CONTRACTORS ADVANTAGE
WHAT
IS FLAT RATE PRICING ?
Introduction
“This Free Flat Rate Book” is the first book written about Flat Rate Pricing and is the most authoritive work on the subject available. The goal of this book is to help demystify flat rate pricing for people have never used flat rate pricing. Those who are currently using flat rate pricing can also benefit from reading this book. This book does not claim to have all “the answers”. No one person or no one company has all the answers.
Flat rate pricing is not rocket science, it actually is quite simple.
Tens
of thousands of contractors across the
What
is Flat Rate Pricing?
When you go into a restaurant you look at a menu and see a flat rate price for a hamburger. That price includes all the labor, ingredients, overhead items, and profit for the restaurant.
The
vast majority of products and services sold in the
For decades many repairs done at homes and businesses were done by contractors while using a time and material basis. With the advent of computers today, it is easy to estimate a repair price for a repair task in advance. A price book can then be assembled to show a customer a price for a repair job before the work is done. The price book works just like a restaurant menu.
How
Flat Rate Pricing Benefits Contractors
If you have been a contractor for a while you are familiar with the following kinds of customer complaints.
“You charge too much.” When you as a contractor charge by the hour, most customers think you charge too much. They see the enormous (in their view) hourly rate you charge and think you are getting rich off of them. This is understandable that they would think this way. Even if you charged only $70 per hour they may earn only $25 an hour at their job. They have no idea what it cost to run a business and hence think you overcharge them. If you use flat rate pricing instead of time and material pricing they do not know how much per hour you are charging them because your hourly labor rate is not revealed. This is not dishonest on the contractor’s part. Almost every purchase a consumer makes does not reveal a break down on a seller’s costs of doing business.
“I don’t have the money to pay now.” When a customer doesn’t know how much something is going to cost in advance, many times they do not know if they have enough financial resources to pay for a repair when it is completed. When using flat rate pricing a customer knows up front how much a repair is and that the full payment is due upon completion if that is what your company policies are. In summary; flat rate pricing helps to lower collection problems.
“The parts cost too much.” If a customer was at a retail store and saw a thermostat being sold at $35 and you charged them $70 for the same thermostat many customers would think you are overcharging them. Most customers have no idea how much it costs for the contractor to bring that thermostat to their home on your truck. With flat rate repair pricing the customer does not know how much you charge for the thermostat because it is included in the flat rate price.
“The technician took too long to do the job.” When a customer is being charged by the hour instead of a flat rate customers take notice of the technicians productivity. They notice a technician taking a smoking break, a bathroom break, a telephone break, a break to read a schematic or instruction manual and see it as time they are paying for. If the repair is difficult to diagnose and hence takes longer than a customer thinks it should, then they think they are paying for a technician’s training. The customer is correct in thinking this way and doesn’t want to pay for such things. Flat rate pricing eliminates these problems and the longer a repair takes the better the deal in the customer’s eyes.
“The technician charged me for picking up parts.” Most customers don’t like paying for the technician’s labor for picking up parts. A good flat rate pricing system like Accu-Pricing™ solves this problem by having the technician show the price up front for the repair including labor to pick up any parts required.
“My neighbor paid less than me for the same repair.” Flat rate pricing by its very nature insures that everyone pays the same price for the same repair.
These are just some of the customer complaints that Accu-Pricing™ solves. Remember most dissatisfied customers never complain to the contractor but just quit doing business with the contractor.
Not only does flat rate pricing help solve many customer complaints but it helps retain technicians. It is common knowledge that it is very difficult to find and maintain quality technicians. In the “benefits to technician’s” section in this book you will discover how technicians are happier working for their flat rate pricing contractor and hence will not quit. Technicians are also more likely to refer other like-minded quality technicians to work for a flat rate contractor.
Another great benefit when using flat rate pricing is the contractor knows their profit on each repair sold. The contractor can also know how much annual profit they will earn.
How
Flat Rate Pricing Benefits Customers
Flat rate pricing benefits customers in many ways that
using time and material pricing cannot.
With time and material pricing customers do not know
the cost upfront so this leads to much customer stress.
