From the latest USA newsletter:
Pricing Service in a Small Service Company
By David Oliva
While doing research for this series of articles the topic that came up most frequently was pricing. How do I know what to charge, what pricing structure should I use, what’s “fair”, what’s the value of our service, should I be cheaper than my competitor, etc? Appropriate and profitable pricing is one of the most important parts of running a successful small service company (SSC). It’s also one of the most difficult. Most SSC owners, me included, have no formal business training and so we struggle with issues like this. Many SSC owners undervalue their skills by quite a bit because of this lack of training and so are sometimes extremely underpriced. This creates a variety of problems such as not having enough extra income to cover the cost of necessary training and an inability to expand or improve the company due to lack of funds. It also creates a problem for the industry as a whole because it undermines professionalism and creates an atmosphere where customers are taught not to value our profession as they do other professions.
Let’s start at the beginning. The foundation for all pricing starts with your cost of doing business (CODB). Without knowing your CODB setting prices is a guessing game. United Servicers Association has a great, free, CODB calculator on their website. What it will allow you to do is input all of your expenses and calculate your CODB on an hourly basis. Knowing how much it actually costs you simply to be open for business each hour of the day is invaluable and, at least the first time you do it, eye opening. It was a big shock to me when I ran those numbers about 5 years ago. I had no idea we had to spend so much money just to be open. Once you have that number you can begin planning a pricing structure.
Link to USA free CODB: https://www.unitedservicers.com/codb-calculator
There are two basic structures for pricing, hourly or flat/job rate. An hourly rate is self explanatory but a job rate structure may be unfamiliar to some. A job rate structure will typically have between three and ten rates, which will vary from the simplest jobs to the most involved and complex. With a job rate system the time it takes to complete a repair is only one factor out of many used to determine the price. Job rates systems are generally the most profitable way to price repairs in our industry. The benefit to the independent SSC of a job rate system is the ability to capitalize on experience and skill. With an hourly rate the better and faster one gets the less money they will collect on each job, making it necessary to complete more jobs to make the same amount of money. With a job rate system the faster you are the more you make because the price of the repair is not tied to time. Job rate systems reward skill and efficiency.
What is fair? This is a contentious point in our industry. Many SSC owners feel that we should not charge professional rates for the work we do or that job rates are “unfair” to the customer because they tend to increase the overall repair price. I believe this stems from a lack of respect for the work we do, even from people within our industry. This attitude, as stated above, undermines the industry as a whole. There is no reason why we should not be well paid for the service we provide to our customers. Fairness is subjective and so it is a meaningless concept in regards to pricing. Pricing in an SSC, which typically does a low volume of repairs relative to larger companies which can take advantage of high volume, should be fundamentally based on two points. The first, and most important, is CODB. Without covering your CODB you will fail, this is simple math. If your CODB dictates rates that you feel are “unfair” then you either need to reduce your CODB or let go of the idea that prices can be fair or unfair. The second point is your market. After you’ve calculated your CODB you can then feel out your market for profit maximization. The old school method for feeling out maximum price still holds true, if you’re not getting at least a few complaints about your prices you can charge more.
Value is also subjective, and so ideal customers may be those that place a premium on quality service and are willing to pay for it. If your market is a large metropolitan area then chances are high end brand appliances are plentiful in your service area. Typically customers with these brands will value quality over price and be willing to pay higher rates for better service. In such a case why try to compete by having the lowest price? Why not offer the highest level of service available and charge appropriately for it? Competing on price is often a race to the bottom and in the current economic climate lowering your prices may not be a viable option. Compete on quality, not price.
The biggest obstacle to higher rates, and higher profits, is often psychological. It’s very common to hear SSC owners say “I can’t charge that! No one will pay it. My competitor only charges $10.” This is a myth based on nothing but fear. I was once browsing the racks of luxury retailer Neiman-Marcus and came across a shirt from the designer brand Givenchy. This was a simple sweatshirt with a screen printed Rottweiler on it. This shirt was priced at $900. You may not be interested in designer fashion, but LVMH Group, the parent company of Givenchy, made about $5.7 billion in profit in 2017. The point being that customers are willing to pay almost anything for what they perceive to be valuable. And this is where value comes from, a product or service is valued at whatever people are willing to pay for it. If you can set up your company to be perceived as more valuable than your competition then you can command higher rates.
This industry is full of people who love what they do, and are very good at it. They treat their customers with respect; they provide quality service and honor their warranty. The go out of their way to help people who need help. And so why shouldn’t they make enough money to drive a new service vehicle, have excellent health insurance and take a great earned vacation now and then? Why shouldn’t they value their skills the way other trades and professions value theirs? Why shouldn’t there be enough extra profit to provide for a great retirement, another topic of great interest to SSC owners? The answer to all of those questions is they should, and there should be. Pricing appropriately will ensure that and we need to focus more on this, and in greater depth, especially for the SSC owners, since we are the ones who need the most help with it.