Overcome the 5 Biggest Problems With Flat Rate Pricing

Nov. 1, 2004
by Bill Ligon In 1991, I instituted a flat rate pricing system in my company. It wasn't easy, because I was resistant. I went through a series of "problems"

by Bill Ligon

In 1991, I instituted a flat rate pricing system in my company. It wasn't easy, because I was resistant. I went through a series of "problems" that, once I overcame them, helped me move my rate from $40 to $75. As I grew my business, sold it, and began consulting, I saw a pattern of behavior among HVAC contractors that either prevented them from changing over to a flat-rate pricing system, or made the process much harder than it needed to be.

Through my observations, I've identified five problems with instituting flat rate pricing, and have addressed the concerns so that other contractors considering adopting this pricing method can overcome them more easily.

PROBLEM #1: "I hate change and I don't want to do it. I have to pay to train my people, plus I will spend money I don't have, for software or books. Add in the learning curve, and it's just more trouble than it's worth."
Does this statement apply to your way of thinking?

From my experience, both as a contractor and as a consultant, nearly 90% of us lose money in our service departments. This observation is shared by every other consultant I've ever spoken with. The good news is it doesn't have to be that way.

Most HVAC contractors work hard to give great service to customers. The question arises: If this is true, why do they lose money? The answer: Contractors often are uninformed about the financial side of the business. And because they lack understanding, they don't know the importance of departmentalizing our companies. Because they don't know the numbers, they find it hard to believe theyre losing money in service. In fact, most contractors don't believe they are.

In the following sample, you'll see some numbers you should know about your service department:

Total Annual Sales In Service

Total Gross Margin
$130,000 50%

Overhead in Service Dept.
$150,000 57%

Profit/Loss in Dept.
($20,000) (7.7%)

The only way to find out your numbers or overhead is to departmentalize your profit and loss statement.

When you do, you most likely will come to the realization that you must raise your labor rates.

If you must raise your price in your service department and if you're a time and material service contractor, you have a serious problem, youre in a box. Your customer will most likely fire you.

Bottom line is this: Flat rate pricing is the only way to raise your price and not be fired.

Some other things to think about:

  • 100% of the contractors who are making serious money (8% to 15% of gross sales), all use flat rate pricing in their service department.
  • All of the contractor service groups such as ISL, Airtime 500, and AireServ, EAI, and many others, without exception, recommend their members use flat rate pricing.
  • Can you think of any industry except HVAC, plumbing, and electrical, that uses time and material pricing?

It makes perfect sense to use flat rate pricing. Others (approximately 35%) have been using it for years, and we should as well.

PROBLEM #2: Am I overcharging my customer?
It really doesn't matter what the selling price is. What matters is what the selling price must be to cover your overhead and render you a decent profit.

One thing for sure, flat rate pricing is not an excuse to overcharge. In some instances, flat rate has received a bum rap because of excessive pricing. My advice is to determine your overhead cost, decide on a fair profit to compensate you for the risk, and provide capital to grow your company. That is a decision only you can make.

PROBLEM #3: Will customers like flat rate?
Consider this:

  • If you take your car to the dealer to be repaired, don't you like to know the repair price before the work begins?
  • If you take your spouse out to your favorite restaurant, don't you like to know the price before you order?
  • Do you want a price from the dentist before he puts in those crowns?

Time and material contractors work for customers day after day without giving them a price. Customers don't like it, and when the shoe is on the other foot, neither do we.

Make sure the customer sees the preferred rate printed right along side the regular rate. When asked why they dont get that rate, say, That rate is reserved for our maintenance agreement customers. Would you like to know more about them?

I believe in giving customers the price for the repair before work is done. They want to know the exact cost. Give them options and let them be in control of the entire repair process. Customer complaints about how fast a technician worked after arriving, or when he left, virtually go away. The customer doesn't care. The price is agreed upon before the work is done. When was the last time you got a complaint about a condensing unit price after the work was done?