It also leads to possible budget problems due to
approving a repair before knowing the total cost and then being surprised by a
high bill they cannot pay. Flat rate pricing solves these problems for the
customer.
Customers are not penalized for technicians that are not very experienced when a contractor charges them flat rate. When using time and material pricing the more inexperienced a technician is the longer the job takes and the more money it costs the customer. This is very unfair to the customer. Watching a technician plug along on a job while the money is adding up is very stressful to the customer.
Another benefit to the customer when using flat rate pricing is they know they are being charged the same amount for a specific repair as everyone else. No more thinking about the technician charging them as much as he can because the price is in the book.
How
Flat Rate Pricing Benefits Technicians
Flat rate pricing benefits technicians in more ways than time and material pricing does. No technician wants to deal with an unhappy customer because the job price was higher than expected when using time and material.
No technician likes the hassle of writing down tons of stuff on the service ticket. It is much less administrative work for them to use flat rate pricing.
No technician likes the hassle of dealing with customers who can’t pay because the repair cost more than expected.
No technician likes a customer breathing down their neck asking how much longer is it going to take meaning how much more is the job going to cost in labor.
No technician likes to answer questions like “How long have you been doing this type of work?” meaning are they going to have to pay for the technician to learn on their job?
No technician likes hearing “That’s not what you charged my neighbor for that job.” With flat rate everyone pays the same.
What is the Best Flat Rate System
The three most critical things are that a flat rate system is easy to use for the technician, can be customized so it can be used to conform to how you want to run your contracting company and lastly the best purchase value.
Lets look at being easy to use first. Technician’s time is so valuable that you want them to be able to look up a repair task in their price book and show it to the customer in less than sixty seconds. Can you imagine the frustration of the technician having to look through a 4” thick price book with 10 or 20,000 tasks to find one repair task? If a technician takes 15 minutes to look up a task instead of 1 minute the contractor loses 14 minutes in money on each repair! Most contractors only do about 500 different repair tasks in the course of a year. The price book should have an index and labeled dividers so that a technician can find the repair quickly. Having an organized price book that is easy for technicians to use is also very important from the contractor’s point of view. Good technicians are hard to find and retain. It is best to keep them happy.
The Second most critical thing to consider when choosing which flat rate system is best is to make sure you can customize it for your business. Some flat rate systems have very little customization features available. A contractor should not have to change the way they run their business to conform to how their flat rate pricing software works.
The third critical thing is purchase value. If you had to choose between three different flat rate pricing systems what is the value of each one? Which one will work best for your business at the lowest cost? The most popular question we hear is how come Accu-Pricing™ is so much better than the competing pricing systems and why does it cost so much less. Please see "Why So Cheap" on the web site.
Software
or Books Best?
There are two ways to buy a flat rate pricing system. One is to buy price books each year from a company that prints out your price sheets and puts them in a book for you. The other way is to own the software and print out your own price sheets each year. Either way you will want to update your price sheets each year by increasing your prices to account for inflation.
Some
flat rate pricing providers sell only price books some only software and some
sell both. We at Accu-Pricing™ sell only software because it is not in the best
interests of the contractor to buy books. Accu-Pricing™ is so easy to use if
you can type in a box and push the print button you can literary print out your
price sheets in five minutes.
By owning the software you are not paying each year for new price books. Then of course you can customize your books any way that you want. Software is very good for the contractor in many other ways.
What
to Call Your Price Book
Use the Accu-Pricing™ logo on the price book and on each price sheet. The reason for this is to eliminate most if not all customer pricing questions or complaints.
When customers see the Accu-Pricing™ logo and name, they assume that the printed prices are not negotiable. In the very rare event a customer asks any questions, the technician can say “We subscribe to a national pricing service and I don’t know any pricing specifics.” Most contractors find less than 10% of customers question pricing specifics.
Making Your Own
Flat Rate System
Sometimes small contractors may think about making their own flat rate pricing system. Is this possible? Absolutely. Is this a smart thing to do? No.
Even if a contractor wanted to develop their own, the one thousand plus hours it would take would be much better spent earning money doing something else. Even if the contractor had no business and had the time to do it he/she would be better off spending time getting new customers than to spend weeks on end in front of a computer trying to figure out a workable pricing system.
