What is positive pricing? Positive pricing is understanding your true costs and charges, pricing economics, and consumer psychology. It is setting some prices high and others low. It is using pricing to send signals. It is using pricing to attract customers and to close sales. It is discounting with credibility. It is pricing presentation. It is pricing to reward customers and influence customer behavior. It is pricing for the maximum return and the maximum future for your company.
The starting point for all pricing discussions is service pricing. Your service price should allow you to pay your bills, yourself, and your employees. It should also allow you to invest in the growth of your company, provide your employees with training, and still leave a little left over. In other words, service prices should be set to earn a targeted net profit.
Since service pricing carries your overhead, your lowest service price should reflect your target price (i.e., the price you need to achieve your targeted net profit). Charge service agreement customers your target price and everyone else a higher rate.
Response Charge Pricing
Contractors usually charge about the same response charge as their competitors, or they charge what they've always charged. Either reflects little thought and no strategy. Response charges should be set by design.
If your service rate is correct, you won't need revenue from your response charge to be profitable. You can use the response charge as a marketing tool. Five common marketing approaches are:
- Quote the response charge to present a low price
- Give away the response charge with dollars off coupons and other sales promotions
- Use the response charge for load management (i.e., increase it when you've got more calls than you can handle)
- Waive the response charge for service agreement customers
- Use the response charge to capture calls by crediting it towards repairs if the homeowner authorizes you to proceed.
Material Mark-up Pricing
Contractors often use mark-up tables borrowed from a supplier to set parts pricing. However, such tables have little or no bearing on your business or conditions. It's like setting service rates after calling your competitors. It may result in the right margin for your company, or it might not. No one knows. Your mark-up should be calculated to achieve a targeted net profit.
If overhead is assigned to service prices, don't double charge for it here. Material should cover inventory carrying costs (i.e., cost of money, shrinkage, etc.) and your targeted net profit. This correctly reflects the fact that labor generates more overhead and material generates less.
Effective Hourly Rate
Did you ever wonder how some low price contractors remain in business year after year? Their effective hourly rate is higher than anyone real-izes. Your effective hourly rate includes your response charge, your hourly rate after accounting for minimum charges (e.g., one hour minimum), and is divided by your average repair time.
A contractor who hustles through calls, taking 30 min./call, charging $50/hr. with a $50 diagnostic fee and a one hour minimum, is in effect charging $200 per hour ($50/hr. with a one hour minimum, + $50 diagnostic = $100 for a 30-minute call, or $200/hr.
Since hourly rates, minimum charges, response charges, and repair times work together to make an operation profitable, tweaking any element may dramatically affect the bottom line. Be careful.
Pricing should have a nuance or two. Big box retailers tend to promote 60 to 90 items in advertising circulars. The pricing on these items is low, while pricing on other items may be much higher. In other words, retailers vary their prices. You should, too.
Flex your prices down for simple repairs with easy parts availability (e.g., replacing a thermocouple) and for readily comparable items or repairs (e.g., a thermostat found in every big box). Flex them up for difficult repairs and proprietary parts (e.g., control boards). When you flex some prices down and others up, you hit your target margin on balance. This is retail pricing.
Consumers hate the uncertainty of time-andmaterials pricing. Yet many service companies insist on presenting prices this way. A smart contractor presents prices the way most homeowners prefer: flat rate.
Service Agreement Pricing
The service agreement is a self-funded marketing program. Though service agreements are profitable on the margin, their primary purpose is not to generate profits directly, but to build relationships, tie customers to your company, drive higher margin installation work, and fill in the valleys of demand. Remember, each service agreement is a future replacement.
Don't burden service agreements with service department overhead. Allocate overhead against service, not service agreements. Only burden service agreements with the added overhead the program generates. Keep service agreements affordable and a bargain.
The rubber meets the road and the profit hits the bank with installations. Installation customers with repeat positive service experiences involving your company are least price sensitive. They want to buy from you.
By contrast, free agents have no loyalty. They want a low price. This is where your salesperson enters the picture. He creates desire to buy from him first, the company next, and the solution last. If he sells the first two, the free agent must buy from you.
Loyalty aside, the days of single "back of the business card" price quotes are over. Homeowners want choices, from you or from your competitors. Offer a range of solutions.
Offer financing for your solutions. When contractors finance installations, homeowners spend 37% more. Arrange financing from multiple sources. Talk monthly payments.
Use survey guides to ask the right questions during the sales presentation to ensure you offer solutions people really want. Prepare installation pricing cookbooks to quickly and easily price the solutions. Follow up to ensure actual costs match estimates. Adjust cookbook pricing accordingly.
Low price companies are often not worth more than they charge. The Catch-22 is their low pricing means they cannot afford to deliver the type of service that would command a higher price. To break the cycle, charge at levels needed to deliver better service, and then work like crazy to improve service.
This is positive pricing. It's setting prices to support the quality of service you want to offer, that your customers deserve, and that merits a premium. It's setting prices in advance of service improvements, and then investing to raise service quality to meet your pricing.
Profit is an exact reflection of the value and service you provide to society. Profits reflect your worth. Don't hesitate to price positively. Don't hesitate to make a profit.
Profitability, however, does obligate you. You're obligated to take care of yourself, your family, employees, and customers. And you're obligated to share some of your good fortune with others.
Provide pro bono repairs every now and then. Take a struggling business owner under your wing and mentor him. Give back to your community and industry.
Of course, giving back is something that only profitable companies can do. It's worth it to be one.
At the time this article originally appeared, Matt Michel was CEO of the Service Roundtable, which provides sales, marketing, and business tools online for HVAC contractors. For more information, call 877/262-3341 or visit www.ServiceRound table.com.