Hello and welcome to the Service Contractor’s Business Tape of the Month. This monthly cassette tape series represents yet another step in accomplishing Grandy & Associates’ vision of helping the service contractor come to a place of maturity and profitability. Each month, a different national speaker from throughout the service and trades industry shares dozens of cost-reducing, profit-increasing ideas to help you become a more profitable company.
Most contractors have heard about flat rate pricing. Those who have heard about it normally fall into one of two camps. They love it or they hate it.
And by hate, I mean they are not interested in switching to it for any one of a number of reasons. Perhaps my next statement will clarify the arguments a bit. Flat rate pricing is going to become the standard of the industry over the next three to five years.
Like it or not, it’s coming. Most companies will switch to flat rate eventually. It’s not really a matter of if, but a matter of when.
This month, Tom Grandy, President of Grandy & Associates, is going to give us an overview of flat rate pricing. He’ll discuss the pros as well as the cons. If you’re going to switch to flat rate pricing, you need to know why you’re doing it.
If you’re not going to switch, you need to have some basis for that decision as well. Keep an open mind as you listen to this tape. It might just make you a lot of money.
Oh, and by the way, don’t forget to sign up for Grandy & Associates’ newest three-day business training program called the Basic Business Boot Camp. Response has been tremendous and classes are filling up fast. Call and make your reservation today.
There’s a flyer enclosed with your tape. When I graduated from college over 30 years ago, my first job was with a major Fortune 500 company as an industrial engineer. Now, for the younger listeners in the audience, 1970 was also the time major corporations were beginning the process of computerizing their accounting functions for the first time in history.
Our company had a very large accounting department headed by an elderly gentleman who’d been with the company for over 25 years, but he was dead set against computerizing his department. However, corporate policy prevailed, and over the next several months, the accounting department was moved closer and closer to being computerized, and the elderly gentleman fought it every step of the way, refusing to become part of the new computerized system. Finally, the day came.
Manual accounting was a thing of the past, and computerized accounting was there to stay. Oh, yes, there was one other change. The elderly gentleman that was head of the accounting department suddenly had no idea what was going on, and within a very short period of time, he was terminated after 25 years of faithful service.
Why was he fired? Simple. He was unwilling to change. Many years ago, my mother was close to death, and I’d flown in to visit with her.
One of her friends picked me up at the airport. Her friend was in her late 70s and was full of life, so I felt free to ask her the following question. I said, Miss Bradley, you’ve lived a long and a fruitful life, and you seem much at peace.
I’m a young parent with hopefully many years ahead of me. Of all the lessons that you’ve learned over your lifetime, what piece of advice would you share with me that you’ve learned over those years? She didn’t hesitate for a second. She simply said, quote, When the wind blows, bend, because if you don’t bend, you’ll break.
Let me repeat that. When the wind blows, bend, because if you don’t bend, you’ll break. And that’s just what happened to the accounting manager.
He was unwilling to bend, and it cost him his job. It doesn’t matter who you are or what you do. Change is a part of life, and if we don’t learn to bend, we too will break.
I realize many listening to this tape have some pretty firm convictions concerning flat rate pricing. You may be for it, you may be against it, but guess what? It really doesn’t matter, because it’s coming anyway. I’m going to make a statement that I believe to be 100% accurate, and the statement is this.
Flat rate pricing is going to become the standard in the trades industry within the next several years. Let me say that again, because that’s an important statement. Flat rate pricing is going to become the standard in the trades industry within the next several years.
My reasoning is simple. It’s the only system currently available that allows the contractor to charge the hourly rate they need to charge in order to provide the kind of service the customer says they want. That’s hard to do with rates of $30 to $60 an hour for service.
Today I’m going to give you a brief overview of how flat rate pricing works, while sharing the pros and the cons of the system. I’m also going to give you a quick overview of several currently available flat rate companies to give you a feel for each of their strengths and each of their weaknesses. Before we begin, it would be helpful to review some background information.
First of all, flat rate pricing is not, it is not designed for system replacement, new construction, or remodeling work. Nor is it designed for commercial, or in most cases, light commercial work. Flat rate pricing is primarily designed for residential service.
When a company changes to flat rate pricing in their service department, they no longer charge the customer by the hour. The customer is charged a predetermined amount of money for a specific type of repair. The repairs are all listed in what’s known as a, quote, flat rate book.
Purchased from one of several flat rate companies. Each repair listed has a predetermined price printed next to the description that includes the cost of the materials and labor, plus overhead, plus any applicable local sales taxes, and of course, their desired net profit. It’s an all-inclusive price.
The customer pays the set price no matter how long the repair may take, which is exactly how the automotive industry works today. Once a company has shifted to flat rate pricing, a typical service call goes something like this. The customer calls your office for service.
