The most common flat rate pricing implementation mistakes and how to avoid them.
This article was especially written for service technicians and service department managers who use flat rate pricing for their heating, air conditioning, refrigeration, (HVAC), plumbing, electrical service, and maintenance work. If you are considering the use of flat rate pricing, you will also benefit from this article and avoid these common flat rate pricing mistakes.
The Top 10 Benefits of Flat Rate Pricing
In my article “What is Flat Rate Pricing?“, I talk about the concept of flat rate pricing in detail. Flat rate pricing is essential to operating a successful service and maintenance department. If you’re not sold on the idea, let us first recap some of the main benefits of flat rate pricing for residential HVAC, plumbing, and electrical service and maintenance work.
- Flat rate pricing allows you to charge more because you are not itemizing your invoice. Time and material pricing invites unfair and uneducated criticism of your labor charges that you can’t justify.
- Customers complain less because they know the price before the work begins. No more sticker shock. Customers agree to a diagnostic fee, and they approve all work before it starts.
- Customers appreciate knowing they’re paying the same price for the same repair as everyone else.
- Collections are easier because prices and payment are discussed in advance.
- Technicians prefer it. A nationally standardized flat rate price book is authoritative and easier to explain. The price is “not their fault”.
- You will see fewer invoice errors because technicians copy the descriptions and prices right out of the book.
- Labor times are based on the “average technician”. Your company will benefit from fast efficient work.
- It’s easier to sell equipment against high repair costs because the customer can see the price of new versus the price of a repair.
- Maintenance agreements are easier to sell because the customer can see the discount they would get on the repair if they owned one.
- Experts overwhelmingly recommend flat rate pricing. The nation’s big franchises use it and so do the largest companies.
Mistake #1: Your Service Labor Rates Are Too High
Many companies use flat rate pricing for service thinking that they can now charge more than they are worth. You should never overcharge your customers; no matter what pricing method you use. Ask a qualified accountant to help you calculate your actual cost of service labor. This is a called your breakeven point; the total direct cost of producing one hour of service department labor. You may then add a reasonable net profit to your breakeven point. Our advice on service labor pricing is this: Charge 25% more than it costs you to produce it. In other words, achieve a 25% net profit for “regular hours” labor. That allows you enough profit to offer senior citizen discounts or service agreement discounts. Look for a 35% net profit for overtime service and repair work.
It is very difficult to hire someone who really understands how to price labor. Look for an experienced professional who understands the service industry. We have engineered a terrific breakeven calculator on this website.
Mistake #2: Using Flat Rate Pricing to Overcome Poor Service
You can’t use flat rate pricing to overcome poor performance. Some service companies are just plain lousy, and they don’t appear to be worth what they are charging. Phones are not answered in a unique and practiced manner. Their service technicians are not properly uniformed, clean-cut, serious professionals. Managers emphasize technical training over customer service and communication skills. Trucks don’t look like they belong to a quality company.
Let me speak about value for a moment. There is a difference between “low price” and a “good deal”. I understand OJ Simpson paid Johnnie Cochran $500 per hour for his criminal defense. There are cheaper lawyers, but I would have to say Mr. Cochran WAS A BARGAIN! Value is a comparison of what you receive and what you pay for it. Anytime what you receive exceeds what you paid; the purchase was a bargain. Marketing professionals understand this concept and they understand sometimes it is simply a matter of perception. Like a fine hotel or a fine restaurant, they work hard on both real and perceived value components.
Think of it another way. A competitor’s service technician could charge $50 per hour for a HVAC repair and be a rip off. Your service technician could fix an air conditioning system for $200 per hour and be a great value. How can this be? A $200 per hour technician should perform a complete and thorough diagnostic procedure. Everything should be cleaned and tuned, and a professional repair performed in one trip. That’s worth two hundred bucks. A fifty dollar an hour parts changer who takes longer than he should and looks like he’s there to tar the roof instead of repair an electrical, plumbing, or HVAC system is no bargain. A bum at $50.00 per hour is still a bum.
Mistake #3: You Gave Up on Time and Materials
You do not have to (or maybe shouldn’t) stop using time and material pricing. There are times where you may wish to quote something by the hour. Let’s say that you are an electrician and you’re troubleshooting a non-functioning florescent light. It’s a commercial building with a 17’ ceiling. You might quote the owner $75.00 per hour to locate the electrical short (open circuit) and then you may quote a flat rate price to make the electrical repair. Maybe you do HVAC or plumbing work; you can think of a similar scenario.
You may have commercial clients that need a breakdown of time and materials – for whatever reason. Large commercial service or non-standard repairs can, and perhaps should be, performed under time and material billing.
