Common Flat Rate Pricing Mistakes
This article was especially written for service technicians and service department managers who use flat rate pricing for their heating, air conditioning, refrigeration, plumbing, electrical service and maintenance work. If you are considering the use of flat rate pricing, you will also benefit from this article and avoiding these common flat rate pricing mistakes.
Service Labor Rates Are Too High
Many companies use flat rate pricing for service thinking that they can now charge more than they are worth. You should never overcharge your customers; no matter what pricing method you use. Ask a qualified accountant to help you calculate your actual cost of service labor. This is a called your breakeven point; the total direct cost of producing one hour of service department labor. You may then add a reasonable net profit to your breakeven point.
Our advice on service labor pricing is this: Charge 25% more than it costs you to produce it. In other words, achieve a 25% net profit for “regular hours” labor. That allows you enough profit to offer senior citizen discounts or service agreement discounts. Look for a 35% net profit for overtime service and repair work.
It is very difficult to hire someone who really understands how to price labor. Look for an experienced professional who understands the service industry. We have engineered a terrific breakeven worksheet that you can use to determine your breakeven point on labor. Best of all, it’ss free. http://aptora.com/breakeven/
Using Flat Rate Pricing to Overcome Poor Service
You can’t use flat rate pricing to overcome poor performance. Some service companies are just plain lousy and they don’t appear to be worth what they are charging. Phones are not answered in a unique and practiced manner. Their service technicians are not uniformed, clean-cut, serious professionals. Managers emphasize technical training over customer service and communication skills. Trucks don’t look like they belong to a quality company.
Let me speak about value for a moment. There is a difference between “low price” and a “good deal”. I understand OJ Simpson paid Johnnie Cochran $500 per hour for his criminal defense. There are cheaper lawyers but I would have to say Mr. Cochran WAS A BARGAIN!
Value is a comparison of what you receive and what you pay for it. Anytime what you receive exceeds what you paid, the purchase was a bargain. Marketing processionals understand this concept and they are well aware that sometimes it is simply a matter of perception. Like a fine hotel or a fine restaurant, they work hard on both real and perceived value components.
Think of it another way. A competitor’s service technician could charge $50 per hour for a HVAC repair and be a rip off. Your service technician could fix an air conditioning system for $200 per hour and be a great value. How can this be? A $200 per hour technician should perform a complete and thorough diagnostic procedure. Everything should be cleaned and tuned and a professional repair made in one trip. That’s worth two hundred bucks. A fifty dollar an hour parts changer who takes longer than he should and looks like he’s there to clean the house tar the roof instead of and not repair an electrical, plumbing, or HVAC system is no bargain. A bum at $50.00 per hour bum is still a bum.
You Gave Up on Time and Materials
You do not have to too (or maybe shouldn’t) stop using time and material pricing. There are times where you may wish to quote something by the hour. Let’s say that you are an electrician and you’re troubleshooting a non functioning florescent light. It’s a commercial building with a 17′ ceiling. You might quote the owner $75.00 per hour to locate the electrical short (open circuit) and then you may quote a flat rate price to make the electrical repair. Maybe you do HVAC or plumbing work; you can think of a similar scenario.
You may have commercial clients that need a breakdown of time and materials – for whatever reason. Large commercial service or non-standard repairs can, and perhaps should be, performed under time and material billing.
You Think You Need Thousands of Repairs
Some service businesses think they need thousands of HVAC, plumbing, and electrical repairs. Most service departments do about one hundred different repairs 80% of the time. One hundred flat rate tasks equals about a ten page book. So what about the other 20%? Well, 95% of what you repair can be covered with five hundred flat rate repairs. You will never have a flat rate book large enough for the last 5%. For those repairs, calculate the price in the field using a Quick Price Calculator like that found in Flat Rate Plus®.
Here’s a tip for those of you that use flat rate software like Flat Rate Plus (the flat rate pricing software I developed). Ask your service technicians to place a light pen mark next to every task they use from their flat rate pricing book. After one year, inactivate any tasks that you have not used and reprint the books them. I would not include a flat rate repair unless you sell it five or six times per year.
No Training, No Ownership
You can’t just buy a flat rate pricing book or software and drop on someone’s desk. That’s what many contractors I have worked with did. There were no pre-purchase discussions and no post purchase training.
You need to get “buy in” from your service technicians and other coworkers. You’ll get this by discussing flat rate pricing with them and explaining why you switched or are considering the switch from time and materials. You must explain how flat rate service will benefit them as well as benefit the customer.
Once you have your flat rate price books in hand, you need to conduct initial and ongoing training on the proper use of the flat rate books as well as answering common questions and addressing customer concerns. There is no substitute for training and all great service organizations train their people.
Flat Rate Pricing is Not New or Unique
Flat rate pricing is simply offering to do a job (of any kind) for a fixed price. You are using flat rate pricing each time you write a sales proposal or make a verbal “estimate”. People expect to be told “how much” before any work is ever started.
Flat rate pricing has been around since commerce first began. Almost all industries flat rate. In fact, many industries (like your cell phone company) work hard to offer a guaranteed flat rate price. Most industries do not use time and material pricing.
Whether you do heating & air conditioning (HVAC), refrigeration, plumbing, electrical, or other residential and light commercial work, your customers will most mostly want a flat rate price.
Technicians Don’t Use Flat Rate Pricing Properly
Many companies forget why they use flat rate pricing. One reason is so that you can offer your customer a guaranteed price before you do any work. I have seen too many service technicians, electricians, plumbers fail to present their findings to the customer and gain approval for repairs. Technicians often do the work, write down a flat rate price on the invoice, and hand it to the customer; or worse yet mail it to the customer.
It is vitally important for service professionals to perform a complete diagnostic, write everything down thoroughly, and present their findings and recommendations to the customer.
Final Thoughts on Flat Rate Pricing
Flat rate pricing is not some miracle cure or get rich quick scheme. Flat rate pricing is no substitute for skilled service technicians and fantastic customer service. Flat rate pricing will not overcome an overpriced service department staffed by unskilled service technicians that display lousy attitudes.
Your plumbers, electricians, and service technicians need to wear uniforms, have their shirts need to be tucked in, and they need to remove their hats and sunglasses before they knock on the door. They must be personable and extremely polite.
Your service department needs to have detailed written policy on behavior and presentation. The HVAC, refrigeration, plumbing, electrical industries place way too much importance on technical skills than they do on people skills. In the game of life, a skilled people person beats a skilled technician every time.