How to Set Prices for Profit
Eight years ago when Perry Hodges converted Best Electric from residential construction to residential service, he decided to differentiate himself from his competition in Bonita Springs, Fla., by providing a premium service—and that meant charging a premium price. He knew he couldn’t use time-and-material pricing because it hadn’t worked for him before, so he borrowed a concept he saw HVAC service contractors successfully use: flat rate pricing.
It didn’t take Hodges long to see the benefits of the system. His customers were happy because they didn’t have to check their watch wondering if the tech was driving up the bill, and his techs were happy because they didn’t have to deal with sticker-shocked customers at the end of a job. But most of all he was happy because he could set prices that helped him plan for profit.
Know thyself. The first thing Hodges did when he switched to flat rate pricing was forget about his competitors. It’s tempting to fish for quotes from the service company across town and adjust your prices accordingly, but he says it’s a temptation you have to resist. “They’re not you, and you’re not them,” Hodges says. “Your selling price must be based on your costs of doing business.”
Establishing that break-even cost is the most important step in the process. Once you know what that is, you can work backward to determine how much you need to make for each hour your techs are working, which will become the basis of your prices. Several software companies offer programs that help, but as a flat rate pioneer, Hodges didn’t have that luxury.
After setting aside time for travel, paperwork, and training, he estimated he could get four billable hours per day from each tech. He multiplied that by the average number of days he could expect them to work per year and divided that number into his break-even cost. That became his billable hour rate.
But that was just what he needed to make to stay open. He wanted to make a profit, and a healthy one. To hit 10% to 15% net profit for the year, he shot for a 65% gross profit—the money left after subtracting only the cost of labor and materials—on each job. From there, establishing the price of each job was a matter of estimating how many billable hours it would take, adding in the retail cost of the materials, and making sure it hit his projected 65% gross profit target.
Hodges built a price book that covers 224 tasks, but he still couldn’t conceive of every problem his customers might have. For the occasional oddball request, his technicians can establish what he calls a “no task estimate” in the field. They’ll take notes, snap digital pictures, and e-mail their findings to the service manager from a laptop in their truck. After a phone conversation about the necessary time and materials, they’ll set a price.
Once your price book is complete, the challenge is to watch your billable hours closely and make sure they’re keeping you on track to hit your goals. Hodges reviews every invoice that falls below his preset profit margin to see what went wrong. “Maybe I didn’t factor in enough time to do the job or maybe I just missed a line item when I set the price,” he says. “Whatever it is, I want to correct the problem because I don’t want my techs going out and doing that job over and over at 55% [gross profit].”
Sometimes the problem is more serious. If you aren’t hitting your goals even though you’ve built your prices correctly, you may have an underperforming technician, and all the price adjustments in the world won’t fix that. “You can’t keep raising your prices because of technician productivity problems,” Hodges says. “It’s not fair to the customers, and you’ll price yourself right out of the business.”
Despite your best efforts to set fair prices, though, you’re bound to run into the occasional objection. You may have to dangle a discount in front of the customer to make the sale—try a $25-off coupon or a 10% discount for joining your preferred customer plan—but Hodges warns to never lower your price indiscriminately because it will look like you think your prices are too high to begin with.
You won’t overcome every price objection, and that’s a fact Hodges has accepted. He knows when to cut his losses and move on—especially if he wants to continue hitting his profit numbers. “There are some customers who can’t afford premium service,” he says. “My competitors can have them. I like my niche.” EC&M
Hodges knew he’d have to occasionally return money to customers who object to the price after the sale, so he learned how to deal with it.
Sidebar: Guilt-Free Givebacks
- Plan for the pain.Givebacks don’t sting nearly as much if you’re prepared. Hodges sets aside 1% of his gross sales as a cost of keeping these customers happy. “Just budget for it and forget about it,” he says.
- Have a reason. Always use your 100% satisfaction guarantee as justification if you can’t convince a customer your services were worth it. “If you don’t, you might as well agree that you were price gouging,” Hodges says.
- Distance yourself. Your business is your baby, so dealing with givebacks directly may be too painful to bear. Hodges delegates the responsibility to his office manager. “I’d rather not even know when it happens,” he says.
Profile: Best Electric
Years in business:
12 (four in residential construction, eight in residential service)
$1.3 million with 14% net profit
13 (eight service techs, one service manager, four office employees)
Least expensive task:
$87.50 for electrical panel maintenance
Most expensive task:
$2,954 for a 200A service change