Mistake #4: You Think You Need Thousands of Repairs
Some service businesses think they need thousands of HVAC, plumbing, and electrical repairs. Most service departments do about one hundred different repairs 80% of the time. One hundred flat rate tasks equal about a ten-page book. So, what about the other 20%? Well, 95% of what you repair can be covered with five hundred flat rate repairs. You will never have a flat rate book large enough for the last 5%. For those repairs, calculate the price in the field using a Quick Price Calculator like that found in Flat Rate Plus®
Here’s a tip for those of you that use flat rate software like Flat Rate Plus (the flat rate pricing software I developed). Ask your service technicians to place a light pen mark next to every task they use from their flat rate pricing book. After one year, inactivate any tasks that you have not used and reprint the books. I would not include a flat rate repair unless you sell it five or six times per year.
Mistake #5: No Training, No Ownership
You can’t just buy a flat rate pricing book or software and drop it on someone’s desk. That’s what many contractors I have worked with did. There were no pre-purchase discussions and no post-purchase training.
You need to get “buy in” from your service technicians and other coworkers. You’ll get this by discussing flat rate pricing with them and explaining why you switched or are considering the switch from time and materials. You must explain how flat rate service will benefit them as well as benefit the customer.
Once you have your flat rate price books in hand, you need to conduct initial and ongoing training on the proper use of the flat rate books as well as answering common questions and addressing customer concerns. There is no substitute for training and all great service organizations train their people.
Mistake #6: Thinking Flat Rate Pricing is Not New or Unique
Flat rate pricing is simply offering to do a job (of any kind) for a fixed price. You are using flat rate pricing each time you write a sales proposal or make a verbal “estimate”. People expect to be told “how much” before any work is ever started.
Flat rate pricing has been around since commerce first began. Almost all industries use some type of flat rate pricing system. In fact, many industries (like your cell phone company) work hard to offer a guaranteed flat rate price. Most industries do not use time and material pricing.
Whether you do heating & air conditioning (HVAC), refrigeration, plumbing, electrical, or other residential and light commercial work, your customers will mostly want a flat rate price.
Mistake #7: Technicians Don’t Use Flat Rate Pricing Properly
Many companies forget why they use flat rate pricing. One reason is that you can offer your customer a guaranteed price before you do any work. I have seen too many service technicians, electricians, plumbers fail to present their findings to the customer and gain approval for repairs. Technicians often do the work, write down a flat rate price on the invoice, and hand it to the customer; or worse yet mail it to the customer.
It is vitally important for service professionals to perform a complete diagnostic, write everything down thoroughly, and present their findings and recommendations to the customer.
Mistake #8: You Don’t Update Your Parts Costs The Easy Way
People always ask me how often my company updates the direct costs on parts and supplies. They are concerned about keeping up with inflation, and they should be. The easiest and most accurate way to keep your pricing current is to practice thorough bookkeeping.
When you create inventory truck stock lists and replenish your trucks, you are constantly updating prices as you go through the normal bookkeeping processes for inventory replenishment. When you create a purchase order or enter an item receipt, you have the opportunity to update the price of each item on that PO with the latest price.
When your flat rate pricing system is tied to your backend accounting software system, your flat rate price books are always up to date. The flat rate price books used in the field are literally being updated all day long with the most accurate price information possible.
Don’t let a flat rate pricing company lie to you about the accuracy of their parts prices. No flat rate company will ever be able to update your prices accurately. Prices vary greatly between companies and locations across the country.
Some Final Thoughts on Flat Rate Pricing
Flat rate pricing is not some miracle cure or get rich quick scheme. Flat rate pricing is no substitute for skilled service technicians and fantastic customer service. Flat rate pricing will not overcome an overpriced service department staffed by unskilled service technicians that display lousy attitudes.
Your plumbers, electricians, and service technicians need to wear uniforms, have their shirts tucked in, and remove their hats and sunglasses before they knock on the door. They must be personable and extremely polite.
Your service department needs to have detailed written policy on behavior and presentation. The HVAC, refrigeration, plumbing, electrical industries place way too much importance on technical skills than they do on people skills. In the game of life, a skilled people person beats a skilled technician every time.
About the Author, James R. Leichter
The Most Trusted Voice in the HVAC industry
James is a successful entrepreneur and master mechanic widely referred to as Mr. HVAC. His accomplishments include being the CEO and founder of Aptora, the President of RA Tax and Accounting, the founder of MrHVAC.com, and a partner with Pro-American Investments. He is also the creator of Flat Rate Plus®, which is hosted on this flatratesoftware.com website.
James is well known for his burning passion to help contractors and it shows in his unique speaking style. His articles have been widely published by the industry’s most popular magazines. His videos have had over one million views. James has hosted management workshops all around the United States and has conducted onsite consulting with hundreds of contractors.