It's Easier Than You Think!
By Jim D'Amico*The Old Days
I remember the days when oil dealers were content to pump oil and take some of the profits to subsidize their service department. Oil burner service was often provided to customers at or near breakeven. In the early 1970’s, while working in my family's fuel business, I was told by a grizzly, old oil burner mechanic, "Oil companies are supposed to lose money on service." Even back then I found that to be perplexing, considering the significant investment in providing quality, heating service.
Understanding Service Department Costs
The real issue we face in deciding how to price our service is to understanding our true cost. Major HVAC equipment manufacturers will tell you that overhead expense in your service department averages 50 to 55% of service sales. The culprit causing such high overhead is unapplied, or non-billable time. Think about the amount of time your technicians spend driving to calls, stocking and re-stocking their trucks, completing their paperwork (however complete or incomplete that may be), traveling to supply houses for parts, waiting in line for those parts, talking with customers, discussing service calls with managers and dispatchers, etc. The list goes on and on. Translated to real time it takes up 40-50% of their working hours each day. The reality is those hours are not billed to your customers. That means that you can only bill 4 to 5.2 hours per technician per day! Combine the low number of hours billed with low labor rates and low parts prices and we have a formula for low or no profit!
The New Era
Today with the high cost of trucks, equipment, labor and benefits, we cannot depend on oil profits to support our service department. Therefore, our service department needs to become a profit center.
However, with pressure from customers to provide service at low labor rates combined with pressure from employees to provide better pay and benefits, service profit is at best difficult unless we are willing to change our pricing structure.
Low Price or Fair Price?
If you ask a service customer what is most important to them when they need service, most customers will say they want fast service and the lowest price possible. Although customers say they want a "low price," they most likely mean a "fair price." And we all know there is a distinct difference. We also know that we cannot always be fair to our customers if all we have to offer is low price. Moreover, customers are willing to pay a fair price if they perceive the value exceeds the price. When their furnace shuts down at zero degrees and we can get it up and running, the value always exceeds the price. In addition, customers' lives today are very busy, often too busy to be concerned about the details in service repairs. Yet we continue to give them detail about labor time, labor rates, parts used and part prices that they most likely don't care about. Really, all they want is a proper repair and a proper guarantee for our workmanship.
Experience Has Shown
Through the last decade many service companies have determined that customer, employee and business owner satisfaction starts with a higher retail price for service. However, when selling higher priced service, we need to avoid an adverse re-action from our customer who is sensitive to labor and part prices. How can that be done? The best method that is now most widely used by service companies and widely accepted by customers (indeed often asked for) is for a quoted price before the work is completed. A Flat Rate price for repairs is the best way to satisfy everyone's needs and remove the pressure off hourly labor rates.
Flat Rate Pricing by Definition
Flat rate pricing is giving a customer a firm, up-front price that includes all parts and labor before any work is done. Flat rate pricing is designed to allow us to raise our labor rates to a reasonable level without experiencing a knee-jerk reaction that we often get when customers hear our labor prices. However, because we guarantee that price regardless of the time we spend on the job, flat rate pricing is fair to our customers. Flat rate fees are given only after our customer's heating or air conditioning system problems have been thoroughly diagnosed by a trained technician. Typically, a pre-determined diagnostic fee is assessed for the trip and the average time it takes your technician to determine the problems with our customer's system.
What Customers Really Want
Through the years customers have shown they want us to be professional, be available when they need us, complete repairs correctly the first time, provide a good warrantee, fix it and spare them the boring details, provide a quoted price for service, and give them a fair price.
Just like the old days, those companies that give the customers what they want will survive.
How Flat Rate Pricing Better Satisfies Customers
When we convert from time and materials pricing customers receive these benefits:
- Customer always knows in advance what we charge for service.
- Times allowed are generous, so technicians can be more thorough and they don't have to rush.
- Customer is no longer concerned about the time spent on the repair, because more time on the repair should not drive up the repair fee.
- Customers can accept or decline repairs before the work is completed.
- The same fee is charged for the same repairs regardless of the conditions.
- Customers never pay for an inexperienced technician.
- Customers are informed before the work is completed and therefore can decide whether to repair or replace.
- Customers receive a guaranteed price and a one year guarantee for all repairs.
