Flat Rate Update - Computing Your Profit
Hundreds, maybe thousands, of companies have switched to flat rate in the last few years. That change in the way service and repair companies did business was responsible for better customer service and improved profits for a significant segment of the industry.
Most of the new flat rate users received their flat rate manuals a few years ago. Remember when you first switched to flat rate pricing? You got new pricing books after making sure all the jobs your company performs were in the book. The prices were based on your (real) overhead and the profit margin you wanted.
That approach was a plus for the business. For some companies it was the first time their true overhead and desired profit margin was reflected in their pricing structure. And it has been working well. However, it's time to make some changes.
New NumbersFlat rate pricing is well received by customers, unlike the old time and materials pricing. When expenses went up in the old days, you just raised the hourly charges - and faced the predictable customer objections.
What can you do these days with flat rate pricing calculations already built into the pricing manuals? That's the question I hear as I travel around the country working with service and repair businesses.
When you look at your costs for insurance, fuel, workers' compensation - and the increases in those charges that your business has experienced in the last few years - you are not receiving the same margins you were when the flat rate manuals were produced. With some of the cost increases, particularly in fuel pricing, it's time to recalculate the numbers used to develop the flat rate prices you offer to customers.
Every day you use out-of-date figures you lose profit, or maybe you're not breaking even. Cost calculations need to be updated. Let me share some ideas, step-by-step, for updating your flat rate manuals.
Step 1 - Figure costs first. The first thing you need to do is determine the overhead costs you spend to run the business. Include all the costs. If you omit one, it will not give a true picture of your operating costs.
Step 2 - Calculate break-even point. If you take all of your costs and divide by the billable hours spent providing service and repair work for your customers, you will know the break-even point per hour of work performed. No profit, just what it costs you to deliver an hour of service work. Not the labor rate, but the true break-even cost per hour of work for customers needed to operate your business.
Once you know the break-even point, you can use that number as a starting point to set your prices for each job.
Step 3 - Set profit margin. Effectively using flat rate means you determine your profit margin before any pricing is listed and build it into the price for each job. (Instead of seeing what is left over at the end of each financial reporting period to determine what your margin came out to be.) If you pick a 20 percent profit margin, for example, you will calculate the sales price of the job based on that profit margin. You do not just add 20 percent to the break-even cost of the job.
Step 4 - Calculate basic job price. Using your desired profit margin, you are ready to calculate the basic job price. If you want, for example, a 20 percent profit margin, you divide by the cost of the job by the reciprocal of the profit margin (1 minus the margin of 0.20), in this case producing a reciprocal value of 0.8.
Dividing the cost of the job - let's use $100 - by 0.8 gives us a selling price of $125. Given a job cost of $100 and a desired profit margin of 20 percent, you price the job at $125. Now you have the new basic price of the job, but there's more.
Step 5 - Add special account fees. If you have worked with me before or heard me speak to service and repair business owners, you will recall that I advocate adding a few minor charges to each job for special accounts in the business.
For instance, adding $2.50 per job in what we call the Education Account will set aside funds for technicians to attend training classes in any area of professional services - not just technical or equipment training - that they may be interested in, including sales, customer service or communication skills.
Each technician has his own account. A contribution is made to the account from each job he completes. Soon each technician has a sizeable balance in his account, waiting to be applied to training programs. It is also a motivator to remain with the company because the account is forfeited if the technician is no longer employed by the company.
Similarly, we suggest adding to the cost of the job another small charge, $2.50 works well, for a Tool Account. Much like the Education Account, money is set aside from each job for the technician performing the work that is applied to a separate account for the purchase of tools.
If there is a new tool a technician wants, he can use the funds in his tool account to purchase the tool, as long as there is enough money in his account. Like the money in the Education Account, funds from the Tool Account are forfeited if the technician works for the company.
Step 6 - Totaling the numbers. After determining the total costs of operating the business; then dividing that by the total number of billable hours to get the break-even cost for each hour of work; then computing hours required for each job; then calculating profit margin and special charges; we, finally, have the cost of each job recomputed for a new flat rate manual.
But we are not finished yet. We still have two more steps.
Step 7 - Layout and print the manuals. Once the price is computed for each job, you need to produce an attractive manual that invites the reader (customer) to scan the page easily and find the job he needs completed, confirming the job price quoted by the technician.
Use colored paper, show areas of emphasis in bold and use tabs to identify sections in the manual for different types of work: one for the plumbing section, another for the heating section, etc.
You will also find it valuable to have sections on installation guidelines and service agreements. The section on installation procedures backs up the technician when he says he is required to replace some of the worn or damaged parts and connections related to the job, and it consoles the customer, since they know all technicians must perform the repairs in the same manner.
The service agreement material can make it easier for the technician to inform the customer of the benefits of purchasing a service agreement.
When you prepare them to be bound, specify a comb binding because they will lie flat; the pages will flip easily and stay secured in the book through use.
You can see that these manuals are sales tools, much more than just lists of prices. That's why it is important for them to be attractive, readable and informative.
If your company does not have the software to print the flat rate manuals, contact Maio or another company that can offer you printing services so your manuals maintain the professional image of your company. They will help your technicians sell more jobs, so take the time and resources to produce high-quality books.
Step 8 - Distribute manuals and train technicians. The job of updating your flat rate manuals is not complete until you distribute the books and train your technicians. First, make them turn in their old books. You will likely see tattered and torn manuals that have become very familiar to your technicians. Instruct them again on using the new manuals, touting any new features in the books, and their attractiveness and ease of use in front of the customers.
Hold brief training sessions - even contests - among the technicians to determine the new price of a common job and add-on job - for customers with service agreements and without. Not surprisingly, they may come up with different prices for the same job, even with the books in front of them. Make sure they are familiar with the books and know how to use them before they go on the day's service calls.