the same. Think of your electric bill. You pay for the amount of electricity you use. Using the methodology above, the customer pays for the amount of pest control he or she uses. Obviously, if the retreatments are your fault, then you need to consider that in your price increase decision. But the strategy couldn’t be fairer.

ACCOUNTING FOR COSTS

Now, what goes into the acceptable dollar-per-hour calculation? It is all direct costs, such as labor, chemicals, vehicles, uniforms, workers’ compensation premiums, and any and all other costs that happen in the field.

Once all those costs are accumulated, we assume that we want to run a 50 percent to 55 percent gross margin. To keep it simple, let’s assume 50 percent. If we assume that direct costs related to a technician for the week is $2,500 at a 50 percent gross margin, total revenue should be $5,000 ($2,500/0.5). If we assume the technician works 40 hours, then our acceptable dollar-per-hour should be $125. We can complicate the matter by adding a route efficiency ratio, such as 75 percent, making the hourly rate $166.

All very interesting, but why do I say don’t make an across-the-board increase either in dollar amount or percentage? Because it won’t help you with customers who are severely underpriced due to their usage. So, my recommendation is to use the methodology above to get all customers to the acceptable dollar-per-hour.

Do I want to walk back my statement that we should not make an across-the-board price increase? Interesting times warrant interesting approaches. So, once we use the above approach to get to the acceptable dollar-per-hour, we need to adjust our acceptable dollar-per-hour to account for inflation, Therefore, if we use the CPI from February 2022 as our guide, in addition to adjusting individual prices, we need to make an across-the-board price increase of at least 7.9 percent to keep up with inflation.