The contractor also would not have the experience that comes from hundreds or thousands of contractors across the country on how to design the best flat rate pricing book. If you are still thinking about designing your own flat rate pricing system read the E-Myth. It is a book that can dramatically change for the better how you look at your business and how to be more successful.
Training
Technicians With Flat Rate
It is important when switching from time and material pricing to train your technicians and other employees that will use it. Some contractors have their employees read this book as part of the training process.
It is good to spend a few minutes with each technician and role play with them. Play the role of the customer while the technician plays the role of the technician.
Give the technician a repair task scenario like replace a blower motor. Have the technician look up the repair in the book and show you the price in the book the technician could say something like “I found out what is wrong Mr. Smith. Your blower motor needs to be replaced. This price here is for people who do not have a maintenance agreement but you can save $XX if you start a maintenance agreement today. Which choice works best for you?”
It is important to spend a few minutes with your technicians to explain how much it costs to run a professional contracting company so they don’t think you are overcharging people.
When
Not to Use Flat Rate Pricing
Occasionally a repair task is so odd or so tricky that it may be easier to do it by a time and material method. Instead of flat rate in almost all cases the contractor will earn less profit when doing work using the time and material method versus flat rate pricing. The reason for this is simple. If your flat rate pricing hourly rate is $125 an hour but your competitor’s time and material rate is $75 an hour the customer will think you are overcharging them if you charge $125 an hour and they will probably quit doing business with your company.
The less than 1% of the time you can’t easily use flat rate pricing it is better to charge the customer the “going” rate in your town and lose a few bucks on that particular repair.
Remember, the cost to acquire a new customer averages $400 in advertising costs in most areas of the country so you don’t want to lose a customer over a lousy 10 or 15 dollars.
Another option to an odd task is to just estimate the repair costs on the high side and give the customer a flat rate price for the repair.
Another option is to give the customer a maximum price that the repair will cost and guarantee you will do it for that price but will charge them less if the repair takes less time than expected.
Diagnostic
Fees
If you are using time and materials pricing now you are probably charging a “service call” fee to have your technician go out to a job with your truck and tools. Then you are charging an hourly rate to do the repairs needed. You of course explain this to the customer when they call and they are never happy to pay your technician for driving out to their home or business. You can’t blame them for thinking that way because they do not get paid themselves for driving to work. Most of them however don’t complain even though they don’t like paying for travel time.
Flat rate pricing usually works a little different than time and material pricing. One thing nice about using flat rate pricing, is that it adapts to many different ways of running your business so the contractor can be more able to meet local market conditions.
The following are some ways that flat rate pricing is commonly used. Typically the service call fee or ½ hour diagnostic fee is included in the first repair task that is being done. If more than one repair task is being done the additional tasks do not include the travel time fee because it was paid for in the first repair task. When a customer calls for service they are told there is a diagnostic fee of X amount of dollars to troubleshoot the system.
Some contractors do not like to use the term diagnostic fee because some customers will say “I already know what I need done so why should I pay a diagnostic fee.” Some contractors will call it an initial inspection fee or a service ordering fee or a minimum ticket fee or by some other name.
After the technician has diagnosed the customer’s problem, they show the repair price in the price book and get the customer’s approval before the repair is done. In the rare event the customer doesn’t immediately approve the repair the technician collects the diagnostic fee and goes to his next service call.
How much should you charge for the diagnostic fee? The lower your fee the more customers will choose you to do business with.
Some technicians are so experienced that they could afford to go out to a customer’s house for free because they could diagnose 99% of problems in less than 15 minutes. They could then talk the majority of customers into going ahead with the repairs. The free diagnostic fee would be recouped in the repair selling price.
The lower your diagnostic price the more “cheapskates” you will run into. These are probably people you don’t want for customers. The higher your diagnostic fee the more you weed out the cheapskates however the fewer the new customers you will get.
Contractors need to experiment with a happy medium to discover what works best for them. Some contractors will have a lower diagnostic fee when they are slow and need more business. When they are very busy with work they increase their diagnostic fees.
Some contractors will offer different levels of service like standard or premium. The premium service costs more but includes service within a certain time period such as one hour, two hours, same day etc.
