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					Still Not Flat Rate?
C’mon, What Are You Waiting For?

By

Matt Michel


The controversy over flat rate pricing                Over the past six years, I've had numerous
continues to amaze me. It continues to                opportunities to explore consumer sentiment
amaze me that there's any controversy at all.         about flat rate in focus groups. Regardless of
                                                      the industry, consumers strongly prefer flat
For those who may not be aware of it, flat            rate. It is a strong, emotional preference.
rate pricing involves offering a single, up
front price before starting a repair. This            Consumers think flat raters are more honest.
contrasts with time and materials pricing             They feel relieved to know definitively what
where a price is given for the material, but          a repair costs before they agree to go ahead.
the labor is open-ended. Flat rate has been           They no longer feel the need to scrutinize
present in the automotive industry for a long         and compare hourly rates. They don't feel
time. Frankly, it's been present in most              the urge to watch the technician so that he's
service industries for a long time, but only a        not padding minutes. It may not be rational,
minority of service companies use it.                 but that's how people see it.

For the record, I'm a strong advocate for flat        Furthermore, consumers think they're going
rate pricing, but not for the usual reasons. I        to get a better price from a flat rater. That
like flat rate because consumers like it.             may or may not be true. Yet, it is a side
                                                      effect of efforts by Congressional tax cutters
Back when I was running a contractor                  to promote a flat tax. Consumers associate a
organization and we made the leap to flat             flat tax with lower taxes and by transfer
rate, I commissioned a consumer survey                associate flat rate pricing with lower prices.
about flat rate pricing. At the time, we
estimated that roughly 3% of air                      Now, it should be noted that not all
conditioning contractors were using flat rate.        consumers prefer flat rate. Some like time
Yet, one out of every two consumers                   and materials pricing. And some also like
preferred it.                                         rotary phones, typewriters, and DOS, but
                                                      that's not the direction of the market.
To me, that seemed like a pretty good deal.
Half the public wanted something that only            Whenever consumers indicate a strong
3% of the providers offered. If I knew                preference, follow it. Don't fight it. Leave
nothing else about flat rate, that would have         that for your less enlightened competitors.
persuaded me. And the preference for flat
rate has grown since then.                            Let your competitors stand by the shore
                                                      insisting the tide stop because they don't like
                                                      it.

  Want More Sales? Profit? Time?                 Then You Want The Service Roundtable
www.serviceroundtable.com                                                            (c) 2002 Matt Michel
                                                                                                       2




Not Flat Rate, But Fair Rate.

One of the great ironies of charging time and         you. He might be able to. Then again, he
materials is that you make more money with            might not. He might end up with more
your slow technicians than your fast ones.            windshield time (and his windshield time is
The customer actually pays more for a less            more expensive).
competent service technician.
                                                      Flat rate evens out the differences. The
How so?                                               customer pays the same whether it's a fast
                                                      tech or a slow one.
Your slower technicians are usually your
less experienced and less competent                   Your slow techs may take longer than the
technicians. This is not necessarily a bad            flat rate time estimate (though most flat rate
thing. Not everyone is a superstar and not            systems are padded so that even the rookies
every superstar started that way. Regardless,         can keep up). Even so, you pay them less
slower technicians are probably paid less             per hour.
than faster technicians. Yet companies
charge the same rate, no matter who is sent           Fast techs may run under the time estimate,
on the job. Thus, the longer a tech takes, the        but you pay them more per hour. You see,
more the company makes:                               things tend to even out with flat rate.

      Slow technician = longer time on the           If a service company is to charge time and
       job = more billable time.                      materials correctly, then they would take a
                                                      page from the lawyers and the consultants.
      Slow technician = lower pay = more             When I do consulting, I charge $3,000 per
       gross profit per hour.                         day. By contrast, I only charge $2,000 per
                                                      day for one of my employees. We charge
By contrast, your faster technicians probably         different rates because we bring different
cost you more and bill less:                          skills and experience to the table.

      Fast technician = less time on the job         If a time and materials company were going
       = less billable time.                          to be really fair about it, they would charge
                                                      different hourly rates based on the skill level
      Fast technician = more pay = less              and experience of the technician. Of course,
       gross profit per hour.                         this can get mighty confusing. It's far
                                                      simpler to charge the same hourly rate for
The customer pays more to give your slow              everyone.
technician experience. That's not fair to
them. You profit less because your fast               It's even simpler to charge the same rate for
technician costs more and bills less. That's          every given job/task/repair. And while we're
not fair to you.                                      at it, toss the parts and materials into the
                                                      price to simplify it down to a single number.
Granted, a fast technician might be able to           That's called flat rate pricing.
work in one more call per day, overcoming
the penalty his speed and efficiency has cost

  Want More Sales? Profit? Time?                 Then You Want The Service Roundtable
www.serviceroundtable.com                                                            (c) 2002 Matt Michel
                                                                                                         3



Flat Rate Myths

If flat rate is so wonderful, then why doesn't          In fact, the fast food restaurants are bundling
everyone use it? Well, for one thing, service           burgers, fries, and a drink into a single flat
companies seem to be notoriously slow to                rate priced meal these days.
change. Actually, that's characteristic of
most small businesses…make that most                    "Give me a #3," you say. It saves time. It's
businesses. In fact, few established                    easier. It's simpler.
businesses would innovate at all without the
forces of a competitive market compelling               When a contractor switches from time and
them. Inertia keeps many companies from                 materials to flat rate, the pricing does not
attempting change.                                      need to change. Yet, it often does.

