Flat rate pricing has been the buzz of the trades industry for a lot of years. Few contractors are without an opinion when it comes to flat rate pricing. There are basically two camps. Camp one says we are on flat rate pricing; we love it and would never consider going back. We have far less customer complaints, the techs can bill while on the job (no calculations) and it is the perfect system to sell service agreements since the customer can see, in black and white, the savings for the current repair. Best of all we are able to charge what we have to charge to cover cost while generating a reasonable profit.
Camp number two is 180 degrees the other direction. We hate flat rate. It is gouging the customer, it’s too complicated, our techs would never go for it and I am 100% confident we would lose our entire customer base if we switched. Besides our community is too small, too large and/or no one else is on the program. It just won’t work!
Let me make a statement that camp number two will totally disagree with.
Flat rate pricing is going to become the standard of the industry!
Now let me back paddle a little bit. Yes, it is going to become the standard of the industry – but not for the reasons you might think. Flat rate pricing will not become the standard of the industry because it is a great system, although it is. Flat rate pricing is going to become the standard of the industry because the cost of doing business is going up – rapidly.
See if you can finish this sentence. “We could do a lot more work if we could just find another qualified ______.” The blank is technician. There is a huge shortage of technicians across the country, in every trade. Now we live in the greatest country on the face of the earth but we are also governed by a basic economic principle call Supply and Demand. When something is in short supply the cost goes up. Techs are in short supply so guess what? Right, the cost has, and is, going up. The hourly rate paid techs today is significantly higher than what we were paying even a few short years ago.
What about benefits? Fifteen years ago it was the rare company that paid even a portion of the technician health insurance. Today it’s becoming commonplace for companies to pay at least a portion of the health insurance, if not all of it. Paying $200 to $500 per month for health insurance, per employee, is a huge increase in the cost of doing business. Many companies are also adding other benefits like a 401K plan and/or profit sharing.
It isn’t just the cost of wages and benefits that is going up either. What about your general costs of doing business. Have your marketing, workman’s compensation insurance or telephone bills increased over the past years. What about gas! Wow, talk about a cost increase. I’ll even be willing to bet the general wages for your office staff have gone up as well. So what are you saying Tom. I am saying the total cost of doing business has gone up a lot over the past years and it is not likely to stop any time soon.
When costs go up who pays for them? Well if your customer doesn’t pay them …. You will! If you continue to absorb the increasing costs of doing business it won’t be long before your profits aren’t just reduced, they will disappear!
Now let’s assume you are a well-informed contractor. Perhaps you have even attended one of Grandy & Associates three day “Basic Business Boot Camps”. You know your cost. As costs have gone up your time and material rates have steadily increased. Great job, now for the problem.
What happens when you real cost of doing business demand you charge well in excess of $100 per hour? What will the customer’s reaction be? Let’s assume you need to charge $135/hour just to cover costs while making a reasonable profit. Your tech arrives at Mrs. Jones house and announces that all repairs will be at $135 per hour. Mr. Jones goes ballistic!!! “Are you kidding? My husband doesn’t make $135 per hour. As a matter of fact I don’t think my doctor charges $135 per hour. You must be nuts!” At which point Mrs. Jones then quickly escorts our friendly technician to the door – without making the repair.
The problem is simple. The company has run the numbers. They KNOW they must charge $135 to simply cover costs while generating a reasonable profit…..but the customer won’t pay it. What do we do? The answer is simple. Switch to flat rate pricing. On flat rate the customer never sees the hourly rate. All the customer sees is the total cost of the repair. The hourly rate you must charge, in this example $135/hour, is never seen by the customer. All they see is the total cost of the repair. Mrs. Jones doesn’t mine being charged $187.50 for the total repair and she has no idea that the internal hourly rate is $135. Best of all, she really doesn’t care what the internal rate is. She is overjoyed to know the firm cost of the repair BEFORE the job is done.
Flat rate is going to become the standard of the industry. However, the reason is not because it is a great system, it’s because it is the only system we currently have available that allows the company to charge what they really need to charge per hour without showing the customer the actual hourly rate. Brace yourself, flat rate pricing is coming like it or not!
If you a need a little help calculating your hourly rate you may want to purchase Grandy & Associates “Labor Pricing” software program. Simply enter your costs of doing business and it will instantly tell you exactly what you to need to charge per hour, by department.