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    By Jim D'Amico

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    A recent news article entitled, “As a business, your costs are up; what about your prices?  by Associated Press writer Stan Choe appeared in our local Rochester Democrat and Chronicle Sunday newspaper.

    The article makes the following statement and then asks an important question; “all types of expenses are rising for small businesses as inflation grabs hold across the economy.  That has owners more likely to raise their own prices than at any time in the last decade. Should you be among them?”

    The article cites a recent National Federation of Independent Business (NFIB) survey.  The survey said that 19% of small businesses raised their prices in May, 2018. The survey also reported that more than a quarter of the small businesses surveyed are set to follow suit in the next three months.  The article also quotes Bob Phibbs, a consultant and CEO of The Retail Doctor, who said, “Smart retailers raise their prices, and the failing ones say they can’t.”

    The article also discusses covering cost increases and suggests a few business considerations about pricing and price increases.  I’ll share those suggestions and give my personal opinion on what I believe makes sense for a service company.

    The bullet points are taken from the article and are in bold, italics and quotation marks.  My comments follow after each bullet point.

    From the article, “Here are some issues to keep in mind mulling over how to cover increased costs:

    • Don’t assume switching to lower-cost items can fix everything.” 

      I agree.  You can only reduce costs by a very small percentage, and it’s unlikely that you can cut costs across the board, especially in inflationary times.  You should also recognize that reducing your expenses is generally only a temporary fix. I don’t believe you can cut costs to arrive at your desired net profit.  You must grow top-line revenue.


    • “Consider raising prices only on some rather than across the board.”

      This may be good advice, but selective increases may work better in retail sales rather than in a service business.  Picking and choosing requires you to have a firm grasp on your margins, income and expenses. On the income side, you will need to know your product sales mix and margins to determine the correct products and appropriate corresponding selling prices to offset increased expenses.  Generally, if a large portion of your business is service sales, it may be wise to simply raise your hourly rates to offset the cost of doing business.


    • “Give some advance warning.”

      If your company is involved in equipment installation and you have several jobs quoted, advance warning of a price increase may help to move some customers from prospects to buyers.  However, I have a concern about giving advance warning on service rates. On the service side, it may be suicidal to let customers know you have raised your rates, regardless of whether you are quoting flat fees for repair or time and materials.  The last thing you’ll want to do is turn your steady customers into price shoppers. That will only get your company into a race to the bottom.


    • “Make sure employees are on board.”

      I certainly believe it is best to keep employees appraised of new pricing and customer policies.  My suggestion is to discuss with employees the reasons why your prices are going up. It is also important to provide the appropriate talking points so that employees are comfortable when talking with customers.  However, I don’t suggest that price increases should be made by committee decision. Only the executives and managers that are responsible for both customer relations and the bottom line should be involved in pricing decisions.


    • “Consider that this may actually be the best moment to raise prices.”
      The article states, “The economy is growing, unemployment is low, and consumer confidence is close to its highest level since 2000.  ‘Things don’t stay this good forever,’ Phibbs said.  ‘Now is the time to be making money.’ “

      I couldn’t agree more.  A strong economy has a big impact on consumer confidence and when consumers are comfortable they are more accepting of price increases.

      I also believe when you need to raise your rates, it is likely the best time to convert from Time and Materials pricing to Flat Rate pricing for service.  We can help you with that.

      As Bob Phibbs said, “Now is the time to be making money.”

     

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