Some contractors will include only so many minutes in their diagnostic fee and have a task in their flat rate book entitled “extended diagnostic fees” for those occasional hard to troubleshoot jobs.
Some contractors waive the diagnostic fee if the repair is done. They have their repair prices set high enough to cover doing this. It is important to run your business in such a way that there is an incentive for customers to have the repair done immediately instead of the technician coming out to the jobsite twice. Customers need to realize that if they want to “think it over” their delay in giving the technician the ok to go and do the repair is going to cost them an additional service call or diagnostic fee.
How Much to Charge for Parts and Labor
How much profit does a contractor want to make after all costs and taxes are paid 10, 20, 30%? Over the past 100 years the stock market has returned an average annual return of a little over 10%. With that in mind at least a 10% after tax profit is a good goal.
Contractors who use time and material pricing have a very difficult if not impossible time earning at least 10% profit. The reason is that when determining how much per hour a contractor needs to charge in order to earn a 10% net profit (as in our example) the hourly rate will typically be much higher than his competitor’s hourly rate. A consumer will typically call a few contractors and ask how much do you charge to come out and fix my furnace? If your competitor says $75 an hour and you say $125 an hour who do you think the consumer will have come out for the repair? The $75 an hour company in most cases.
In order to achieve the 10% net profits wanted, the $125 an hour contractor will need to use flat rate pricing and keep the $125 an hour fee private. Note, there is nothing dishonest about this. Every retail store and restaurant does business this way.
It is critical for a contractor to charge an hourly rate that is adequate to meet their profit goals. The best way to determine that is to use the Accu-Pricing™ “Know What to Charge For Labor” calculator and the Accu-Pricing™ “Know What to Charge For Parts” calculator. These calculators will tell you how much you need to charge to meet your goals.
It is better to cover all your overhead costs in your labor rates otherwise if you do a repair job that only requires labor and no parts you will lose money on that repair if you are using parts profit for paying overhead expenses.
Some contractors like to mark up parts a certain amount like parts that cost between $0 and $20, 2 times the cost. Parts that cost between $20 and $75, 1.75 times the cost. Parts that cost $75 and up 1.5 times the cost, etc. There is a better way to do this.
Some contractors like to use the “How Much to Charge For Parts” calculator that comes with Accu-Pricing™. This will give them a set markup for all parts like 1.53 times. Even though we include this calculator with Accu-Pricing™ we believe there is a better way to do this.
It is good to know what the minimum markup needs to be on parts to meet your profit goals. If you take that number and add in the labor number you may arrive in most cases a total repair price much lower than you can fairly collect. Why not earn as much as possible from your business without ripping people off. For example, you might want to markup a capacitor 10 times its $5 cost while you may want to only markup a thermostat 1.25 times its cost.
Look at the total price a customer pays for a repair and think about what the perceived value of what that repair is. For example, a motor or computer board has a perceived value in a customer’s eyes a lot higher than a thermostat does.
Don’t worry about making a decent profit! Microsoft after they pay all their expenses earns over 85% profit. Charge enough money so you can provide a good lifestyle for your employees. This includes good health insurance, vacation days, sick days nice trucks, training, good pension, etc.
The way to achieve this is to markup your parts as much as the market will bear. Your labor hours you will want to keep accurate meaning if the average repair time is 2 hours for a task then figure in 2 hours. Don’t increase it to 2 ½ hours to make more profits.
In closing, it’s your business, you run it any way you seem comfortable, its called freedom. It’s a great country we live in thanks to all who have fought for our freedom.
Performance
Pay
Performance pay is very common in many industries such as the auto repair industry. Most contractors still do business the old fashion way by paying their technicians by the hour. This is a very unproductive way to pay technicians and that is why some contractors are using performance pay.
It is estimated that within 10 years, 95% of contractors will be using flat rate pricing along with performance pay. Performance pay eliminates paying technicians for cigarette breaks, coffee breaks, call backs, personal errands, sitting around at the supply houses, etc.
The more educated and the harder the technician works the more money the technician can earn. For example: if a technician is replacing a blower motor and the time allotted is 1 ½ hours but the technician completes the repair in 1 hour, then they got paid a flat rate of 1 ½ hours thus being rewarded for their excellent performance.