While inertia might be the major inhibition,            Pricing often does change with flat rate for
several myths also restrain the diffusion of            two reasons. First, many contractors do not
flat rate in the service industry. Let's look at        charge enough to pay their people well,
them.                                                   support their customers properly, pay
                                                        themselves well, and have a little bit left
                                                        over for the bottom line. They hesitate to
The Flat Rape Myth                                      charge enough for a variety of reasons,
                                                        which include a lack of self-worth and fear.
Some contractors believe everyone using
flat rate are price gougers.                            Flat rate won't persuade a contractor his
                                                        services are worth more, but it can help
Nonsense. Flat rate is a pricing presentation           overcome the fear his customers will cough
method, nothing more, and nothing less.                 and choke when presented with a labor rate
                                                        that's higher minimum wage.
When you buy a hamburger at a fast food
drive through, you're charged a flat rate.              Customers don't choke and cough because
You don't pay separate charges for the labor            they don't know the underlying labor rate.
to cook it or the materials that went into the          Frankly, it's none of their business. I don't
assembly. No one gets an itemized list of the           know the labor rate when I get my hair cut,
individual cost for two all beef patties,               when I visit the doctor, when I buy product
special sauce, lettuce, cheese, pickles, onion,         off the shelf in a store. I don't need to know
and a sesame seed bun (and if you know                  or want to know. Just cut to the chase, give
what that refers to, it dates you, and also             me the price, and let me decide. Flat rate
shows how long a repetitive advertising                 allows you to cut to the chase.
message can endure). No one gets a discount
for asking them to hold the pickles.                    The second reason that prices change is
                                                        things get simpler. No longer does the
It would be silly if they priced everything             service company need to tap dance around
separately. It would bog down the process,              the price with the old soft shoe. Step to the
which is designed to be fast.                           left and charge a trip charge, truck charge,
                                                        fuel surcharge, response charge, or what
                                                        have you. Step to the right and do a quick
                                                        spin with a first half hour charge or one-hour

  Want More Sales? Profit? Time?                   Then You Want The Service Roundtable
www.serviceroundtable.com                                                              (c) 2002 Matt Michel
                                                                                                      4


minimum charge. With flat rate, you can              If every possible task were found in a flat
figure the rate you need, bundle it with the         rate book, it would be impossible to hoist it.
material, and present a single fixed amount.         From time to time, a technician is going to
                                                     encounter something in the field not
                                                     covered. When this occurs, the technician
The "Technician Resistance"                          should calculate the flat rate price or call
Myth                                                 back to the shop where they can do it. If the
                                                     task is one that will be encountered in the
                                                     future, it can be added to the next book that's
A lot of contractors are afraid of their
                                                     printed.
technicians. They think the technicians
won't react well to going flat rate. In some
                                                     When the time for a task is off, it can also be
cases, this has merit. The technicians have
                                                     corrected with the next printing. By now,
bought into the flat rate price gouging myth
                                                     most flat rate systems are stable enough that
and get their boxers in a tangle.
                                                     it's unlikely many tasks will be off by much.
                                                     If a task is off, it's not the end of the world.
Yet, flat rate is easier for the technicians.
                                                     Finish the job, fix the task for the future, and
They don't have to calculate up the bill.
                                                     keep going.
They can look it up. They don't have to
worry about the customer watching them to
                                                     Do not feel the need to perfect the system
ensure they aren't padding time.
                                                     before starting. If you do, you'll never start.
Technicians will adopt flat rate IF it is
presented correctly. This means hearing
them out. Listen to their concerns. Then             The "One Long Job" Myth
address them.
                                                     I know one contractor who hesitated for
Flat rate is new and different to them. As           years because of the fear of that ONE job
such, it's a touch frightening. Give them a          that would run long. He fixed on that and
chance to get used to the idea, to understand        couldn't move ahead because he might
why it's important, how it benefits them, and        stumble across one job sometime,
so on. A heavy-handed mandate is doomed              somewhere, and lose money.
to fail, while a training approach will speed
a successful implementation. Remember,               Remember, that ONE job is balanced by
tens of thousands of technicians have                others. It's like that ONE warranty where
managed to successfully adopt flat rate.             you lose money. You can afford it because
                                                     there are many, many more warranties
                                                     where you make money.
The "Perfection" Myth

Contractors hesitate to adopt flat rate              The "I Can Do It Better" Myth
because it's not perfect. Nothing in this
world is perfect. Most flat rate systems are         Many contractors, who sneer at and despise
close enough and exceptions can be                   the DIY trade, try to do-it-themselves when
corrected over time.                                 it comes to flat rate pricing. They spend
                                                     countless hours creating their own flat rate


  Want More Sales? Profit? Time?                Then You Want The Service Roundtable
www.serviceroundtable.com                                                           (c) 2002 Matt Michel
                                                                                                        5


system,   which     often        never     gets         does for you to hand build your service
implemented. What a waste!                              trucks.

