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Is Your Service Department on Flat Rate Pricing Yet?

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It’s an old topic but it needs to be revisited……again!  Has your service department adopted flat rate pricing yet?  If not, it’s time to seriously consider the conversion.  Most contractors have very strong opinions about flat rate pricing one way or the other.  However, the reality is this.  If you have actually sat down and calculated what you need to charge per hour for residential service it is highly likely your hourly rate well exceeds $100/hour.  Guess what, it’s a tuff sale to the customer if you are on time and material pricing.  By the way, it is the rare company that can charge less than $100/hr. for service and still make a reasonable profit.

The concept of flat rate pricing is a matter of customer perspective.  Let me see if I can make the point with a simple example.  Close your eyes and visualize that you are living in my hometown of Owensboro, KY.  There is a really nice subdivision where the average home is $500,000 or more.  It has rolling hills so most homes are two story with walkout basements.  Who lives there?  Older people with lots of money!

Its fall and the huge oak and maple trees leaves are changing color.  Mr. and Mrs. Jones are walking around the back yard admiring all the beautiful fall foliage.  Suddenly Mr. Jones says, “Look Mabel, our gutters are full of leaves!  I think I will go get the 40 foot ladder and clean them out.”  Now it’s Mabel’s turn to talk. “Bill are you nuts, you’re NOT getting on that ladder.  You might fall or get hurt at which point I will be the one taking care of you.  You are NOT getting on that ladder.”

Suddenly the front doorbell rings and its little sixteen year old Johnny from down the street. “Mr. Jones, I noticed your gutters are full of leaves.  Would you like me to clean them out for you?”  Mr. Jones then asks how much little Johnny is going to charge.  Johnny tells him he charges $50/hour.  Mr. Jones blood pressure instantly goes up as he slams the door.  He is not paying any sixteen year old $50/hour for anything, period.

Now let’s look at same situation, but from a different perspective.  The bell rings and little Johnny again asks Mr. Jones if he wants his gutters cleaned out and Mr. Jones again asks how much he is going to charge.  This time, however, little Johnny tells him he will charge $50.   Mr. Jones is now thinking “Wow, $50 doesn’t sound too bad.  Besides I won’t have to get out the ladder out and Mabel won’t be upset. “Sure Johnny, go ahead and clean them out”

Now how long will it take little Johnny to clean the gutters?  Probably an hour but now Mr. Jones is focusing on the price of getting the work done and he is NOT focusing on how much little Johnny is charging per hour.  Yes, flat rate pricing (sometimes called Up Front Pricing or Guaranteed Pricing) is simply a matter of perspective.

Let me summarize some the benefits of being on flat rate pricing.

  • No Longer Have An Hourly Rate – Now the potential customer can’t call all over town to compare hourly rates to determine who will do the repair. Besides, a lower hourly rate does not necessarily save the customer money.  It might take the lower rate company twice as long to get the job done.
  • Less Customer Complaints – Flat rate pricing eliminates 90% of your customer complaints. What do customers complain about?  Complaints generally center around how long did it take and/or perhaps they have looked up the part cost on the internet.  Both items are now invisible to the customer.
  • Better Cash Flow – Since there is no calculation on the techs part, or the office, payment can (and should) be collected at the conclusion of the repair.
  • No “Announcement” of Rate Increases – On time and material a $5 or $10 increase in your hourly rate is a big deal. The company not only had to announce it to the customer, they had to somehow justify the increase.  If the company were on flat rate pricing they would simply need to change the internal hourly rate and have their book reprinted, or tablet pricing updated.  No announcement to the customer, no disruption of service and no customer complaints.  New books are printed and out the door the tech goes with the price increase being invisible to the home owner.  Oh, did I mention profitability just went up!
  • Your Best Technician Is Now Also Your Most Profitable – When the company bills based on time and material who is the most profitable tech. It’s your slowest, least efficient technician.  After all the customer is billed based on how many hours it takes to do the job.  However, when flat rate pricing is utilized, the customer is billed by the task.  The quicker the task is properly performed, the more money the company makes.  Bingo, “now” your best tech is also your most profitable tech.

You might also want to consider the fact that the trades industry is the only industry that currently does not tell the customer how much it will cost BEFORE the job is done!  Can you imagine strolling through the grocery store, or retail store, and simply putting items into your cart, not knowing how much they will cost?  Sounds crazy doesn’t it but that is exactly what the trades industry does.  To make matters worse, some customers don’t find out what the repair cost was until they receive their bill a week or two later!  Oh, and by the way a recent nationwide survey revealed that 90% of residential customers preferred flat rate pricing over time and material pricing.  It an old principle, but it’s true. Give the customer what they want!”

By the way, when you do switch to flat rate pricing, or if you are already on it, please, please, please update your books, or tablets, at least twice a year with new pricing.  The cost of doing business is constantly going up.  If you don’t increase your hourly rate as costs go up who eats the increase?  Right, the company does.  Even if costs don’t go up (da, living in dreamland) the cost of parts has risen.  I think you get the point.

Now for one last closing comment.  Customers call for service when they have a problem, right.  When it’s fixed the sense of urgency has vanished.  If they paid for the repair when completed, all is well.  If they receive a bill in the mail a week or two later the sense of urgency is gone and the bill gets put in the pile marked “Pay when we have some extra money lying around.”

Thirty years ago auto repair facilities charged by the hour.  Today 100% are or flat rate pricing for each repair.  Guess what, that is where the trades industry is headed.  You can be a leader, or you can be a follower, but the wave of change is on the way!

Tom Grandy

Posted In: ACCA Now, Management

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