Accu-Pricing™ comes already designed to work with performance pricing. Every repair task number includes a code indicating the task hours to do the repair. The customer doesn’t recognize this labor code only the technician does.
Overtime
Issues
Some contractors like to charge overtime to some customers when doing after hours work. No customers like to pay extra for overtime.
Some contractors will carry two different flat rate pricing books in their trucks. One for regular hours and one for overtime work. Accu-Pricing™ comes set up for overtime rates if a contractor desires.
Some contractors like to charge higher rates when they are swamped with work. They simply use the overtime prices to accomplish higher profits during their extremely busy times. Our capitalistic society accepts different prices for different levels of service.
Rather than using two different price books, one for regular rate and one for overtime rate, some contractors like to use only one book. The price sheets have one column for the regular rate and one column for overtime rates. Some contractors do not charge overtime rates to their maintenance agreement customers. This helps sell more maintenance agreements.
Sales
Tax Issues
In some states a contractor is not required to collect sales taxes from their customers when a repair job is completed. The contractor pays sales tax on the parts when he/she purchased them. This is obviously the preferred way of the contractor to do business if possible because it eliminates a great deal of administration work and expense.
In some states a contractor must collect sales tax on parts and on labor from their customer when a repair job is done. It is important for a contractor to check with their local, county, or state taxing authorities to determine what tax laws apply in their areas.
The goal of flat rate pricing is to give the customer an upfront price that includes any and all costs including sales taxes.
If your area requires you to charge sales taxes on all parts and materials then there are two ways to handle that. One way is to not include any sales taxes in your flat rate prices and your technicians can quote a repair price from your flat rate pricing book and then say “plus tax.” This is one of the many ways Accu-Pricing™ is designed to work. The other way to handle sales taxes, is to include it in your flat rate price sheet and your technicians will say “this price includes all sales taxes.” This is also one of the many ways Accu-Pricing™ is designed to work.
If your area requires you to charge sales tax on only parts or only labor then Accu-Pricing™ will also work that way so that your technician will say “this price includes all sales taxes.” Accu-Pricing™ has a “field” for sales tax amounts and percentages already built into it which automatically calculates the amount of tax due for each repair.
Of
course Accu-Pricing™ data can be imported into most of the common accounting
programs on the market to help facilitate record keeping. Some states will have
sales tax rules that differ when different kinds of work are being done. For
example; the state of
Maintenance
Agreements/Discount Clubs
Maintenance or service agreements are or can be the lifeblood of a company. The more agreements your contracting company has sold the better.
Check our website for helpful maintenance agreement products. Another thing some contractors do is start a “good customer discount club.” This is another way to get customers locked into your company.
Flat rate pricing is great for selling more maintenance agreements or getting more customers under contract. On the flat rate repair price sheets you can have a discount column showing how much a customer can save off the cost of a repair if they are a member. Of course you will want to price all your repairs at a rate that will give you the desired profit margin you want while still giving the customer their discount. If they choose not to become an agreement customer you will just make more money from them.
The bottom line is that some day you will want to sell your company due to health or retirement reasons. Your company won’t be worth much without the customers being under some type of contract. Accu-Pricing™ comes designed to help you get lots of customers under contract.
Objections
to Flat Rate
A few companies have been damaged or ruined by going to flat rate pricing. It’s not the flat rate pricing that ruins the company but their greed. It is a little easier to rip off customers with flat rate pricing than with using time and material pricing. Sometimes technicians discover a contractor is ripping off customers by charging exorbitant prices. When that happens many technicians will quit the contractor. The contractor then is ruined because they can’t find and retain good technicians.
It is critical that technicians be educated on the benefits of using flat rate pricing also the benefits to customers, and the contractor so they “buy into” using flat rate pricing.
Almost all of the technicians who use flat rate pricing eventually like it far more than time and material pricing.
Even
if a contractor is honest they may run into some price objections from
technicians when switching to flat rate pricing. Most contractors in
In closing, the vast majority of contractors 99% who have switched to flat rate pricing have only one regret, not doing it sooner.
©2008 Contractors Advantage