Lett Uce Compare (groan...)
Lettuce is often a used as an analogy for U.S. currency. Like our dollars, when fresh, lettuce is green and crisp. Both the vegetable and the currency even emit a fragrance that might be described as “earthy.”
A cool, crisp head of leaf lettuce, like those fresh dollar bills, is cool and feels nice to the touch. A head of iceberg lettuce is thick and firm, just like a tight stack of fresh twenties!
Both can feed us when we’re hungry.
And both suffer from “wilting.”
That same beautiful head of leaf lettuce, like our money, is worth less to us over time. When they begin to “wilt,” neither money nor lettuce will provide the same enjoyment or nutritional value.
Nutritional value from money? You bet. Money provides nutrients for your business and for your life. It provides the nourishment that every business needs to continue on a successful pathway. If gathered in the proper quantity, it also allows for growth.
Wilting and Inflation Are One In the Same
But dollars today aren’t worth what dollars were worth even a year ago. And when looking at the “wilting” of the dollar’s value over time, every service business person should be concerned. Quite honestly, just 3% inflation has a big negative impact on your service business. That’s because it will take one hundred three dollars this year to buy what one hundred dollars bought last year.
What’s the impact? If you charged $100 per hour for service last year, you’ll need to charge $103 per hour this year just to stay even with inflation. That’s how much your dollar is “wilting.”
Reaching the Customer’s Acceptance Threshold
Considering ongoing “wilting” the challenge to success for service businesses comes mainly in quoting hourly service rates to customers. Especially if a customer does business with a company every year and pays attention to service rates. And yes, customers always pay attention to service rates.
A customer’s willingness to accept your rates may decline with the increase of your hourly rates. Consequently, your job is to maintain a balance point that allows your company to make money and also keep customers happy and giving you more business. But that is easier said than done and your balance point if not maintained can become a tipping point, sending your customers off to another company.
It appears that many customers run away from companies charging $100 per hour or more on time and materials pricing. That seems to be the customer’s acceptance threshold. But charging $100 or less today becomes an impossible task when accounting for the expense of running a service division and factoring unapplied time (time that cannot be billed). It’s the unapplied, non-billable time that drives service division overhead expense up to about 50-55% of the price charged for every service call.
So, if you charge $90 per hour, $45 is covering your overhead and unapplied time. You then have direct (technician pay) and indirect costs (costs associated with that job) to pay. The resulting profit is very little if any. Now, factor in the “wilting” of the dollar and your financial challenges are exacerbated.
What to Do?
The only way around the “wilting dollar” and the potential service division losses in the long run is to convert your service pricing to flat rate and schedule ongoing service rate adjustments within the flat rate system.
Why Flat Rate Pricing Works
Fees charged for repairs when using flat rate pricing combine the labor fee and part(s) fee into one blended price that the customer can pre-approve. The customer will pay a service call fee for the trip to their location and the diagnostics on their system. Generally, that can be done for less than $100. Repair fees are charged based on the database of repairs, each with its unique labor time and parts required. There is no one-hour minimum fee, so it is much more fair for the customer.
Another advantage of flat rate is it allows the customer’s attention to be focused on the needed repair and not on the hourly rate and time on the job, because flat rate means the quoted price is the price honored.
When using flat rate pricing, the service company pays for the education and training for the technician. Consequently, more time on the job does not mean a more expensive repair. All technicians are billed out at the same rate and at the same amount of allotted time for each specific repair, so repair pricing is more consistent from tech to tech and from job to job.
Customers are informed upfront about the service call fee on the request for service. The customer is also informed upfront about the repair fee, but is never quoted an hourly rate. Consequently, if a service company needs to raise rates by $5 or $10 per hour, the labor rate becomes a non-issue. The company therefore can adjust for the increased cost of doing business and the “wilting dollar.”
Looking to the Future
The “wilting dollar” will continue because increased costs are built into how our monetary system works. The key is not to try to fight a one man battle against inflation and higher costs and settle on less for yourself. But rather to stay slightly ahead of the curve and anticipate those things that come your way to chip away at your profit.
Flat rate pricing can be just the thing to keep your money “crisp.”