Try a New Pricing Level, Improve Your Bottom Line
Originally published: 03.01.18 by Ruth King
I recently met with a new client and redid his pricing based on his actual costs and the net profit per hour he said he wanted. His reaction — “We can’t charge that!”
I told him to try the new pricing anyway. What happened? He was awarded the first job he bid with the new pricing and easy pricing format I gave him.
Another contractor was complaining that he hated duct jobs. When I asked why, he said that they never made money.
So, we created pricing for duct jobs. Anything below those prices, he walked away. It wasn’t worth it to him. One he implemented that pricing he no longer hated duct jobs because he was earning a profit on the ones he did.
If you use flat rate pricing for service, increasing your service rates $50 per hour only increases the customer’s repair cost by $12.50 for a 15 minute repair and $25 for a half hour repair.
Customers rarely notice the increase. You will see the increase in revenue, and hopefully profits, because of the number of service calls you perform. Let’s assume that you really can’t charge a higher price. Here are five options
Break even occurs when your net profit per hour is zero. Add your overhead cost per hour and your direct cost per hour. This is the absolute minimum price you must charge your customers. Below this price, your company will operate at a loss and eventually go out of business.
Overhead Cost Per Hour
Determine whether your overhead cost per hour is too high. If your field labor has less than 60 percent billable time, then your overhead cost per hour is probably
too high. Normally you don’t see this with replacement. Many service departments are unprofitable, however, because the technicians’ unbillable time is too high.
If this is the case, start tracking billable hours. They will increase and your overhead cost per hour will decrease.
If your overhead cost per hour is too high and your field labor is productive (more than 60 percent billable time), then look to increase billable time, if possible.
Ask your field personnel how they can bill one more hour a week. Or, how they can get to replacement jobs quicker. They have the answer. Implement their suggestions.
Generate More Revenue
If it isn’t possible to generate more billable hours, then it’s time to generate more revenue and hire more field personnel. More field personnel means more people who share the overhead and the overhead cost per field employee decreases.
Your overhead will increase slightly with each additional field person you hire. You need a truck, mobile phone, etc. It will not double with each additional field person. In this example I assumed that each additional field person adds $2,000 to overhead. Increasing revenues might mean reactivating inactive customers, asking for and receiving referrals, or another type of marketing.
Print out a list of customers who have used your company in the past but not in the past 18 months to five years.
There will be a lot of customers. Contact them (email, direct mail, text) and get them back. This will increase your revenues and decrease your unbillable time.
Increase Billable Hours
If you can’t add more people because your existing personnel are not busy 40 hours per week, then each field employee must increase their billable hours.
This can be accomplished by:
- Technicians recommending repairs that are needed but are not causing the system to fail at the time of the service call (i.e. a weak capacitor, pitted contactor, etc.)
- Installation crews getting to their jobs faster (no warehouse supermarkets, materials are pulled and put in a specific place in the warehouse, staggering the times the crews come in or they go directly to the job for multi-day projects)
- Something else your field personnel recommends.
Always try the new pricing level before assuming that you can’t raise prices.
Even at the new pricing levels, when you implement the suggestions above, you will improve your bottom line.