By Dick Glass CET
After you have calculated how much you SHOULD charge, the next step is deciding what rates you WILL charge.
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Table 1 Figures for 100% Price Increase
Table 2 100% Price Increase And 40% Job Loss
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Decision Time
During the past few months, you have been making decisions about many things. However, most of these were minor, and not really the kind to raise your blood pressure from worry.
No doubt, you have done most of these beneficial things:
set new financial goals for your self and your business; learned how to read P&L statements and balance sheets, thus identifying and correcting any weak areas of expenses or income; and calculated your productivity, comparing it to the industry average.
These actions should have in creased income and efficiency, while reducing expenses and waste as much as possible.
Probably you now have a good, tight operation. But there's one more item you lack: an increased income from profits and return-on-investment which also allows a reserve for future business growth.
Previous articles have shown two methods of calculating the service rates that you need and deserve.
Probably you have arrived at your own figure by now. If the proposed service rates show a drastic increase over your present ones, it's likely you are afraid to adopt them! YOU'RE CERTAIN NONE OF YOUR CUSTOMERS WILL PAY THE NEW RATES, and you will lose all of your present volume of business.
If that is your reaction, don't be surprised. Such a dilemma is faced by almost all managers of small businesses.
The thinking goes something like this:
If the competitor's prices were not so low, I might be able to increase my rates slightly.
If the products I service cost the customers more, the owners might be more willing to pay higher repair prices.
If I could refuse all of those unprofitable repairs, perhaps the present rates would be satisfactory.
If I could sell more parts and accessories, those profits might compensate for insufficient income from labor.
These four kinds of wishful thinking were thrashed out before.
In this painful decision, none of them are relevant. And, decision time is NOW.
If you can't succeed in receiving adequate compensation for your efficient operation, then your business is bound to fail, either quickly or slowly as you dissipate your investment.
Are my rates fair?
The Answer
At this point, the only answer you need (to the question of raising your rates) is what effect the proposed increase will have on your business volume. Nothing else is important.
The experience of others who have faced the same problem shows that the fear of failure from higher rates is about 10% real and 90% imaginary.
You can solve the dilemma by a "Philosophy of Pricing" that's based on these four factors:
COURAGE,
COMPETENCE,
CREDIBILITY, and
CURRENCY.
Courage
Great courage is needed to charge realistic prices, especially if you have a hungry close competitor who's still charging 1970 prices.
Competence
Of course, you must have sufficient technical ability, parts stock, test equipment, shop facilities, and a good public image to justify the proposed rates. This does not require perfection, which is impossible to achieve. But, your ability to perform must not be less than your customers expect.
Credibility
Credibility goes beyond mere honesty (which is expected), for it must convince the customers that your prices are fair. Customers need proof of the value you have charged for. A TV shows no outward sign of the dozen hours of painful labor needed to solve a "dog" problem. You must tell them. If you used $1,200 worth of test equipment to locate the defect, it adds credibility to mention the fact. Sometimes solving a minor extra problem (curing a noisy volume control with tuner cleaner, for example) will convince a customer that you give added value.
Customers are just as likely to complain about a low, below-cost repair as a profitable one. However, they all want value, and you must give evidence of value received.
Currency
Currency, the money you need to operate, will come as the result of the other three "Cs"--Courage, Competence, and Credibility. These are far more effective than your self-righteous indignation toward any customer with arrogance enough to question your rates.
A Good Reason to Charge More
One fellow CET formerly was a shop owner, and now is an investigator for a state licensing board.
Will my customers go elsewhere? Recently, I asked him about the main cause of customer complaints against servicers. He answered quickly, "The servicers who get into trouble most often don't charge enough for their work." This is the reverse of our usual beliefs.
Problems of low prices
Many problems for both you and your customers occur because you don't charge enough. For example, you try to crowd in extra repairs to make a small profit despite below-cost rates. The pressure causes you to make mistakes, requiring numerous recalls. These recalls are done grudgingly because of the lack of time and not having any profit to pay for the extra repair. In turn, your sour face, and his suspicion about why a second repair was necessary, detracts from your credibility.
Table 3 Price Increase, Job Loss, Parts Income
Other problems arise because you can't afford enough employees, adequate test equipment, and a competent office staff.
Even worse, your desperate desire to break even might tempt you to charge for work not done or parts not installed. The justification is that the customer is paying no more than if you charged proper labor without the false items.
Will my shop get a "high price" reputation? Regardless of rationalization, it's still petty thievery.
Forcing your customers to settle for someone of less competence is one possible indirect disadvantage to the community, when your below-cost prices drive you out of business. Your distributors suffer when you can't afford to buy proper test equipment and supplies, and the government loses the taxes you would pay if you made a profit.
Your family is cheated by the long hours of overtime you work just to make a bare living. Even your neighborhood is penalized because your run-down shop eventually be comes an eyesore.
