Flat Rate Pricing Revisited – Part 3

Flat Rate Pricing Revisited – Part 3

Frank Blau
Contributing Writer
ShuBee®

This will be the last article in this series. Here I will respond to some common questions and criticisms that arise about flat rates from contractors around the country.

Isn’t flat rate pricing merely a sneaky way to raise prices?

I’ll begin my explanation by repeating a key statement from last month’s article.

It is critical for a contractor to perform detailed numbers crunching before going to a flat rate system. Otherwise you may well set your flat rates below your true cost of doing business.

This numbers crunching ought to take place whether you are a flat rate or T&M contractor. It’s just that by implementing a new pricing system, you are forced to do what you should have been doing all along.

It’s probably true that most flat rates run higher than T&M charges for comparable work. This is not being sneaky. It results from contractors finally doing the numbers crunching required to figure out what it costs them to do business and earn a decent profit. Also, there are relatively few contractors charging flat rates. More flat rate competition would lead to more competitive pricing.

What I find mysterious is how many contractors object to increasing their prices! People in any other business take delight in raising prices and do so at every opportunity without the slightest guilt. A free market economy is based on the principle that business owners will naturally attempt to maximize their profits.

The problem is that most PHC contractors sell themselves far too short. The market place will let you know when your prices are too high. Until that happens, do not be ashamed to charge as much as you need to so you can grow your business and pay yourself on a par with other professionals.

What if customers continue to ask my hourly labor rate?

This happens quite frequently because PHC contractors have trained consumers for more than 100 years to think in terms of T&M. Everyone who answers your telephone ought to be instructed in how to respond to this inquiry. There are a number of ways to handle it.

First and most direct, simply say, “I’m sorry, but our company does not bill that way” (or “no longer” bills that way). Explain that too many customers complained about the uncertainty of open-ended billing and prefer knowing exactly how much a job will cost.

If the customer persists, start itemizing all the factors that go into compiling a bill – insurances, vehicle maintenance, equipment maintenance, tool replacement, depreciation, skills upgrading, taxes, advertising, facilities costs, quality control, inventory, utilities, administration, employee wages and fringes, computers, stationary, legal counsel, etc., etc. (All of this should be scripted, of course.) Most people will stop you long before the litany is complete.

You may even want to offer the customer an itemized breakdown of every one of these costs per dollar of selling price. As long as they are asking for something as personal as your labor and material breakdown, be nice and provide them with all your costs!

Not one out of 100 customers will take you up on this offer. If someone does, what a great opportunity to mail that person a promotional letter and literature along with the itemized breakdown, detailing everything your company has to offer.

Try calling your local phone or electric company, or Sears, or any other giant service provider, and ask them to break down their service charge into labor and materials. You won’t get a straight answer. The dispatcher will simply respond that they don’t operate that way, or he/she doesn’t know.

One of the better responses I’ve heard is , “Sorry, it’s all computerized.” Once they hear the word “computer,” most people figure it’s hopeless to ask anything else!

Can flat rates get me in trouble for price fixing?

Having marketed a flat rate pricing service, I have spent many thousands of dollars in legal fees making sure to stay within the boundaries of the law. Each company’s flat rate prices ought to be somewhat different than that of competitors’ because each company has somewhat different cost structures and profit goals.

There no doubt would be a clustering around certain price ranges, based on what the market will bear. (The air fare wars are a good example.) However, this is no different than T&M pricing. Why shouldn’t that be considered price fixing?

If flat rates are so great, why aren’t more contractors using them?

Flat rates are controversial because of all the misconceptions surrounding them, as detailed here. Also, our industry is stodgy and reluctant to change, even when it is in our own best interests and that of the consumer.

But times finally are changing, slowly but surely. Flat rate pricing is becoming ever more popular and, I believe, represents the wave of the future in our industry.