Two years ago we uploaded a blog post entitled “Can $1 Really Make A Difference?” That post has been one of our more widely-read posts. In fact, we decided to make it into a short video. The conclusion of that blog post was, yes, $1 can make a difference in your service business. You may enjoy reading that message.
Now let’s talk about real impact by raising service rates by $5.
If your company uses time and materials pricing, five dollars may place your hourly rate at a price point that may be challenged by your customers. That’s because if you quote your labor rate, customers tend to hyper-focus on the hourly rates and time on the job. All things being equal (although we all know they’re not), hourly rates are a way customers measure the difference between service companies. Often, more consideration is given to hourly rates than to the training and experience of the staff or a company’s years in business.
And, customers have a price point or a threshold that they aren’t willing to cross over when it comes to service rates. So, regardless of whether you are raising your rates by one dollar, five dollars or twenty-five dollars, when using time and materials pricing, because you quote an hourly rate, you will eventually get to a point where you may price yourself out of the market for some customers. Not all customers, but some.
Let’s assume, therefore, that all service companies reading this blog post are using flat rate pricing. Flat rate pricing makes raising rates much easier because hourly rates are not quoted to the customer.
It’s always safe to assume that most service companies bill four hours per day for each service person. That’s twenty hours per week and one thousand hours per year. An increase of five dollars will mean and extra five thousand dollars per service person.
Going back to our example in the blog post mentioned above, if each of your service vans drive 18,000 miles per year and gets 12 miles per gallon and you pay $3 per gallon of gas on average, your annual gas expense per service van is $4,500. Five thousand extra dollars pays 100% of the gas expense for each vehicle. It also contributes $500 toward your vehicle insurance on that van or other expenses.
Now we’re talking serious money.
As a percentage of hourly rates, five dollars is .0667 at $75, .05 at $100 and .04 at $125. The national average of hourly rates used by companies on flat rate pricing was $145 per hour in 2017 (see Coolfront Technologies Hourly Rate Report). As a percentage, five dollars of $145 is .0345. That keeps a service company just slightly ahead of the annual cost of living increase.
In terms of added expense for repairs, five dollars has little impact. A one hour repair increases by $5. A half-hour repair increases by $2.50. And keep in mind, most customers will require less than one repair per year on their systems. So, a five dollar per hour increase should not have a big impact on the number of complaints about repair fees.
Besides, a competent staff with a high level of training and expertise delivered by a professionally-run service business is probably worth an extra five dollars per hour to most customers.
Heck, that’s just about the price of Caramel Mocchiato Coffee at a high-end coffee shop. A very small extra to pay for year-round comfort.