Advantages of higher prices
After you increase your labor rates, your competitors invariably raise theirs. So, your "higher" prices rapidly become "average." Also, those higher rates tend to convince the set owners that your service is better than the low-priced shops. Fewer old sets with difficult multiple troubles will be brought to you, thus eliminating most of the junk sets, which often require extensive and unprofitable repairs.
The higher income will allow you to hire more-experienced technicians, and purchase needed test equipment and supplies. The temptation to charge for parts or labor that are not delivered will be lessened.
Probably you know of two shops in your area. One charges twice the per-hour rate of the other. Yet the higher-priced servicer usually has most of the business. This usually is the case.
Still not convinced? Then read about what is likely to happen when you increase your rates.
After The Price Increase?
Let's imagine that your previous service call price was $20, and you increase it 25% (up to $25).
Further, we'll assume a 10% loss of calls because of resistance to the price increase.
Previously, your income for 100 calls totaled $2,000. With the new rate, the remaining 90 calls will bring in $2,250, which is an increase of $250 for doing 10% fewer calls.
Of course, the $250 is not pure profit, for you have eliminated the parts profit from those calls not made. If you average $10 per call of profit from parts, the $250 is reduced to only $150. On the other hand, you have saved truck and overhead expenses, thus bringing the total up to perhaps $200. This represents a 10% increase of income with a 10% reduction of time and work.
Calls Remain The Same Actually, those previous figures are too pessimistic, because there are no known cases of such a moderate price increase reducing the business volume.
Experiences around the entire country show that only extreme price increases produce any loss of business.
Double Rate?
For example, let's assume the service-call rate of $20 is increased to $40 (that's double-or a 100% increase). I estimate that the shop might lose no more than 20% of the service volume. And this includes any long-term reduction caused by the competition keeping the old rates.
If you disagree with this 20% estimate, use the form of Table 1, and calculate by your own figures.
If overhead costs and wages remain the same before and after the raise, the Table 1 $1,200 increase of income is largely pure profit.
Worst Case We'll assume you have properly calculated your costs and found that $40 per call is absolutely necessary to provide a modest profit. By disregarding the truth, you expect a 40% loss of repair jobs because of the higher rates. Now, what financial change will be brought by a 40% loss of customers and a 100% price increase? Table 2 tells the glad story. Without including any other factors, the income is $400 (20%) higher! Next, we'll calculate the complete gains and losses (see Table 3). The final gain of income is $600, which is higher than the bare estimate.
Calculate the Effects of Pricing Change
The purpose of this article is NOT to convince you, to RAISE your labor rates, but to give you a method of forecasting the effects of any price change you might make.
Many service-shop owners already know they need a certain price adjustment. But, they delay because of fears that the customers will complain loudly, and probably take their business elsewhere.
After you make any change of rates, I recommend you MEASURE any effects of the price change.
Disregarding any unusual financial factors (extreme weather, a costly strike in the area, etc.), check your daily, weekly, and monthly volume against the same time period last year during the old rate.
Also, urge your employees to write down every case where a customer complains about the price.
Chances are, you will find very few legitimate price complaints. Probably, no more than you received at the old rates.
If you still worry about the backlash from rate changes, make gradual price adjustments and monitor the results each time.
I can't survive much longer on my current rates Comments Comparison shopping is a permanent part of our modern life.
Price comparisons between identical products in different stores can be done easily with high accuracy. All Buicks (or Plymouths or Pacers) come from the same factory; the prices vary only at the whim of the dealer.
Other comparisons are more difficult and less valid. In my area, all barbers charge the same for a haircut (how has the FTC over looked that kind of price fixing?), so we choose a barber for his skill or personality. On the other hand, when a broken pipe begins to flood your home with water, do you call a dozen plumbing shops and choose the one with the lowest price? I am the patient of a certain doctor, for he is the only one who was able to help me. His office calls have increased 50% in the last two years, but I will not go to another.
My point is that some price comparisons are valid and helpful, while others are an exercise in futility. Very few electronic-repair prices can be compared directly.
Most shops have some kind of a flat-rate price for service calls, and these prices allow some degree of comparison. Even with calls, there are no standards about the specific services which are done within the basic flat-rate price versus others that require an extra charge. Be yond service calls, the price comparisons become even less accurate.
One reason is that, before a technician examines the machine, the customer doesn't know what parts and services are needed.
A few customers might call several shops to compare their prices before selecting one. How ever, most set owners are aware that such a "bargain" often be comes a disappointment. Consequently, the choice of a service shop usually is done according to the various reputations for honesty and competency. Credibility is more important than price.
An old saying states, "Quality will be remembered long after the price has been forgotten." That principle certainly applies to the pricing of electronic repairs.
(adapted from: Electronic Servicing magazine, Jul. 1978)
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