Good Techs Are Hard to Find
To give customers that exceptional service they want, we need to have qualified help. But, if you think you can easily find good qualified technicians, you haven't been looking for one lately. Finding and keeping qualified technicians is perhaps the most critical issue facing our service industry. Qualified technicians are not born. They are developed. And that development requires a significant investment of time and dedication on the technician's part by way of schooling, on the job training and investing in the tools of the trade. However, regardless of whether our trained technicians were educated by us or came to us educated they all want the same things from us.
What Technicians Really Want
Like customers, technicians have expectations of our company. They want us to be professional and provide a safe and healthy work environment. They also want us to provide training, good pay, good benefits and provide them a career path for their personal growth. In addition, technicians want to take enough time to complete repairs properly. They want us to give customers a good warranty, and a fair price. Technicians also like to have an easy method to quote repair pricing, with the opportunity to earn additional income by offering service agreements and other options.
How Flat Rate Pricing Benefits Our Technicians
- Technicians are more relaxed because the customer has pre-approved the repair fee.
- Technicians no longer rush to complete repairs in a shorter time in an attempt to keep the price down for the customer.
- Technicians are presenting prices from a professionally bound book.
- Technicians can earn additional income by selling more service agreements because the price guide shows service agreement repair savings on the printed page.
- Technicians, working on behalf of the customers' best interests, can discuss the benefits of replacing equipment prior to completing expensive repairs.
- Technicians spend less time justifying repair fees after repair is completed.
- Technicians have fewer mathematical mistakes on customers' bills.
What Service Companies Really Want
We as business owners want to make service run as smoothly as possible. We strive to be professional, be there when customers need us, complete repairs right the first time and provide a good warrantee. We want to provide a quoted price for service, reduce pricing mistakes, and improve cash flow. We work hard to keep good employees by providing a safe and healthy work environment, provide technician training and a career path for our employees, with good pay and benefits. We want to have happy customers, get more business from referrals, turn service department into a profit center and receive a good return on investment.
How Flat Rate Pricing Benefits Our Company
- Company receives a diagnostic fee for the trip to the customer's home and the time it takes to determine the service problems.
- Company can charge higher labor rates and higher part mark-up multipliers without and adverse customer reaction.
- Company receives full labor time for repairs, not just the time on the job. Thus, more experienced, faster technicians contribute more to bottom line profits.
- Builds loyal service agreement customers.
- Allows company to budget for training.
- Company can afford higher pay and better benefits, therefore closing the employee revolving door.
- Company receives a greater return on investment.
- Service department becomes a profit center.
How Can We Achieve All This Now?
Trying to satisfy everyone's needs and still turn a profit in service is difficult and may be impossible if we hold onto an outdated time and materials pricing method for service.
Improving Service Department Profits and Keeping Customers Happy
Time and material pricing is an open-ended contract where the customer is never sure what the entire fee will be until the work is done. Overcoming high price objections and improving profits can be achieved by changing from time and material pricing to flat rate pricing because flat rate pricing takes away the customers concern about time on the job and the price of labor. Thus, by re-focusing customers' concerns to the guaranteed fee for the repair we can actually can charge more per hour and have fewer complaints. This is achieved because flat rate pricing systems combine labor and parts selling prices to give customers firm pricing quotes for repairs. Customers like flat rate pricing because it gives the customer a finite amount that he/she will pay regardless of the time spent on the job.
Going Forward in Reverse
Time and material pricing has one big disadvantage with regard to our technicians' skill level. Maybe this scenario will sound familiar. You hire a tech and begin to train him. The more you train him, the better he gets. The better he gets, the faster he gets. The faster he gets, the less money you take in with time and material pricing. The reason is that the labor dollars are tied to and billed according to the actual time on the job. Less time on the job equals less labor dollars received. On flat rate pricing, a labor time standard is set in the system. Now if your highly skilled technician works faster than the set standard, your company gains additional labor revenue. That just makes better business sense.
Good Relations Through Good Communication
If we want to enjoy the best possible relations with our customers the best way is by communicating our fees for needed repairs before we begin the work. And if you think about it, we have been trying to do just that for years. We've just been doing a bad job. How do I know? As a fuel dealer we either do one of three things when a customer needs a price for a repair. When our technician describes a needed repair and the customer asks, "How much it will cost?" the tech responds either, "I don't know, the office will bill you." Or, he tells the customer approximately what it might cost, but that is only his opinion. Or, maybe he tells the customer something like this; "I'll have to call the office to get a quote. But that will take time and I'm really busy. Maybe you should sort it all out with my manager and I'll come back later!" In any event we have just done a bad job communicating.
