Flat Rate Is Just A Tool

Mr. Secor states, “Flat rate does not work (without knowing your costs).” Does any price structure work without knowing your cost? Secor also states, “Flat rate does not work because it does not have a ‘lock’ on knowing costs of doing business.” It is not the abstract term “flat rate” that knows the cost of doing business; it is the business owner/manager that knows this cost.

In ordering our flat-rate pricing manual, WE tell the supplier what markup we wish to have on parts, including separate rates for OEM parts, and what labor rate we wish to use. There are separate columns for additional related repairs (less labor charged to customer), overtime calls, and discounted planned maintenance customer pricing.

The time allowances are based on averages as Mr. Secor states, but rather than viewing that as a losing situation for everyone, we feel it is fairer for the customer to be charged for how long the repair should take, as opposed to how long that particular tech takes on that particular day. Their cost does not vary due to an inexperienced or tired tech, and they pay the same for a given repair as their neighbor/relative who had the same repair by the same company (which can be important in a small town). We as the company do lose some on jobs that run way over, but can make it up on the jobs that take less time. (We don’t see this “averaging” as bad.) And, we can recover some training costs when the technician becomes faster than the “average” time allowed on a regular basis.

Mr. Secor seems to take exception to the idea that “Flat raters, however, suggest these [overhead] costs simply need to be passed on to the customer.” These costs would be passed on through the labor rate and materials markup, the same way a time and material contractor passes them on. I don’t know how any contractor can stay in business without figuring overhead into whatever pricing structure they use.

His statement “price is secondary to the quality of the work — period” is true with some customers and not true with others. He also states that “quality work at reasonable cost and the referrals it generates were the best ... forms of advertising possible.” Again true.

Apparently, Mr. Secor equates time and material contractors as quality contractors with reasonable rates and flat-rate contractors as second-rate contractors with unreasonable rates. Our quality of work did not diminish with a change in our pricing methods, nor will billing on time and material raise the quality of a poor contractor; quality workmanship has nothing to do with billing methods and reasonable rates are not determined by the method, either. (Our rates are in the same range as our competitors who use T&M.) We have a contractor in the area who charges on T&M, and he charges for every minute on the job with no exceptions for callbacks or warranty problems.

Secor‘s argument about the “evolution of flat rate” is ridiculous. According to him, we should be out of business by now, or close to it. Our customer base has not fallen off, pricing complaints are not any more than they were on T&M, and our advertising budget is 3 percent or less, as most of our customers are referred.

Flat-rate pricing will not cure poor management, nor will it cause the problems he suggests with proper management. The customer does have the right to know what he is paying for. With the flat-rate system, he can know the cost before the repair is done and decide whether he wants to have the contractor proceed or shop around. With T&M, he can know, but it’s too late to object. I don’t see why a customer would feel better knowing that he paid $50 for labor and $50 for material as opposed to $100 for the “repair”; either way it’s $100. Flat-rate prices are not inherently higher than T&M; it depends on how fast the tech is on a particular job as to which way is “cheaper.”

Joni Luce, Stratz Heating & Cooling Inc., Big Rapids, Mich.

Note: Letters should include the author’s full name, address, and daytime telephone number. All letters may be edited for length and clarity, and may be published in any medium. Please feel free to include your title and the name of your company. Information may be withheld at the author’s request.

Publication date: 06/30/2003