Remember, just like you, customers want to know upfront.

PROBLEM 4: What if my technicians resist the concept?
We worry about what technicians will think about this new way of pricing. After all, they don't like change, either. You may think you can educate technicians about how high the overhead is in service. I remember trying to do this; it's a message youll never get across.

What I said to my technicians is: "How in the world will I ever be able to pay you what you're worth, unless we make money in the service department?"

You can think of others. It gets their attention, but they still believe you're making a fortune (and on their backs, as well). I had one client give each technician a raise of fifty cents per hour. That did have a positive impact, although I don't necessarily recommend it.

Hear this. To get your technicians on board, just tell them this is the way pricing will be done. No discussion. Tell them you'll train them how to use the new flat-rate pricing books. Tell them the dispatcher will explain to customers about the diagnostic or show-up charge. No customer is required to make a repair. The customer is always in control. Tell your technicians their job isn't to sell repairs, but to give customers options, and let them make the decisions.

Also point out to technicians that they'll no longer be pressured to work fast, nor will they have to take heat from a customer who is unpleasantly surprised at the big repair price. No longer will they have an owner with a stopwatch observing their every action.

Since I began using flat rate pricing, no technician who worked with it wanted to go back to the time and material method. No math, no taxes, and almost no writing. No pressure. They love it.

PROBLEM #5: Why do I need to use the flat rate books?
The proper use of the book itself is very important.

Train your technicians how to use the flat-rate pricing book. I recommend a weekly meeting with role-playing. Either you or your service manager should prepare some repair scenarios and have technicians find those repairs in the book. One owner I know created a competition where technicians had to find the correct task in the shortest time. The idea is to get them comfortable using the book, talking about what it's used for with customers, and carrying it with them on every job.

The last point is key. Probably the biggest mistake that technicians make is leaving the book in the truck. Why is that such a big deal? Because that book is more than a pricing tool, its a calling card and sales piece as well. There is something powerful about the printed price. It says to customers, "I'm getting the same price as everyone else." Does the customer always like the price? Of course not, but your prices are the same for everyone.

If you sell maintenance agreements, the correct use of the book is essential. It's tough to get your technicians to sell agreements.

Did you ever hear this excuse: "Boss, if I had wanted to be a salesman, I would have been one?"

Using the book properly will cause the customer to ask about maintenance agreements. When customers say to the technician, "How much is it?" the proper response is: "I don't know, why don't we look in the book." He should point to the price in the book and make sure the customer sees the preferred rate printed right along side. You want the customer to ask, "Why don't I get that price?" Answer, "That price is reserved for our maintenance agreement customers. Would you like to know more about them?" Properly used, your maintenance agreement sales will soar.

To sum up, the problems arent really flat rate problems. For the most part, the problems exist in our own minds. Remember, youre the owner, youre taking the risk, and you deserve to make a decent profit. Flat rate pricing will help you do just that.

Bill Ligon has been in the HVAC industry since 1957. He was a territory manager for two HVAC manufacturers, worked for a HVAC dealer as a salesman, worked with a gas utility company selling "gas airconditioning," and started two HVAC dealerships from scratch. Ligon started up and operated Air Comfort Center, a dealership in Shreveport, LA and after 23 years sold his very profitable business to a consolidator. He can be reached at 888/320-9220 or by email at [email protected]

This article is based on the presentation, How to Overcome the Five Biggest Problems with Flat Rate pricing, which Bill Ligon gave at HVAC Comfortech 2004 in St. Louis, MO, Sept. 15-18. For information about HVAC Comfortech 2005, which will be held in Nashville, TN, Sept. 14-17, 2005, call 216/931-9550.

Learn from the leaders: This year HVAC Comfortech presented more than 30 speakers providing educational seminars. All the sessions were recorded, and the recordings are available for purchase. For pricing and ordering information, visit the show website: www.hvaccomfortech.com