A technician is then dispatched to the customer’s home. Upon arrival, the technician doesn’t simply locate the problem. Instead, the technician performs what’s known as a diagnostic survey of the equipment.
That means he goes through the entire piece of equipment to be sure a problem in one area doesn’t cause a failure in another. Performing a diagnostic survey can take a specific or significant amount of time, especially depending on what trade you’re in. Sometimes up to 20 to 30 percent of the entire time spent on the job.
Once the problem is diagnosed, the technician then opens a three-ring notebook with every repair known to man listed in it. And when the tech locates the needed repair in the manual, he or she then shows the customer in black and white what the repair cost will be. The customer then decides if they want the repair done or not based on the price.
Typically, about 90 to 95 percent of the customers say, yes, go ahead, repair the piece of equipment. About the only time the customer says no is when they just simply are unable to pay the quoted price. Once approval is given, the technician then performs the repair.
When the repair is complete, most technicians are able to collect the money on the spot since no cost calculation is necessary. The price is printed right next to the repair description. Now let’s shift gears a bit.
What has been the consumer’s major concern over the years? The customer is usually concerned most about whether they have the fastest technician or perhaps the slowest technician. The customer wants to know how long the tech sat in the truck before he entered their house. The customer is also concerned about how many trips were made to the truck and or to the parts house.
Why are they concerned? Because time is money. The more time the overall repair takes, the more it’s going to cost the customer. So what’s the customer doing? They’re peeking from behind the curtains to see how long he was in the truck.
They’re watching as the repair is done. When the tech needs to go get a part from the shop or from the parts house, guess what? The customer’s keeping track of how long they were gone. Again, why do they do that? Because time is money.
The more time it takes, the more it’s going to cost the customer. This is not, I repeat, this is not the case however with flat rate pricing. When flat rate pricing is used, the customer knows the entire cost of the repair before the repair is done.
Once they know the price and they’ve agreed to it, they’re no longer concerned about how long the repair will take. They don’t really care if the repair takes 20 minutes, 2 hours or 2 days since their cost is the same. So what are the benefits to your company? First of all, you no longer have an hourly rate.
Price shopping customers can no longer call your shop to find out what your hourly rate is. You no longer have an hourly rate. You’re on flat rate pricing.
The bottom line benefit here is that you tend to weed out customers that are price shoppers and that’s a good thing since most of the price shoppers are also the people that give you the most problems. The company’s cash flow also increases since the technician can now collect on the job. With standard time and material billing, the technician may or may not know the price of the parts used.
Therefore, may or may not be able to collect on the job. With flat rate pricing, it should be standard practice for the customer to be asked on the phone what form of payment they will use when the repair is completed. Will they be paying by cash, check or credit card? Since the flat rate book has the price printed right in it, there’s no calculation for the tech, making collections a lot easier.
Another real benefit of flat rate pricing deals with selling service agreements. Now let’s take a bit of a side trip here before we talk about the relationship of flat rate pricing to service agreements. Let’s begin our trip with a statement and the statement is this.
Service agreements are literally the foundation stone for profitable growth in the 21st century. That’s right. Service agreements are literally the foundation stone for profitable growth as we enter the 21st century.
If you don’t believe it, look around. When the utilities got into our industry, what was the first thing they did? They sold service agreements. When the consolidators got into our industry, what was the first thing they did? Right.
They taught their newly purchased companies how to sell service agreements. If you join most any trades franchise today, one of the first orders of business will be the teaching of how to sell service agreements. Why sell service agreements? Simple.
It ties the customer into your company on a long-term basis. One of the reasons customers have not bought service agreements in the past was because they questioned one of the key benefits of the program. One of the key benefits of most service agreements includes the offering of a 5, 8, 10, 12, maybe 20 percent discount on labor and or materials if additional repairs are needed during the year.
The belief of many customers was that the tech simply took the normal repair cost, increased the cost 20 percent, and then showed a 20 percent discount on the ticket, which resulted in no savings at all for the consumer. Although that may not be the way costs were handled, many consumers believed it anyway. Now let’s go back to the relationship between flat rate pricing and service agreements.
It just so happens that flat rate pricing is the ideal system for selling service agreements. With flat rate pricing, real discounts as a service agreement customer are no longer in doubt. The savings are there in black and white for the customer to view.
Every flat rate system sold has at least two pricing columns. The first column is normally the standard price, with the second column being the service agreement customer’s price, which reflects the service agreement discount given. Normally when the technician shows the customer the repair price in the book, they will give a mini-presentation to the customer that sounds something like this.
