Strategically Setting the Right Price
HVAC contractors discuss how not to price yourself out of business
Setting a price structure is typically one of a business owner’s greatest challenges.
If a company’s commodity is priced too high, potential customers are likely to look elsewhere. And, if its costs are too low, the business may fail to generate enough revenue to pay it’s workers or management.
Considering the many factors that constitute a price, including production, demographics, material costs, waste, labor, and more, many HVAC contractors admit that strategically managing the cost of services is an essential part of operating a successful HVAC business.
When it comes to pricing strategies, most HVAC contractors use a flat rate or time and materials (T&M) model or a combination of both. Each method offers its own advantages to service contractors.
Paul Ainsworth, owner of M.L. Building Technologies in Millsboro, Delaware, utilizes both pricing models in his business. “I use flat rate pricing unless a customer wants or needs something unique done. Then it becomes a time and material operation. I don’t charge overtime, and this seems to work well for my demographic, which is a combination of suburban and rural customers.”
Ainsworth admits his operation is smaller and has less overall overhead than many larger companies. And, while he’s not the cheapest company in town, he’s not the most expensive, either. “I try to show my customers value in what I do and sell, and if they still don’t get it, I encourage them to get additional estimates, as long as they are apples-to-apples estimates.”
Rob Minnick, owner of Minnick’s Inc. in Laurel, Maryland, uses a flat rate pricing strategy, which he believes makes things easier on the customers.
“With a flat rate, the customers know the cost before we do any work,” Minnick said. “Also, this minimizes any worry about time. The customer is not worried about any additional time a technician may spend searching for parts in the truck or talking on the phone with support.”
Rich Morgan, president of Magic Touch Mechanical Inc. in Mesa, Arizona, agrees that flat rate pricing eliminates clock watching.
“Flat rate pricing allows a technician to quote the customer’s entire investment upfront. It eases any anxiety a customer may have with the time and materials pricing method.”
Flat rate pricing also brings peace of mind to the customer, said Scott Merritt, owner of Fire & Ice Heating & Air Conditioning in Columbus, Ohio.
“We believe it’s the only way for a customer to make an informed choice,” Merritt said. “The customer should never be unaware what a repair will cost before the work occurs, and, if a tech is inexperienced, that shouldn’t cost the customer more. Flat rate eliminates any unknown variables.
“We have two jobs when we walk into a house,” continued Merritt. “No. 1, fix the unit; No. 2, fix the customer. That customer has invested in our company enough to know they are being charged a service call fee, and it’s up to us to give them a consistent product. We believe flat rate pricing allows us to do just that.”
CREATING A MENU
Determining pricing for HVAC services is as important as putting gas in your car, noted Mike Gorman, owner of TechKnowledge Systems in Miami. “You can’t get anywhere or do anything if you don’t have the right prices — it’s a fundamental part of doing business.”
Gorman, a former contractor, spent more than 20 years in the financing and remodeling industries before opening his consulting business.
“For any kind of business, the best way to set price is to understand what your costs are. Once you do that, you know the minimum you can take for whatever kind of service you’re providing. Then, you need to experiment in your marketplace. Determine the impact your competition is having on your ability to sell at the prices you desire. Often, stronger personalities are able to function and demand a higher price for their services than others. If you can’t get the price you need to pay the bills and keep the doors open, then you need to do some introspective investigation to figure out what’s wrong.”
Gorman said HVAC contractors need to be able to price quickly and accurately and should probably have a packaged rate for service and maintenance in order to distinguish themselves from the competition. One way to do this is to have a menu of different products and services to hand to customers, Gorman explained. “These days, a lot of contractors are using computers to price, and it’s really not a necessity for HVAC because contractors have a limited array of products and services they offer. Preprinted forms speed up the process for them to make the sale when they get to the house.
“It’s like going to a restaurant,” he continued. “You’re all set for a hamburger, and the waitress hands you the menu. You can see the burger you want, and it costs $13.49, but you only want to spend $12. Do you ever call the waitress over and say, could you give me this, but I only want to spend $12? Let’s imagine our worksheet is the menu. We pull it out and show the customer four different options. Then, we give them choices. It’s just our nature when we see something written down, like the menu, we have less potential to question the prices. On the other hand, if somebody walks into the house, takes a look at the ceiling, and says it’s going to be $2,700 — we don’t have the same kind of feeling about the price because we don’t know where that number came from.”
AVOIDING THE MILKING STOOL
Additionally, Gorman suggested making a direct link between the selling price and how much contractors pay their employees to do the work. If there is a price menu for customers, there should be a corresponding value paid to employees.
“The problem with paying an hourly rate to employees is the milking stool tends to enter the picture,” he said. “When the guys see things slowing down, every job takes a little longer, because if they work really hard and fast, they know they’re going to work themselves out of a job. So, they milk the last job for everything they can get, and the person who pays the price is the employer.”
Gorman suggests delegating the responsibility for repairs to the employees for a set price.
“For example, we’re going to pay everybody by the hour at the same hourly rate. Before, our hourly rate was $20. Now, everybody earns $16 per hour, but they earn that for the value of work in hours they perform. So, at the end of every month, or every two months, we give them another check that fills in the gaps. According to our records, this employee actually did 60 hours worth of work in a 40-hour period, so we’re going to write him a check for the difference. We’re going to pay him for what he did. Now, if the employee only did 40 hours worth of work, they’re going to get a 40-hour-a-week check. But, if they did 50-70 hours of work that week, which is not unusual, they’re going to get paid for it. So, we pay employees exactly what we budgeted for labor on that job. This way, we never overpay. However, if there’s a service call, they have to go back to fix it. And, they’re going to get paid $16 per hour to do that. The benefit here is now I can actually know when I fill the job, within a few percentage points, what my labor rate is going to be. This allows me to compete with the guys who are doing it for less, because now I can become more efficient.”
OVERCOMING THE COMPETITION
After contractors determine the right pricing strategies for their businesses, there’s still the challenge of overcoming lower-priced competition.
According to Minnick, if cost is a customer’s only concern, they are not a good fit for his company. “We build our service on value, a money-back guarantee, and the way we handle customer concerns,” he said. “The customer then sells himself based on these principles.”
Merritt said he doesn’t look at low-priced companies as true competitors.
“A true competitor has factory-trained, NATE [North American Technician Excellence]-certified technicians in nice uniforms driving nice vans using professional tools with cutting-edge computer tracking systems for paperwork and parts,” he said. “They have these things 24/7. These are attributes a low-priced competitor hasn’t invested in yet. The only way to combat any competitor is to show value to a customer. If your company focuses on value instead of price, you will always be busy.”
“Nowadays, more often than not, the customer has already done some research online and looked at online reviews from others,” Morgan noted. “People have higher expectations from a company with a reputation like ours and a get-what-you-pay-for buying philosophy. We have a canned-ham response that covers the operating expenses involved in sending out a NATE-certified technician the same day, usually with the parts they need along with the proper warranty, right on the truck.
“About a year ago, I heard a contractor say: ‘I’m sure you can find another contractor that will do this cheaper. If you look around enough, you can probably find one that will do it for less money too,’” he continued. “I now use that line whenever I get complaints about our pricing. Usually, people get it.”
Publication date: 1/25/2016