Pricing correctly is ground zero for operating a profitable company. You can have the best run company in the world but if you’re not pricing correctly, first off you won’t be profitable, but over time it’s inevitable that your ‘well-oiled machine’ will begin to breakdown.
We should start by pointing out that there are a lot of WRONG ways to decide what to price.
- We commonly hear customers say they have someone in the office (we’ll say Suzie) call all the competition in the area to get their pricing. They find the high and low ends of the spectrum and figure they should land somewhere in between. We call that….Suzie pricing.
- Other’s will take that same spectrum and conclude that if they’re on the low end, that will get them more business, more business will mean more revenue, and more revenue will mean more profit. We call that Scaredy Cat pricing. More business may get you more revenue, but it also means more overhead, and if you’re not profitable from the get go, that’ll actually mean less profit.
- Some just go by what we call SWAG pricing…some wild amazing guess. SWAG pricing is usually based on ‘that’s what my last company was charging’ or ‘that sounds about right’.
If you want to price correctly (which you do), here are 7 pricing items you need to know.
- Know your market - now I we just said that you don't want to base your pricing on your competitions pricing and that is true, but you can use it to inform a couple pricing related items. First, you can use it to determine if your diagnostic fee/service charge is appropriate for your market. Second, you can use it to gauge whether your market will accept your pricing. If the rate that you set is outrageously higher than the rest of the market, you may need to cut costs so that you can get your rates to a more tolerable level.
- Know the number of sold hours and what they cost - you're paying each technician 40 hours per week, but you're not able to charge customers for 40 hours per week. Why? After accounting for truck replenishment time, weekly team meetings, vacation and sick time, chit chat at the water cooler before heading out for the day, and a daily stop at the 7/11 for a coffee or soda, your team is probably only 50-55% efficient. Let's say you pay your techs $20 an hour, after accounting for insurance costs and workers comp, they may cost you over $30 an hour. Charging the customer $30 per hour to cover those costs doesn't work when they're only at a customers house 20 hours per week. Make sure you're covering your costs NOT by hours worked, but by BILLABLE hours.
- Know your service department overhead - your tech wages are only a portion of the costs that you need to cover. Now factor in the costs of your service department. If you're running a large enough operation where you have separate departments for service vs installation vs other, make sure you're evaluating costs by department. You might be surprised to find significant discrepancies between them.
- Know your breakeven - after evaluating costs for items 2 and 3, and dividing that across the number of BILLABLE hours, you now have your breakeven. This is what you need to charge to get back to 0. Now, let's build in profit.
- Know how much profit you want - what is your target profitability? What do you want out of your company? 20%? 30%? Once you determine your profitability goals, add that on top of your breakeven cost...and be careful...don't confuse mark up with margin!
- Know your growth plan - if you want to grow your business, don't pull that out of your profits, have your business pay for your growth. If you want to add another truck in the next 2 years, and that truck is going to cost you $50,000, divide that $50,000 over the number of billable hours you'll have over 2 years. Add that amount onto your hourly rate, and if you set aside that amount for each hour billed over the next 2 years, guess what, in 2 years you'll have $50,000 for a new truck.
- Know how to explain your pricing - Great! So now we've determined exactly what you need to charge to run your business and grow your business. For some, this may mean no change at all, for others this may mean increasing your pricing by 50, or 100%. How am I supposed to explain that to my customers! The answer is flat rate.
We know that this is a shift for many companies, especially those coming from time and material. We'll make sure you're prepared for Explaining Flat Rate to Customers, and don't forget to read up on Why Flat Rate?.