Why Flat-Rate Pricing Is A Good Idea
Flat-rate pricing is nothing new. It’s been around about as long as money has. It is certainly not unique or unusual. Many industries use it, including dry cleaners, accountants, auto repair, and computer service. Even manufacturers use it to pay their dealers to perform warranty repairs.
That’s because it makes sense.
Time and materials (T&M) pricing is actually more unusual and less popular than flat-rate pricing. Have you ever bought a home, car, or even a meal on T&M? Our industry seems to be one of the last remaining holdouts clinging to T&M.
Flat-rate pricing seems to be a very hot topic right now. Most service departments are losing money and are a real drag on their company’s bottom line. For years, service has been viewed as a necessary evil if you wish to be in the installation business. Business people are anxious to convert their service department from a loser to a winner. Flat-rate pricing is a tool that can help.
You already use flat-rate pricing. Every time you write up a proposal or a maintenance agreement, you are using flat-rate pricing. Whenever you are asked to quote a fee, that’s flat-rate pricing. Quoting is flat rating and most companies quote 65 percent to 85 percent of their annual sales.
Each time you explain to a customer what needs to be fixed, you are interrupted with one question. The question is “How much?” Technicians attempt to explain their company’s charges using the old time and material song and dance and they look unprofessional at best. Customers are nervous of financial situations that are out of their control, so they demand that your techs give them a guaranteed price. Under pressure, your technicians offer the customer a range, perhaps $200 to $300. He just quoted them a price of $200, and the customer is timing his every move. Your techs don’t deserve that.
With flat-rate pricing, your technician explains the options to the customer and quotes a firm price up front. Having full control, customers can decide what they want done and offer their approval. Who could complain about that?
When you quote out of the book, the math is already done, proper spelling is right in front of you, and the customer is assured that he or she is paying the same price everyone else is paying.
Collections are a breeze. Have you ever noticed that most of your complaints come from invoices that were filled out after the tech left the jobsite? Very few people complain about invoices they have already paid!
Increased ProfitsAnother important reason to use flat-rate pricing is to allow your company to benefit from fast, efficient repair work. Have you ever noticed that your fastest techs bill out the least amount of money and enjoy the highest hourly rates? We call this the “backward equation.” You hire a tech, train them, supply them with tools and equipment, and they get good and fast. The better they get, the more you pay them. The faster they get, the fewer hours they bill on each call. You are losing money on great techs. Flat rate rewards the efficient and penalizes the inefficient.
Do you make more money on T&M pricing or do you do better on bid work? You may have noticed that when you must do a job on T&M, your profits are limited. When you bid a job, you have a chance to make a decent living when you do a quality, efficient job.
T&M sets a limit on your profitability. No matter how good you get, that limit still exists. No one ever got rich being paid by the hour.
Another reason to flat rate is so you can charge what you are worth (and only what you are worth) and not be unfairly compared to an ignorant competitor that is cheaper. You will catch more telephone shoppers. You see, someone will always be cheaper and customers often do not know what else to ask about except price.
Taxicabs routinely bill out well over $110 per hour and the cost of operating a taxicab doesn’t even compare to a $25,000 “hardware store on wheels” driven by a tech who is almost impossible to replace. And the taxi driver expects a tip! How can they get away with those rates? Simple — they don’t charge by the hour. In fact, many large cities actually require cabs to provide guaranteed flat-rate pricing to major destinations.
It’s impossible to provide high-quality parts, trained personnel, and excellent service, 24 hours per day and still be cheap. It can’t be done. Stop allowing the public to compare your hourly rate to that of your most ignorant competitor. You can sometimes outsmart the competition, but you can never “out dumb” them.
Some Flat-Rate FallaciesContrary to what some might suggest, flat-rate pricing is neither unfair to the consumer or a guarantee of success. Flat-rate pricing is no excuse to charge more than what your company is worth. You don’t have to use flat-rate pricing 100 percent of the time. You can still quote an hourly rate for certain diagnostics and repairs. Who said it was all or nothing?
Why would anyone be against flat-rate pricing? We have read their explanations, but we wonder how many of these flat-rate pundits demand a guaranteed price for themselves? How many of them would drop off their VCR for repairs and not demand to know the cost of the repair prior to authorizing the work? We doubt many would go for this.
Some are under the impression that a flat-rate book would be hard to create and that the book would have to be huge. Neither is true. Deal with a flat-rate provider that has actual experience in the field and has used the book they sell.
Complainers often cite that the only people that recommend flat-rate pricing are the people who sell flat-rate pricing systems. If this were a legitimate argument, then lawyers would not be allowed to recommend a will or a trust. Doctors could not recommend surgery or medication, and so on. The fact is that there are many experts that recommend it but don’t have a financial interest in selling it. In our case, we recommended it long before we developed one to sell.
Advocates of T&M will tell you it’s not fair to charge a customer the average price when a job goes better than expected. Is it fair to charge your customer more when your techs don’t have the right tools, parts, or training?
In the final analysis, you will have to do the research and decide if flat rate is for you. Talk to both sides. I would never tell you that you’re wrong. That’s not my place. You do what’s best for you. But remember this old saying: “There are three types of people: those who make things happen, those who watch things happen, and those who wonder what happened.” Which one are you?
Leichter has 20 years of experience as a technician, business owner, and consultant. He is the president of MrHVAC.com. He may be contacted at firstname.lastname@example.org.
What Do You Think?
Is flat rate the way to go, or is time and materials the best way to price a repair? Let us know which method your company uses. Drop us a line at The News, P.O. Box 2600, Troy, MI 48007. Letters may be sent to LetterstoTheNews@bnp.com or faxed to 248-362-0317.
Publication date: 03/24/2003