Ms. Jones, you will notice that the cost of this repair is $123.50. However, if you were one of our annual service agreement customers, you’ll notice your price would have been $98. Now Ms. Jones, if you’d like to become one of our annual service agreement customers today, I’m authorized to charge you the lower price. You’ll notice, Ms. Jones, that you can save over $25 on today’s repair, which will pay for a significant portion of your annual service agreement.
Ms. Jones usually says, yes. I’ve talked to contractors who sold as many as five or six hundred service agreements the very first year they were on flat rate pricing. Of course, the bottom line benefit of flat rate pricing is increased profitability.
Now don’t mistake in the term increased profitability to mean a license to gouge the customer. Has that been done? Of course it has, but that’s not the intention of flat rate pricing. The intention of flat rate pricing is to allow the company to charge the hourly rate they need to charge to cover all of their real costs of doing business while producing a reasonable profit.
Now let’s take another short trip. What limits the growth of most trades companies today? Eight of ten contractors will say, we have plenty of work, we just simply can’t find qualified technicians. Let me ask you a question.
Do you think you would have any trouble finding qualified technicians if you offered them a base rate of $25 an hour, plus two to three weeks of vacation right off the bat, plus you paid all of their medical, dental, and vision insurance, plus offered a 401k plan and profit sharing, and then just for fun you threw in a tool allowance and an earned educational credit allowance. Do you think you’d have any trouble finding qualified techs with that kind of a compensation program? Personally, I think they’d be lined up at your front door waiting for the next opening. At the end of our full day seminar workshop on labor pricing, we sometimes do a fun little exercise.
We ask each contractor in the room to take the hourly rate they just developed and add in the cost of the above increased pay and benefits. Guess what kind of hourly rate most come up with? Most contractors find that offering wages and benefits like we just described, on top of their current cost of doing business, usually results in hourly rates in the $100 per hour range. Guess what internal hourly rate most flat rate companies fall into? Most use an internal hourly rate of somewhere between $80 and $125 an hour.
That’s pretty standard all across the country. As I said earlier, flat rate pricing is not a license to gouge a customer. It’s a system designed to allow you to charge what you need to charge to cover your real cost of doing business while providing the pay and the benefits needed to find, hire, and to retain quality technicians while at the same time generating a reasonable profit for the company.
The next question deals with what kind of problems you may run into as a company if you switch to flat rate pricing. First, it’s a totally new way of doing business. It’s nothing like your current method of operation.
The biggest problem most companies have is with their older technicians. By older, I mean those who are either older in age or older in years with the company. The basic problem is change.
People in general don’t like to change and technicians in particular don’t like to change. If you could describe the perfect day for most techs, it would sound something like this. They would be dispatched to a location with a piece of equipment that had major problems.
They would spend eight full hours working on that piece of equipment and at the end of the day it would be running like a fine-tuned sewing machine and best of all, they would never talk to a soul. And that’s the problem with flat rate pricing, from the tech’s point of view anyway, because they’re forced to communicate with the customer. They have to get their approval to do the work and in most cases they’re required to tell them about the benefits of being a service agreement customer.
The forced communication often pushes techs out of their comfort zone with the net result being some quit. The average company with three to five service techs in the field often loses at least one technician when they switch to flat rate pricing. New techs however are not a problem.
They’re told the company is on flat rate pricing, they’re told what their duties are and most move right in smoothly, which is not usually the case with existing techs. Oh yes, one other thing. If you’re going to flat rate pricing, go in with the attitude of not turning back.
If one tech finds out this is a trial period, I can promise you the entire program will be sabotaged. Now if ten different companies in the same trade all switch to flat rate pricing and each one just happened to use the same flat rate pricing company, each would have a price book with different pricing. They would all be different because there’s certain information the contractor provides and there’s certain information the flat rate company provides.
The combination of all the mixed data ends up creating a completely unique pricing book for each company. You as a contractor will be asked, what internal hourly rate do you want to use? The flat rate company cannot tell you what to use. First of all, they don’t know your cost of doing business and secondly, it would be considered price fixing.
The burden of determining what internal hourly rate to use is up to the contractor. The contractor also determines what material markups to use. Each flat rate company will provide some guidelines, but it’s up to the contractor ultimately to determine what markups will be used in their particular system.
The contractor also decides what price discounts to use for its service agreement customer. You can pick 5, 10, 12 or even 20% if you wish on labor and or materials. The choice is yours.
The contractor also determines what diagnostic fee to charge. You can pick $29, $39, $49. Again, the choice is yours.
The flat rate company on the other hand provides three things. First of all, they’ve done all the time studies to determine how long it takes to do each task. Usually there’s enough time built into the task for the average technician to do the job plus usually about a 10% slot factor.
