Three Essential Functions, Part 2 — Service Profitability
Originally published: 11.01.18 by Ruth King
Last month I wrote about maintenance profitability, the most important segment of your business. It feeds service and replacement, the subjects of this column and next month’s column.
How do you ensure that your service rates are correct?
Here’s the formula: Highest paid technician’s hourly wage + Overhead cost per hour for the service department + Net profit per hour you desire.
This is your hourly rate for maintenance plan customers assuming that the service technician can bill out 100 percent of his time. Since this is impossible unless you don&rquo;t have meetings, training, vacations and holidays, estimate the total percentage of billable time.
This is your hourly rate for maintenance customers.
Then divide by the 1, minus the discount you give to maintenance customers to arrive at your hourly rate for non-maintenance customers.
Here’s an example:
- Highest paid technician’s hourly wage = $30/hr.
- Overhead cost/hour for the service department = $35/hr.
- Net profit/hour you desire = $75/hr.
Your service rate would be $140/hr, assuming you could bill 100 percent of a service technician’s time.
Let’s assume you can bill 75 percent of the service technician’s time.
The hourly rate for maintenance customers is:
$140/75 percent = $186.67
Assume you have a 15 percent discount for maintenance clients:
The regular hourly rate is:
$186.67/.85 = $219.61
This is why residential HVACR contractors should be on flat rate pricing. Commercial customers have an advantage in that most customers will pay travel time.
Other than vacations, holidays, meetings, and trainings, the remainder of a technician’s time is billable. In addition, commercial customers can easily charge for everything they use: torches, vacuum pumps, reclaimers, etc.
And, you can charge for shop materials — usually five percent of the materials used or a number calculated by taking your total shop materials cost last year divided by the number of service tickets you had last year. Choose the larger number for the invoice.
Here are five ways to help your service technicians be more productive, i.e. bill more hours. The more hours you can bill, the higher your service department’s profitability.
1. Track and post billed hours. What gets tracked gets improved. Put a poster on the wall with the number of total hours worked for the week and how many of those hours were billable.
In six months you will know the percentages for busy months and slower months. Once you know the trend, have a contest to increase billable hours over a six-month period.
2. The only time service technicians are in the office is for meetings. They go to their first call from their homes. They go home from their last call. In most states you can pay them from the time they arrive at the customer’s home/office until they leave the last customer’s home/office.
GPS helps you monitor this. Route the technicians through the shop to pick up parts as they are travelling to their calls.
3. Give a technician one call at a time. When technicians see all of their calls they stretch the time or rush the time to complete them in a day. In addition, they may change their schedule to suit their needs rather than what dispatch has promised the customer.
4. Never answer the question, “How many calls do I have today?” The answer is, “Enough.” If the technician asks again, answer with “Enough.” Eventually they will stop asking.
You don’t want them to stretch warranty calls or maintenance calls because they think they don’t have enough to do in a day.
5. Debrief the technicians after the calls. At a minimum ask the following questions:
a. Is the call complete? If not, why not — what parts need to be ordered, etc.
b. What recommendations did you make that the customer declined (or needs a quote)? The answer to this question gives you work in the slower times of the year. This is your tickler file. It can be electronic or copies of service tickets in a desk drawer folder.
Whenever the technicians have a slower day, call the customers and ask whether the recommended work can be performed. This keeps them profitably busy.
c. Did you collect (or get a store stamp/manager’s signature, etc.)?
d. Did you get a picture of the model and serial number for the unit you were working on?
This picture should be sent to the office and uploaded into the customer file.
e. Is the customer 100 percent satisfied?
Debriefing ensures that you don’t miss any additional potential for service revenues.
Next month I will cover replacement profitability.