The first question I ask in response to the disappointment I hear in owners’ voices about their profits is, “How much are you charging an hour?” If you are still charging only $45, $55 or $65 an hour (rates I still frequently encounter), then you may fall into this group of low margin/low profit companies. Before I get a chance to show you the benefits of charging more, I usually get the objection that customers may resist increases. The fact is everything goes up periodically, just like your costs have gone up. I find much of the supposed resistance from customers is often in the owner’s mind. In suggesting a solution, I will assume the resistance has some merit and may affect business.
Before we worry about customer resistance, we should be concerned about covering our costs. The first step in any analysis of a service business is to know what it costs to do business. How much does it cost you to place a truck at the customer’s home with a trained technician, all the necessary equipment and everything else he needs to complete a service and repair job at the customer’s convenience? If you don’t know the answer, you are missing some key bits of information that you need to run your business. What I am talking about is your break-even point. This data is essential to know so you can profitably run your business. Without it you are driving blindly down the financial highway and risking the financial success of your business.
There are training sessions and seminars available everywhere to help you become familiar with this required information for your business. Frank Blau has been offered training on number crunching for years. I agree with him. You must know what it costs you to do business. However you get the data, find out what it costs you to put that truck and technician at the customer’s home, and to complete the job. If you are unable or don’t want to do it yourself, your accountant can help you.
If you have three technicians working all day they probably don’t bill more than six hours out of the eight or more hours they are doing service calls. Admittedly, much of the time is wasted, or at least can’t be billed, in driving between shop and customers or for parts, etc. Let’s take those six hours and add $10 per hour (times six hours) to their charges. That comes out to $60 each, or for three of them, $180 per day. Assuming a five-day week, that means $900 more for each week. If we consider they produce 50 weeks a year, that means they have added $45,000 a year to our bottom-line net profits. Nothing changed except a slight increase in labor rates, which represents a $45,000 raise for you. As boss, you could use a raise, particularly if you are charging labor rates near the bottom end of the scale for the country.
A Simple Formula: From the above sample computation, we can produce a simple formula that will tell us how much more we will profit from a simple increase in hourly labor rates. For example, using the same assumptions, we can increase what we keep by about $15,000 per truck if we increase our rate only $10 per hour. If your technicians are able to bill more than six hours or work more than 50 weeks, then your increases will be correspondingly larger. If you have 10 trucks, that’s $150,000 per year — all from a measly $10 an hour increase.
Now let’s consider a $20 an hour increase. Naturally, you double all the numbers from a $10 an hour increase, so you end up with a $30,000 increase in profit, per truck, every year. And that increase is not unreasonable. It makes a lot more sense after you look at what your costs really are, if you don’t know already.
I hear at my seminars around the country that everybody is so busy. They are working hard and their technicians are scheduled all day. More business than they can handle. Many have trouble getting or keeping technicians to do all the work they have. However, if they had more technicians they could make more money and not turn jobs down they can’t do because they are short of help. I believe the challenge of being able to do all the jobs and the low-margin/low-profit complaints are related and can be solved together.
When businesses are faced with more demand for their services than they can handle they, typically, raise prices. With the economy strong, there is a lot of business out there. We have to recognize that we may be turning some down, due to our incapacity to supply technicians. Raising labor rates and prices now only makes sense. Even if we lose some business, we still may be at our maximum capacity to complete the jobs we get called for. I put it this way, “If you are so busy that you can’t handle the work, why are you giving it away?” Now is the time to implement your price increase — and look at the return you get. Would $15,000 a truck, per year, look good to you at the end of the year? And that’s for only a $10 an hour increase in labor rate.
Usually, when you change some aspect of a business there is an offsetting cost. For example, when you add more equipment to better perform some types of work, the cost of the equipment must be factored in to your pricing structure. However, with a simple increase in labor rate there is no increase in cost. Maybe, just maybe, you’ll lose a few customers. But you are probably at or near your capacity anyway. And the customers who object would probably continually object to any service company, and not be loyal to them either. As soon as they find a company with lower prices, they would call them. Of course, they would soon realize you get what you pay for, and the quality of the service they receive would be lower.
Most of your customers will stay with you. Only the ones you do not want will go. So the offsetting cost for a labor rate increase is nothing. It’s about the only thing you can do in your business that provides much in the way of benefits, with no offsetting cost.
Looking Ahead: Looking toward the future, you will need more technicians and need to attract the best technicians. Both will position your business ahead of the competition. You will be able to book more jobs and increase your customer’s loyalty because your technicians are the best and do the best work. It is my recommendation you invest some of the increase in profit you receive from your labor rate increase in training your technicians and in recruiting new, top quality technicians.
Just like purchasing materials, equipment or something from a department store: You get what you pay for. If you want the best, you’ll have to pay for it. And if you want to keep the excellent technicians who are working for you, you will have to compensate them or they will leave. So consider investing your newfound profits in better-trained and better-rewarded technicians. Your investment will be returned to you in excellent service to your customers, a superior reputation and — as you might expect — more profits for the long term.
Raising labor rates, I know, makes many service business owners uneasy. Despite the fact their customers will remain loyal as long as they have been offering top quality service, they are nervous about any increase. I have an easy way for you to deal with this issue. If you raise labor rates, you’ll have to tell your customers when you quote the jobs.
The increase, ultimately, will have to be communicated by your technicians (who may be uncomfortable doing so). Whether verbally, or by referring to a price schedule, the job of informing the customer gets assigned to the technicians. The difference, if any, to the customer will probably depend on whether they have scheduled a service call lately or if they remember the old labor rate. Let’s assume the worst, that they do remember. They will know the rate has gone up and either complain, disregard it or expect some response from the technician. Not fun for the technician.
An easier way to implement a labor increase is to put into effect what I believe is the only effective way to charge for service and repair jobs: Switch to flat rate. You need to increase your rates, and you want to make it as easy as possible on the technician and the customer. Flat rate takes care of all of those concerns for you. First, the labor rate increase is embedded in the flat rate price of the job, so it is not discussed with the customer. Second, the customer understands what the total cost of the job is up front, so there are no surprises. And third, the technician’s job is easier because he doesn’t have to sell the customer on the labor rate.