'Going Rate' ... Or Going Broke?
That concern is legitimate in today’s marketplace. However, I flatly disagree that you cannot bust the going rate without losing business. In fact, I suggest doing just that — and I’ll give you some examples and tell you how.
Fallacy Of Going Rate: I don’t believe you can hang on to the going rate and keep your business competitive and growing. To me, charging the going rate means losing business and watching your business deteriorate. Here’s why: The going rate, in most cases, is influenced by (though not always the same as) the least amount a local competitor is willing to accept for his services. Often a company attempts to buy business or hold on to business by being the lowest priced supplier of services, depressing local labor rates.
Unfortunately, there is little independent analysis of the market, the customers’ real concerns and the actual cost of doing business by companies that only follow what they believe the local going rate to be. Sadly, the lower cost service companies eventually end up with a very small business supported by a small segment of the market who shop price alone, or they go out of business. Meanwhile, some quality service companies have been forcing themselves to try to stay profitable with the failing companies’ prices and margins. Although many service business owners try it, competing with those who run their business based on low price only — often ignoring real costs, and who fail to focus on adding value for the customer — is a losing strategy.
Why then do I see so many companies falling into this trap? It’s simple, the pressures for keeping rock bottom prices is substantial. So, many owners cave in to the pressure and try to survive. Let me share some of the examples of so-called common wisdom I have encountered and some you may have heard, too.
One of the toughest inquiries to respond to is one from family and friends. They may tell you they think they can get the same job done cheaper somewhere else. The fact is that they probably can find some service company that will do the job cheaper.
So they want you, their “friend (or relative) in the business,” to match or beat a price offered by any inexperienced person in the trade. They think you owe it to them. Certainly you may feel obligated to offer them something special, and it’s your decision, but to give away your company’s services is asking a lot. You may soon find you have many friends or relatives who only contract you when they need service and repair work done. To put the issue in perspective, would they offer to lose money on something they did for their employer to help you out? I don’t think so.
Questions From Customers: “It only took your service technician 20 minutes to repair the machine. Why does it cost so much?” What’s your response to objections like these from your customers? Do you have one, or do you give in to any gripe, legitimate or not, from a customer?
Without disagreeing with a customer, you should remember that you paid a trained and qualified technician to drive an expensive, well-equipped truck to that customer’s home and back again. That time alone may be longer than the time spent on the repair job. And it’s not cheap to operate the truck and carry an adequate inventory of parts and equipment and tools. Be prepared to discuss these thoughts that customers sometimes throw at you and your technicians.
Another similar objection is: “I called around ...” The statement may be completed with a finding of lower labor prices or some other advantage. It implies you’ll match whatever data the customer supposedly uncovered. The truth is the labor rate is only a part of the job, and may not mean that the job cost would have been less. And no mention is made about the quality of the work.
One of my favorites is: “I have a cousin who’s a handyman, he can probably fix it cheap.” That fact may be true, but that’s not the business you are in; you run a professional service and repair business, probably requiring some licensing and regulatory requirements. Your technicians are trained and experienced. Your business has a reputation, based on quality work for the number of years you have been in business.
A scary response is the one where the customer reveals a technician from a company nearby can do the job “after hours” for only a few bucks. In those cases, the technician is using his employer’s truck, equipment and parts and materials and only charging for his time. Of course, none of the money goes to the employer — and the liability for anything that goes wrong, including injuries, is the employer’s. These moonlighting situations must be policed by your company, or you will incur lots of liability and expenses, but lose the revenue from the jobs. We have a strict policy (technicians caught are fired immediately) and safeguards, like detailed accounting for all invoices, to avoid moonlighting by technicians.
A popular analysis of prices for service and repair work these days is to compare the charges to those of doctors and lawyers. The implication is that the service and repair work costs as much as the fees for what are often thought to be the most educated and well compensated professionals in our society. How dare an air conditioning repair person charge as much as a doctor! Although making an analogy between the charges for service and repair work and medical fees is tempting, the comparison is faulty. For example, when was the last time your doctor drove 60 miles to come and see you? They don’t make house calls anymore, however, all of our business is house calls.
I could go on and on with the questions and objections all of us get in the service and repair business, but you get the idea. Every one of these claims by customers, real or imagined by the business owner, tends to influence pricing decisions. The more we believe the rumors and common wisdom, the more inclined we are to stick to the labor rate that is the going rate in the area. I don’t think these reasons are sufficient to follow a pricing strategy that hurts your business.
From what I have heard across the country and from our own customers, I believe there are two reasons for service business owners to attempt to rationalize sticking close to the local going labor rate. First, it’s a confidence factor. Maybe I should say lack of confidence. The service business owner must have the confidence to believe that their customers will actually pay for quality service. Second, you have to know your costs — all of them — and understand the margins you need to keep your business profitable and growing.
I can say this in our town, where there are still service businesses charging $40 an hour for their work, while we typically get $130. And we are growing and prospering and they are struggling. I have looked at the financial statements of businesses charging those low rates and proven that they are making no money. Those rates do not allow them to break-even.
Despite the causes for undercharging, unless it is eliminated there will be more service businesses in trouble. The good news is there is a way to do it that is easy and can be implemented quickly.
Thousands of service businesses have done it; we did it almost 20 years ago. If you offer customers service and repair work, you must: 1) be prepared to offer the best service available; and 2) charge a flat rate price. Customers want service, and they are willing to pay for it. They don’t want to second guess your labor rate, your parts prices and your overhead — unless you give them the opportunity. That’s what you do with time and materials pricing. They are encouraged to shop the labor rate and shop the materials prices at home warehouses. You’ll continue to have numerous objections to overcome, until you switch to flat rate pricing.
The other incentive for getting away from the going labor rate and switching to flat rate pricing is reviewing your costs of doing business. How much does it cost you to place that technician at the customer’s home? If you haven’t done a recent break-even analysis on your costs of doing business, now is the time. You might be surprised what your real costs are. Computer programs can help you do this quickly and simply, or see your accounting professional for assistance. Once you know your costs and add your desired markup, you will realize the amount you need to charge. Flat rate pricing will let you generate those revenues.
Switching to flat rate pricing is more than raising your labor rates. You have to supply the value customers want. For example, no more technicians arriving in dirty T-shirts while growling a coarse greeting to the customer. You’ll need trained professionals in clean uniforms. Additionally, you’ll want your technicians to show the customer a price in an attractive price book, before the job is begun.
Some of your customers may still price shop labor rates, parts prices and “call around” or go to their cousin, etc. They probably represent the bottom 10 percent of your business, as far as repeat business or profits or future potential for referrals. Good riddance if they leave. You are probably not making anything on those jobs anyway. Let them go and replace them with customers who appreciate value. (With higher margins you don’t need as many jobs to generate the same profit.)
Adding value and using flat rate pricing is the only way I have found to generate the combination of customer satisfaction and profitability you need to grow your business.
Staying with going rate could mean going broke. Switching to flat rate is your chance to grow.