The second thing they provide is pricing, part pricing. The current price for parts is built into the manual as of the date the system was purchased. The final thing they offer is a mechanism to put it all together to provide your company with its own unique flat rate pricing book.
Now before we talk about what companies offer what products, there are a couple of more issues we need to touch base on. The first is how to pay your technicians. Most companies continue to pay their technicians on an hourly basis.
Some however choose to pay their technicians based on what’s known as book hours. If you pay based on book hours, a technician is paid based on the hours allotted for the task. If the book allows two hours to do the job and the tech does it in one hour, he or she is paid for two hours.
If on the other hand it takes a tech three hours to do the job, he or she only gets paid the two hours shown in the book. Another issue is how to handle the diagnostic fee. Different trades handle it in different ways.
For the most part, the HVAC industry charges the customer the diagnostic fee and the repair price listed in the manual. The plumbing industry is 180 degrees the other direction. Plumbing contractors by and large waive the diagnostic fee if the customer has the work done.
Personally, I like that approach since I believe the customer at least feels like they’re getting a bargain. In reality however, if the diagnostic fee is waived, the time spent doing the diagnostic survey has to be built into the hourly rate. Like all other costs of doing business, the customer eventually pays for it all.
It’s simply a matter of how to best present your total cost of doing business to the customer. There are several companies that offer flat rate pricing to contractors. Callahan Roach is the oldest company.
They gather information from the contractor and they produce the books for your company. It’s hands-free, takes little effort on the contractor’s part, and costs about $2,000 to get started, plus a fee of $600 to $800 when you decide to get your books reprinted. Now that may sound like a large continuing cost, but in reality, if you raise your rates $5 or $10 an hour, you’ll get the additional investment back probably in a couple of weeks.
The next company is called Schaefer Systems. Schaefer’s offers a simple, easy-to-use software program for about $1,600. It requires some input of information on your end, but you have the flexibility of reprinting your manuals at any time without any additional cost except for the printing itself.
The third system is called One Rate Plus by Collier’s Consulting. Collier’s also offers the flat rate system as a software package. I would call it the Cadillac of the software programs, providing you with all the information you would ever want to see.
The one-time cost is about $2,400, but like most things that provide great output, it requires a significant amount of time on the input end. If you’re willing to spend the time inputting data, you can get great results on the other end. Collier’s also has direct software links to most accounting programs.
The new kid on the block is Profit Strategy. Like Callahan Roach, they provide manuals for you. This program is unique in two ways.
First, the price structure. The initial investment is only $995 plus a monthly fee of $50 for the first technician and $15 per month for each additional tech. The monthly fee provides for free reprinting of your manuals once a year.
On the plumbing side of the business, Mayo Systems out of Southern California also has an excellent program that’s been very popular with plumbers across the country for a number of years. There are also several other flat rate companies out there, but the ones I’ve mentioned above are the best known. I’ve heard every excuse in the book not to change the flat rate pricing.
My company is too large. My company is too small. Some say the town is too large.
Others say theirs isn’t big enough. Still others use the excuse, hey, our customers just simply won’t accept it. The bottom line is flat rate pricing works in nearly every situation.
You just have to make a commitment to make it work. If you’re not already on flat rate pricing, I urge you to give it some serious consideration. It has the ability to significantly increase your profit margin while helping your service department run more smoothly.
Keep in the back of your mind that flat rate pricing is coming, and it will become the standard of the industry. Remember, sooner or later your company will be on flat rate pricing. It’s simply a matter of when the transition will take place.
As always, we welcome your feedback on each month’s tape. Feel free to give us a call with your comments, or if you prefer, you may fax or email our office. Better yet, check out Grandy and Associates on the World Wide Web.
Our website provides a detailed schedule of coming full-day seminars. Our address is www.grandyassociates.com, and is also printed on the tape insert. Again, our website address is www.grandyassociates.com. By the way, don’t forget to sign up for Grandy and Associates’ three-day program called the Basic Business Boot Camp, designed for trades company owners and managers.
The program involves three days of intense business training designed to teach contractors all the basics of labor pricing, cash flow, and service agreements. The tuition includes the latest version of Grandy and Associates’ industry-leading software program called Labor Pricing for a Profit with Cash Flow Projections, which each contractor will use to model his or her company throughout the three-day program. Enclosed is a four-page brochure giving all the details.
Each class is limited to 15 contractors, so call soon to reserve your spot while space is still available. The Service Contractors’ Business Tape of the Month is produced and distributed by Grandy and Associates. If we can be of service to you, give us a call on our toll-free line 1-800-432-7963.
Until next month, remember, invest your time and invest your money in those things that will reproduce.
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