I recently had a discussion with George Winslow of City Fuel in Manchester, NH. George told me the reason he decided to subscribe to my company's flat rate pricing system for his service business was based on one bit of advice I gave him. That advice was to consider selling his services at retail. I said, "George, customers are used to paying retail for everything they buy. Why should your service prices reflect anything less than retail?"

George got the message. He reviewed his numbers and structured his pricing strategy to reflect his true cost and desired net profit. His results were sensational! His service revenue increased handsomely. In addition, his company found that because their flat rate service pricing system was properly implemented (my company actually trained his staff), complaint calls about service pricing went down drastically! In fact, they nearly disappeared.

Your Perceptions Become Your Reality in Your Service Department

You may have heard that one's perceptions become one's reality. Put another way, your perceptions become a self fulfilling prophesy because your approach to an issue is predicated on your perception of that issue. That certainly holds true when it comes to service pricing. If you believe that customers will not pay retail for your service you will be correct because you will not attempt to charge your customers retail for that service. By continuing to base your service pricing on the cost of labor and the cost of parts without considering your true overhead expense and desired net profit you will never sell at retail and never turn a profit in service. In fact, you will remain right where you are, lucky just to break even. Hence your perception becomes your reality and your low service rates continue…day in and day out with low or no profits…day in and day out. Worst of all there is no end in sight.

Disaster by Design

Continuing on with the service pricing formula described above may spell disaster for your company. Apart from utility competition, the major challenge facing heating oil dealers today is the high cost of business. Low profits in your service department will continue to place undue pressure on your oil department forcing upward pressure on your retail price of heating oil. Through the years we have all watched fuel dealers succumb to the pressures of high costs, low margins and a shrinking customer base. Considering the general high cost of doing business today coupled with skyrocketing costs of gasoline and insurance, business as usual today may spell disaster!

You are in a Retail Service Business

I have found that fuel dealers for the most part know how to survive in the fuel industry. They consider themselves retailers when it comes to selling heating oil. They talk about the "retail price per gallon." Fuel dealers also believe they are in the fuel business to turn a profit and base retail oil prices on needed revenue to cover wholesale fuel cost, transportation cost, storage cost, delivery cost, overhead expense and desired net profit.

However many believe they are in the service business only to assure they will remain in the fuel business! Consequently, Fuel Sales is the Cinderella product and Service the Ugly Stepsister.

If this attitude prevails, service remains an after thought and service pricing continues to be based on cost rather then on desired net profit. In addition, the failure to focus on service as a profit center causes fuel dealers' employees to fail to communicate properly with customers about needed service. Failure to quote repair fees or discuss needed repairs may appear to the customer as an attempt to hide the facts from the customer. In fact, many fuel dealer employees don't even quote a repair fee unless the customer asks for a quote and even then the details may be sketchy. It is almost as though they have a fear to discuss what will inevitably be billed. Without proper communication upfront, customer relations may take a turn for the worse once that repair fee is billed.

Customer complaints: It's Not the Price but the Lack of Communication

As you know, complaints about service fees and threats to discontinue delivery service are all too common in the fuel business. Not discussing service fees leaves billing susceptible to the customer's perception that the service fee is too expensive. And the customer will always believe the fee is too expensive if your employees are unwilling to discuss the facts. I ask; how can your customer understand the value of the service you provide if you are not willing to communicate the cause of the system breakdown, the need for the repair and the fee for the good service you render? The result will be an irate customer looking for a service fee adjustment.

You also know, an irate customer combined with the fear of losing that oil customer's business causes fuel dealers and service managers to always adjust the bill downward. Hence, low profit becomes a loss and a bad situation just gets worse! Moreover, lowering your fee reinforces the customer's belief that the fee was too expensive to begin with. In addition, reducing your fees trains your customers to call and ask for a lower service price on the next service call! And the vicious circle continues.

Quoting less than retail comes from looking only at cost

When it comes to service, most fuel dealers base their fees on costs, but not all their costs! The cost of the technician per hour (tech's hourly wage) and the cost of the part is often all that is considered and marked up when service is priced by fuel dealers. That type of pricing will guarantee that the dealer will not cover service department overhead.

Compounding the problem is that service overhead expense is significantly higher due to unapplied service technician time. Unapplied time is time for which technicians are paid but that which cannot be charged to any particular job. Unapplied time is a real expense that needs to be covered when billing service. However, unapplied time is often forgotten by fuel dealers when setting service call fees or pricing repairs. I have actually heard fuel dealers speak of cost recovery instead of profit when discussing their service departments! Unfortunately, if one only seeks to cover costs then one can never turn a profit!

How to Charge Retail Prices for Service Using Flat Rate Pricing

Charging retail fees for your service is easier than you may think.

First, you must know your numbers. The best way to capture your numbers is to departmentalize your income statement into fuel sales, installation sales and service sales. Apply your true direct and indirect costs to each of the three departments. Apply the remaining overhead expense in each department based on that department's contribution as a percentage of the overall sales.

Second, calculate your new hourly rate by adding your direct costs (highest paid technician hourly pay rate) and indirect costs (daily cost of technician benefits divided by number of working hours) associated with your technicians' hourly pay. Divide the Service Department overhead by the total number of working hours in a year and add that to the service technician's pay and benefits. Next add to that amount your desired net profit per hour for each working hour.

The resulting amount is that which you will need to charge per hour. Don't let that number cause you to panic. Flat rate pricing properly implemented doesn't promote discussion of your hourly service rate with you customers.

Third, since you cannot bill eight hours per day per technician you must charge a diagnostic fee (service call fee) to cover travel and the time on each job to determine what is needed.

Keeping Happy Customers

Once you convert to flat rate pricing you will no longer quote hourly rates or bill labor based on the time spent on the customer's repair. Labor fees are pre-calculated for each repair and added to part fees allowing a quote to be given to the customer right on the spot from a professional looking pricing guide. There is no more guessing how long a repair will take. Your technician will be able to quote your repair fees up front. As a result, customers no longer hyper-focus on your hourly service rate, the time spent on the repair and your repair parts fees.

Since a firm price for the repair is provided up front, the customer relaxes. As the customer's stress level goes down the technician's stress level goes down proportionately allowing the technician to complete his repairs free from arguments about the fees. And you will see a drastic drop in complaints about service pricing after repairs are complete.

By converting to a flat rate pricing system you can accomplish your retail goals.

When you convert your service department from time and material pricing to flat rate pricing you take the action of establishing your company in the retail service market. Each technician will receive a repair pricing guide that will allow your technicians to easily present your retail service prices to your customers. Giving your technicians the ability to quote repair fees upfront goes along way to keeping customers happy about the fees they pay. In addition, flat rate pricing makes your company and your technician more professional. Your labor rates and part fee can be raised without a negative reaction from your customers. Your credits back to your customers will be reduced drastically because nobody should ever again be surprised by a bill in the mail because repairs can and should be quoted routinely on every call. The results to your bottom line will be significant and your customer satisfaction index will soar!

Don't wait! Procrastination will cost you dearly.

Companies large and small that have made the conversion to flat rate pricing have experienced the positive impact discussed above. Depending on your labor rate increase and the number of technicians you employ, the impact of waiting can cost you tens of thousands of dollars or even more. I believe W. Edwards Deming said it best when he said, "It is not necessary to change. Survival is not mandatory."

Don't wait until next week, next month or next year. With the ever increasing cost of doing business, a change to retail service pricing in your business may assure your survival.