Flat rate systems require an investment, but            There are too many good flat rate systems in
they return it very, very quickly. Unless you           the market. Buy one, keep it up to date, and
want to get into the flat rate business, it             go make money doing what you do best.
makes no more sense for you to develop
your own flat rate pricing system than it




The Final Word on Flat Rate

Let's see. Flat rate is preferred by most               stubborn, and stand their ground where they
customers and offered by a minority of                  should give a little. Each dispute contributes
contractors. Flat rate is fairer to the customer        to the overall poor perception of service
and the company. And flat rate is inhibited             businesses.
by a number of myths. What more can be
said?                                                   Take the negative perceptions and add the
                                                        general inability to defend themselves
Flat rate protects the contractor.                      (because small businesses are, after all,
                                                        small). Throw in an ambitious government
Unfortunately, service providers of all                 type who wants to build a name and
stripes have a negative reputation with the             reputation by rooting out "wrong doing" and
public. Service companies are like                      you've got a recipe for ruined lives and
Congressmen.        People      think     their         dreams. All that's needed is a match to turn
Congressman is okay, but that Congress as a             on the heat and bring everything to a boil.
whole is a bunch of bums. So while your
customers may love you, they probably                   While some companies deserve what they
distrust others in your profession. Every               get, I've seen many good, fine companies
time a scandal news show sets up a sting to             pilloried by a district attorney, attorney
scare the public, this image is reinforced.             general's office, what have you. Sometimes
                                                        the match results from the actions of a single
Of course, there are a few bad apples out               out-of-control technician. Sometimes the
there and they've bent over backwards to                match is a fired employee trying to get even.
give their industries bad names. I know of              Sometimes a rabble-rousing consumer is the
one company where the technicians openly                match. Regardless, every small business is at
talk about Mercedes pricing (where the                  risk.
technicians offer a higher price if they pull
up and see a Mercedes sitting in the                    Flat rate helps minimize the risk…
driveway than if they see a Hyundai).
                                                        It was the worst earthquake to hit Southern
The service industries are also hurt by the             California in quite some time. With it's
poor business practices of so-called, service           epicenter in Northridge, the quake made
professionals. To many business owners get              roads impassable and damaged thousands of
their back up at the wrong time, get                    homes and businesses. Service companies
  Want More Sales? Profit? Time?                   Then You Want The Service Roundtable
www.serviceroundtable.com                                                             (c) 2002 Matt Michel
                                                                                                       6


scrambled to respond to the needs of                  were over a dozen contractors in the waiting
homeowners, making repairs, making homes              area with him. Those he recognized all
safe.                                                 charged less than he did.

Now, remember the environment and psyche              When his turn came, he presented his price
following a natural disaster. People were             book, invoices for work done after the
traumatized. They felt a loss of control. Who         earthquake, and invoices for identical work
can control an earthquake? They had                   done before the earthquake. It was clear he
nowhere to vent and no one to blame for               was charging the same after the earthquake
their losses and inconvenience.                       as he had before it. It only took five minutes
                                                      and the complaints about him were thrown
In the midst of this come the inevitable              out. Others had less satisfactory experiences.
warnings about price gouging. Enter the
contractor. If a contractor charges much              Natural disasters aren't the only cases. I
more than minimum wage, someone will file             know of another case where a contractor
a complaint.                                          was being hammered by an ambitious
                                                      government type who was out to make a
It's possible that some unscrupulous                  name for himself. As the case progressed,
contractors tried to take advantage of the            the only legal ground available to the
situation. I don't know of any specific cases.        government type was related to a disparity
                                                      in prices charged by different technicians
I do know of a contractor that offered a              before the contractor implemented flat rate.
premier service and charged according.                It was the type of disparity that occurs all
After the earthquake, he was very clear and           the time in time and materials pricing. If the
specific with his technicians. He warned              contractor had been flat rate all along, he
them to stick to the price book.                      would never have had a problem.

When he had to appear before whatever                 Consumers prefer flat rate. Flat rate is fairer.
regulatory board was overseeing the                   Flat rate reduces your risk. What are you
complaints, he was ready. He said there               waiting for?




  Want More Sales? Profit? Time?                 Then You Want The Service Roundtable
www.serviceroundtable.com                                                            (c) 2002 Matt Michel

				
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