Flat rate pricing places a professionally printed pricing guide in the hands of your technician. The book should be used in front of the customer to quote the price for the needed repairs. It makes your company and your technician more professional. Your customer now has more confidence in what they are told because they are assured the quote is a standard price that all your customers receive for that repair.
I cannot think of a better way to keep our fuel customers happy and continuing to do business with our company.
Biggest Advantage of Flat Rate Pricing
As we have discussed, there are several benefits to flat rate pricing for the customer, the technician and the company. However, the biggest advantage is the additional revenue flat rate pricing can generate in your service department.
Adding to Your Hourly Labor Rate
Starting with 8 potential billable hours per technician we know that we can bill 50% of our technician's time. Therefore, on an 8-hour day we assume we can bill 4 hours per technician. 4 hours per day multiplied by 250 workdays per year is 1000 billable hours. A $10 increase in our hourly labor rate can result in the following increase in revenue of $10,000 per technician (1000 x $10 = $10,000).
What is Your Potential Revenue
The chart below may help you decide what impact flat rate pricing will have on your company based on an increased labor rate and the number of service technicians you have in your service department. It may also help you to decide to convert your service department to a flat rate system.
| Service Rate Increase | Additional Revenue | |||
| 1 Tech | 3 Techs | 5 Techs | 10 Techs | |
| $10 | $10,000 | $30,000 | $50,000 | $100,000 |
| $15 | $15,000 | $45,000 | $75,000 | $150,000 |
| $20 | $20,000 | $60,000 | $100,000 | $200,000 |
Better Service Through Higher Retail Prices
As you can see from the chart, flat rate pricing can add significantly to your service revenue. The additional revenue will allow for improvements throughout your company. If we are truly determined to provide better service to stave off the competition, then we must increase our retail prices. We cannot become better service providers if we are just getting by on our service revenue.
How Do We Raise Our Rates
As I mentioned earlier the best way to decide what to charge is to know our true cost of service. That is your best starting point. Other factors such as what your current labor rate is and what the market will bear should be considered. If you charge a minimum half hour or one hour fee on your present time and material pricing system you should take that into consideration to determine the appropriate amount of labor rate increase on flat rate pricing. One strategy is to look at a combination of your diagnostic fee and one sixth of your new hourly rate. The total should not be less than your present minimum fee for labor.
The Best Results are Measured by Customer Satisfaction
One may think that higher prices for service will result in more complaints about service pricing. Actually the opposite is true with flat rate pricing. Customers like to know in advance their repair fees. They also like to know that regardless of the time spent on the job that fee will remain the same. Customers also like to give their approval to the work needed before the job is completed. If an option is presented to replace rather than repair a system, the customer likes to have the opportunity to make that decision before spending money on the repairs. Flat rate pricing is a better way to communicate with your customers. Quite honestly, with flat rate pricing your customer satisfaction index should improve.
The Best Flat Rate System for Your Company
When you begin to research flat rate pricing systems you should find a system that best suits your needs. As a fuel dealer you will want a system that deals with a wide variety of repairs to oil systems. You will also want to decide whether to purchase software or subscribe to a flat rate publishing service. Buying software may give some options about updating more frequently, but will require you to build and maintain the database. Subscribing to a flat rate publishers system gives you the opportunity to focus in on use of the price guide as opposed to producing it, but will offer less flexibility with regard to printing price guides. You may also want inquire about implementation training that may be available from your flat rate provider.
A Better Bottom Line
Regardless of your choice of system, the most important decision you will make about flat rate pricing is your decision to do it. Conversion from time and material pricing to a flat rate pricing system is a journey that isn't difficult with the proper system and implementation. And the financial rewards to your service department can be astounding! To help you decide on converting to flat rate pricing ask yourself this question. "When is the best time to start making more money?" If your answer is "Now," your decision is easy.
* Jim D’Amico is President of Profit Strategies, a provider of retail pricing systems for service and installation for the HVACR and Plumbing trades. Jim is available at JimD@ProfitStrategies.net or 800-353-4393. The Profit Strategies main office line is 888-229-4100. www.ProfitStrategies.net.
