Flat rate is common sense for service business

YOU HAVE ALL heard the analogies — "You charge like a plumber." Or the old plumber jokes where the punch line is, "I never made that much either when I was a brain surgeon."

Comical or not, there is a degree of truth. Part of the reason is many service contractors charge by time and materials for their services, exposing themselves to a broad range of customer dissatisfaction.

Believe it or not, even in 2004 most of the new members coming into best practices group Nexstar are time and materials based. They can't figure out why they never have money in the checking account and are terrified of raising their prices. They avoid flat rate because they think of it as a way to hide higher prices from customers.

In truth, it tends to put a customer at rest. Flat rate is a win-win-win concept for the customer, for the company and for the tech.

For most contractors, it's a leap of faith, but it sure beats the alternative.

Nearly every other service industry uses a flat-rate method of pricing. Dentists don't charge for the time they are in their patients' mouths. Airlines don't charge their customers for the time they are in the air plus a bag of four pretzels and six ounces of Coke. They charge a bottom-line price for their services because it is the accepted norm for purchasing everything we and our customers buy.

Good for your customers
The consumer's fear of being taken advantage of is almost directly proportional to the frequency of doing business with a service contractor — the more infrequent, the greater the fear. A flat-rate price, given to customers before the work begins, alleviates most of their fear. Customers realize a flat-rate price transfers the risk of cost overruns from them to the contractor. Customers can either accept or reject the price. They know and can mentally prepare for what a job will cost, just like every other transaction we make as consumers.

Flat-rate pricing makes your company and technician appear more professional. It demonstrates you have experience with the type of problem your customer has because it is described and priced in a flat-rate book. A printed description and price in a flat-rate book tells the customer this technician didn't arrive at a price by judging the customers' ability to pay based on the size and style of their house.

The time allowance should include time for the technician to explain and present several options to the customers to resolve their problem. A successful flat-rate price includes an allowance-of time the technician can use to prepare the worksite, thoroughly test the work performed and clean up after the task has been completed.

Under a time-and-materials method, customers usually rush the technician out of the house to shave a few dollars off their bill. Rushed work often leads to failures and customers face the additional aggravation of calling the technician back to redo the work.

Good for your company
Flat-rate pricing provides a common denominator between the different skill levels of your technicians. Using the time and materials method, your experienced technicians will earn less than technicians with little experience.

You will have less buyer's remorse because you are not inviting a debate between your technician and your prospect on what constitutes your shop rate. More of your customers will come back for more services because of the positive, professional impression you left with them on your last visit.

Raising prices is generally easier to do in a flat-rate price shop. Converting from a time-and-materials to a flat-rate pricing system encourages owners to take a harder look at what it takes to provide the services they do.

Good for your technicians
Technicians love flat rate because they are no longer in a race against time. Customers with their stopwatches are less likely to stare at them while they work. They no longer have to worry about how many trips they need to make back to their trucks, taking time to connect with their customers, run for a part or just taking a break.

Technicians perform better under a flat-rate pricing structure. They are comfortable with spending time to know the homeowner and their home, which supports opportunities to suggest other services they can perform while on the call.

To develop a pricing menu, owners and managers have to look at their company's overhead costs, average times to complete common tasks and time efficiencies. Often, these are new concepts to time-and-material shops. Today, there are several vendors who can help a company develop their flat-rate books.

Both a benefit and an ongoing struggle with converting to flat-rate pricing is understanding that the process is never done. Flat-rate service companies should always stay sensitive to internal and external changes in their companies that can affect profitability.

As an example, Nexstar encourages its members to invest in consistent employee training. Training eats time that could have been sold on a jobsite, but, conversely, it improves skills, quality and customer retention. So pricing has to be adjusted periodically to compensate for the lost sales.

Flat-rate pricing can be the single most important step to running a more efficient business and increasing customer satisfaction. When you take the plunge and convert your pricing structure, you'll look back and wonder why you didn't do this sooner.

Bob Mallory is on the staff of Nexstar, a best practices group that teaches management, operations, marketing and finance. Nexstar is owned and managed by its members who are independent plumbing, HVAC and electrical service contractors. Nexstar was formally known as Contractors 2000. Information is available by calling 888/609-5490 or 651/426-2000, and at www.nexstarnetwork.com.