March 1, 2010
By Mike Hajduk
Like any good businesspeople, most pool and spa service providers try to do everything right. They hire service people with a good aptitude and attitude and give them distributor- and manufacturer-sponsored training. They promote their companies to the local community and make considerable investments in various marketing initiatives. Having put their best foot forward, a customer calls to make a service appointment—perhaps something as simple as weekly maintenance or a minor repair. However, after taking the job, doing the work and collecting the fee, the income statement shows the company has actually lost money. What went wrong?
This scenario, while frustrating, is not unusual. In fact, it has even prompted some influential and sizable pool companies to cut back on their service departments, or in some cases, eliminate them altogether. Some construction companies have even resorted to farming out service to a subcontractor, who takes over the account once the pool is out of warranty.
When contractors farm out service in this way, the underlying message is they don’t know how to charge enough to make money in pool and spa service. As it is, many contractors don’t charge enough to break even, so it’s no surprise they want to pass the business along to someone else.
It’s not unusual for a service company to incur a break-even per hour cost of $75 to 85 per hour or higher. Why, then, do so many service companies charge less than that for service? Most contractors say customers are already hesitant to pay the prices the company currently charges. As such, increasing prices might serve to alienate their current customer base.
If customers are already complaining about a service rate below the break-even point, it’s natural for companies to want to shed a loss-generating department and let someone else worry about the customer. Many pool professionals also feel if a customer has already paid $48,000 for a new pool, there’s no need to risk losing money on them.
It sounds logical, but it is likely not the best long-term strategy for the company. The answer is not to shed service, but rather to charge enough to make a profit. The best way to accomplish this is to establish a flat-rate pricing system for service rates. By doing this, the focus is shifted away from an intimidating ‘per minute’ rate to the quality of work the company is providing.
The vast majority of customers want three primary needs met when it comes to service:
A service provider simply cannot deliver on the first two points by undercharging the customer. The question then becomes, ‘What does the consumer consider a fair price?’ When customers are offered a $65 or 70 per hour rate—which as mentioned, prevents companies from breaking even—they typically balk. Why should they pay such a seemingly extravagant amount? After all, most pool customers don’t command that type of pay in their own full-time jobs. Even if they do, they probably don’t want to hand over that hard-earned money to their pool technician.
The only way to avoid this scenario is by quoting customers a single, fixed amount for the entire job, as is typically done on a construction or remodel job. The quote should include every possible cost—including all labour, parts and other expenses—and should be delivered before the repair is performed. In the construction or remodel division of your business it’s called a quotation; in the service department, it’s called flat-rate pricing.
This system has many advantages. First and foremost, it prevents the customer from nitpicking about an hourly rate or the cost of a given replacement part. With a flat rate, clients are less likely to criticize a technician taking a call on his cell phone or taking a quick break, since they know that extra time won’t be tacked on their final bill. Also, as mentioned, it allows the customer to focus on the quality of the work being performed, rather than counting the minutes and continually tallying his or her bill.
Also, under the guise of a flat-rate system, it is easier to adjust service rates to a point that will allow the company to break even. The customer does not realize the rate is higher; all they see is the final quote.
There are other financial benefits to flat-rate pricing. Each flat-rate repair has a time allotment based on how long it would take a journeyman technician to complete the repair under normal working conditions (with a little extra time added as a buffer). If the technician finds two or three items that need work, economies of scale come into effect, since any decent technician should be able to complete several tasks using less time.
Use this typical service scenario as an example. A technician goes to a home to tend to a noisy pump. Upon arrival, he or she discovers the motor bearings are bad, but also finds the burners on the heater need cleaning and the time clock mechanism has rusted to the point where the pump runs continuously.
In a time and material scenario, the technician goes to the house, changes the pump and continues to his or her next service call. At $75 per hour, the contractor bills $304 for the motor and $75 in labour costs, for a grand invoice total of $379. This will yield an approximate gross margin of 53.3 per cent. For most service companies, this only approaches break-even levels (see Figure 1).
In a flat-rate scenario, the technician charges the customer a diagnostic fee, takes the time to carefully analyze the entire pool and spa system and then makes recommendations for all repairs. The typical result is a more thorough, professional visit, which gives the customer repair options based on the diagnostic. With the addition of the dirty burners and time clock mechanism, the repair is larger—the new repairs are added to the original reason for the call, the faulty motor.
As a result, the cost of the call rises to $786, based upon $100 per hour (this rate, of course, is predetermined by the company and not shared with the customer). The revised fee includes $391 for the motor, $100 for burner cleaning and $246 for the time clock mechanism, plus $49 for the diagnostic. The repair now yields a margin of 63.65 per cent. Now, the service company actually makes a profit; in fact, for most companies, this would yield a perfectly reasonable net operating profit of 10 to 15 per cent.
Of course, costs can vary from business to business. In these cases, service companies can simply modify the parts markups or labour rates to more closely match the respective market.
This all sounds like good news—but how will the customer react? The good news for service providers is that, in general, the customer prefers the flat-rate scenario. Not only does it give them the option to accept or decline repairs before the job is started, it also allows them to be made fully aware of all costs involved before committing to payment. Compared to the open-ended approach time and material contractors use to charge customers, many find the flat-rate system preferable.
Mike Hajduk is president of Callahan Roach Business Solutions, a provider of training, consulting and flat-rate pricing services to the service trades. He can be reached at email@example.com.
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