By Tom Grandy,
Founder
When you were a child, I suspect there was more than one incidence when you asked your parents “Why?”. Why do I need to go to bed this early? Why can’t I go to Jimmy’s house? Why can’t I stay out past 11:00 PM or perhaps why can’t I use the family car? Some children had very patient parents who would take the time to explain the reasoning behind the answer, no. Other parents simply said no. It really didn’t matter how the response was framed; the end result was the same. You did what you were told whether you understood it or not.
When it comes to your company’s pricing, be it the service rate or an installation bid, things tend to revert back to when you were a child. This is the price…charge it! The question, however, is “Do your employees believe in your pricing?” The answer to that question can have dramatic effects on the company’s bottom line.
How a company sets its rates can make a significant difference in how the owner or manager might respond to that question. Some companies simply call all over town and find out what others are charging. Once the data is collected their rates are arbitrary set based on what others are charging. If the company wants to get more of the work (regardless of profit) they will tend to lowball their service rates and replacement pricing. Most who follow this method of setting rates find themselves really busy for a couple of years…until they go out of business!
Other companies realize that their pricing really has nothing to do with what others are changing. They walk through the process of gathering all their costs of doing business (Overhead and markups) and go through the detailed process of finding out exactly what they need to charge per hour, in each department, to generate the profit they desire. The final pricing may be higher or lower than others in town. It really doesn’t matter because they now know what they must charge to cover their real costs of doing business while generating the profit they desire.
Now back to our original question. Do your employees believe in your pricing? Stated another way, do they think your pricing is fair? How they view it makes a huge difference. Likewise, how you answer makes a huge difference. We will talk about that in a couple minutes. Let’s take a brief look at how the lack of confidence in the company’s hourly rate affects employees and company profits.
Technicians
If service techs don’t believe in your hourly rate (pricing) they will tend to undercharge the customer. “Ghee, Mrs. Smith is 87 years old, and living on Social Security, she can’t possibly afford a $213 repair bill. I’ll only charge her $179.” The tech’s heart is in the right place but from the company’s standpoint he just gave away their 10% net profit, plus some (Assuming the rates were properly set!). However, if the tech truly understood that the company needed to charge $213 to make a fair profit the results might have been different. Not charging the full rate consistently means something will eventually not get paid. It might be gasoline, rent or perhaps even the tech’s health insurance or hourly rate!
Salesperson
How many times do you have specific pricing guidelines for installing equipment only to have the salesperson drop the price. Mr. and Mrs. Jones are given a replacement price of $3,750. The customer says something like, “It all sounds good, and I really like the system. However, I already have a bid for $3,200. Can you match it? If so, I will sign right now.” If the salesperson is on commission the answer is definitely yes! The thinking is that there “must” be at least $800 profit in this pricing. Some profit is better than none and I still get my commission. Again, like the service technician, the salesperson did not fully understand, or believe, in the pricing, therefore the discounted price is just fine.
Office Staff
Mrs. Brown calls the office. “This $187 repair bill seems pretty high based on the time the technician was here. Can you help me out?” Sure Mrs. Brown says, how about a 10% discount! Again, if the office staff does not fully understand and believe in the company’s pricing the tendency is to keep the customer happy and therefore to drop the price. After all its only $18.70!
If you set your rates based on what other companies are charging chances are the owner or manager has never had a discussion with the staff and/or technicians about why the company charges what it charges. Why? The pricing can’t be justified.
However, if the company has gone through the detailed process of setting rates based on their actual costs of doing business it is quite easy to have an open discussion of why you charge what you charge.
Knowing what to charge, based on the real costs of doing business, will help ensure profitability and provide the foundation for justifying the rates charged. Next time little Johnny asks why you charge what you charge you will have numbers to back up the pricing.
If you have never gone through the process of helping your employees understand why you charge what you charge you might want to check out this month’s Website Special. Our industry acclaimed streaming program called “Why Do We Need to Charge So Much?” will walk the listener through the details of what goes into setting proper hourly rates therefore installing confidence in your pricing. The normal investment is $139 but this month it’s only $99. Order today. As always, it comes with a 100% money back guarantee. If you don’t like it send it back for a full refund!
