When Was The Last Time You Updated Your Flat Rate System?
Flat rate, or up front, pricing arrived on the scene in the 90s. It was a true lens change for company owners. It provided the “needed” vehicle to allow service departments to charge, what they really needed to charge and to cover costs while generating a reasonable profit. Prior to flat rate pricing, raising hourly rates was a real hassle especially knowing even a minor increase in hourly rates was going to cause a major stir within the customer base.
However, once a company switched to flat rate (where the customer never sees the hourly rate) price increases were a snap. If the company needed to increase its hourly rate by five, ten, or more dollars it was easy. Simply reprint the books, or update the tablet, and out the tech went the next day. There was no announcement to the customer base and best of all no customer backlash. Few, if any, customers even knew the rate change had taken place!
Now let’s address the phase two, generational problem. I have talked to nearly all of the flat rate companies and they all seem to have the same problem. What’s the problem? Once on flat rate pricing many company owners were slow, if not totally reluctant, to increase their internal hourly rates.
We have all heard the joke about the fellow that sold his mule to another farmer claiming the mule was a fantastic worker. However, after several days the new owner called the old one complaining that he couldn’t even get the mule to pull the plow, much less work at a high rate of efficiency. The original owner drove over to the new owner’s farm. He got out of his truck, took a 2×4, and with all his might hit the mule up side of the head with it. The new owner came unglued. “Why did you hit the mule?” The original owner simply said “This is a great mule, but I forgot to tell you, before he will work you need to get his attention!”
Ready or not, I am about to get your attention!
When presenting our full day Service Manager’s University seminar/workshop the class is led in a short exercise. As a class, we record on a flip chart all the cost of doing business that have gone up, for one service tech, over the past year. Below are just a few items the class listed:
- Techs get a $.50 or $1.00/hour raise
- Insurance goes up (W/C, vehicle insurance, health insurance, etc.)
- Vehicle maintenance increases and perhaps the cost of gas
- The cost of parts from the distributor/manufacturer went up
- Overhead within the service department increased (staff raises, their benefit package, etc.)
- General overhead for the entire company increased, a portion of which will be allocated to the service department
The total increase, for one tech, is usually in the $10,000 to $15,000 range for the year. Can your service department afford to absorb those kinds of cost increases year after year…and still be profitable? The answer is a resounding no!
Even if the increase was only $10,000 for the year that means the hourly rate would need to go up $10.00/hour ($10,000/1,000 billed hours per year for a service tech) just to maintain profitability!
As the seminar comes to a close the class is asked to share one or two things they plan on doing when they return to the office. Routinely, nearly half the class says they plan on updating the internal hourly rate within their flat rate system.
My suggestion is to update your flat rate pricing system at least annually, if not twice a year. Keep in mind the fear factor of increasing your hourly rate is on the part of the company, not on the part of customer. As a matter of fact I would strongly suggest you add an extra dollar or two to your “needed” increase just to improve the overall profitability of the service department. Remember, when you are on flat rate pricing the customer never even knows the hourly rate has changed. Simply update your system on Friday and head out Monday morning with new pricing…and increase profitability.
Hopefully it didn’t take a 2×4 to get your attention. Now for the really hard part, calculate the needed hourly rate change and institute it into your flat rate system ASAP.
BECOME AN ACCA MEMBER