The Appliance Service Category
Flat Rate Labor Guide
FORWARD & GENERAL INSTRUCTIONS
If you conducted a survey of the appliance service industry, you would find that there are a lot of strong opinions about flat rate pricing. One of those strong opinions is that flat rate pricing is a “flat-out customer rip-off”, a system employed by service companies to accomplish one objective and one objective only: Charge as much as possible and make as much profit as possible.
It’s easy to understand why there are some who think that way about flat rate pricing. All they have ever considered is a system that has determined a pre-set dollar amount for a given repair of an appliance regardless of location (urban or rural), and the size of the community. And it’s hard to disagree with the idea that a system that suggests a service company bill the same dollar amount for a repair whether the customer is in Los Angeles, California or Lost Springs, Wyoming is fair. Obviously, the price that a service company charges in a city with a population in the millions shouldn’t be the same rate for a customer living in a town with a population of less than 100 people.
That’s why the underlying philosophy of a category flat rate pricing system is that each individual service organization sets their own pricing, and it’s based on their CODB (Cost of Doing Business). That’s the first subject we’ll discuss in this program.
The next subject we’ll discuss is another one that involves strong opinions; technicians and selling. To some technicians, “sell” is a four-letter word, but the reality of their job is that part of it goes beyond the technical aspect and focuses on customer service. And providing customer service involves assisting the customer in making an informed buying decision. Which, no matter how you slice it, means that the technician, in their interaction with a customer, is selling.
The last segment of the program provides template pages for you to complete as you build your flat rate pricing system. It’s called a Category Flat Rate System because repairs are determined to be in a given category based on the difficulty of the job. For example:
Category One: This is the simplest repair that takes the least amount of time. One example of this would be replacing an easily accessible dead defrost timer on a refrigerator.
Category Two: In this category, you will list the jobs that, while they are not the most difficult jobs to do, they are not the simplest either. Some examples to consider here are replacing a washing machine pump on a given make and model of washing machine, or any other repair you would consider beyond the simplest category one type job.
Category Three: Jobs that you may consider in this category would be replacing a drive motor in a dishwasher, or replacing a refrigerator defrost timer that’s not dead, but instead requires that the evaporator be defrosted.
Category Four: Major laundry repairs like replacing transmissions, or performing a repair on a built-in range that requires a significant amount of time may be the jobs that are listed in this category.
Category Five: This is the category that would apply to your most complex repair procedures, such as refrigerator sealed system repairs.
When you develop your labor guide using the template pages, you may have only one page of category one jobs, several category two and three pages, and only one listing page for category four and five jobs. There is no set number of pages. It all depends on the nature of your business, the kinds of jobs you do, and the variety of appliance models that may require different categories for the same job due to the different design of a particular appliance.
Once you have accomplished your job pages, they should be printed and put into a 3-ring binder that serves as a presentation tool that technicians use when explaining the repair that is necessary and what the labor fee for the particular job will be. Placing each page into a clear plastic document protector and designing an insert cover page for the binder is one way to develop a presentation tool that conveys professionalism and quality to the customer.
With your presentation binders ready, the next step to implementing the category flat rate pricing system into your business is to separate your service call billing from your job labor billing.
SEPARATING YOUR SERVICE CALL AND JOB LABOR BILLING
Separating your service call billing from your labor billing is a simple process that not only allows your category flat rate pricing to function effectively, it also simplifies the process of booking calls and answering that ever-present question that a customer asks when calling for service.
Imagine that your phone conversation with a potential customer went like this:
Customer: “How much is a service call?”
(Also asked as, “Can you tell me how much it’s going to cost to fix?” or “If it is the ______, how much will it cost?” or whatever version of price inquiry you hear.)
You: “Our service call and diagnostic fee is $__.00. Once the technician has determined the specific problem with your appliance, he (or she) will be able to tell you what your total repair cost will be.”
Note that the above sample script does not use the term “trip charge” or just service call. It states specifically that the service that will be provided for the stated fee is a service call and diagnostic procedure, which conveys to the customer that the process is not simply someone just driving to their house. It includes someone using tools, test equipment, skill, and experience to accomplish a diagnosis.
It also does not mention time, or any idea that a given number of minutes is included in the service call.
Employing a system in which you separate your service call billing from your labor billing allows you to establish a service call and diagnostic fee (based on your CODB) that is, in itself, a profit generating process.
If a technician accomplishes a service call and a complete diagnosis that determines the repair cost, and the customer elects not to go ahead with the repair, your established price for that professional service should cover your cost of doing business and allow for a reasonable profit margin.
If a technician, in the process of accomplishing a diagnosis, discovers that the problem in simply solved, and no repairs are necessary, your established price for that professional service should also cover your cost of doing business and allow for a reasonable profit margin.
It’s also important to understand that when you employ a script as shown above, your customer understands that they entered into a contract agreement with you to pay the established fee for the specific service provided. It doesn’t (and shouldn’t matter) to the customer how long that diagnosis takes. If an experienced journeyman level technician can accomplish a diagnosis in 10 minutes or less, then the diagnosis is accomplished. If an inexperienced technician takes more than 30 minutes to get the diagnosis correct, then the diagnosis is accomplished. In either case, you are due the amount agreed upon when your customer called for service.
With the service call and diagnosis accomplished, the technician can then use the category pages to explain to the customer what the total repair cost will be. As an example:
Item #1: Service Call and Diagnostic Fee…………………………$__.00
Labor To Replace The Failed Part………………………………….$__.00
Parts Cost……………………………………………………………...$__.00
Tax……………………………………………………………………...$__.00
Total……………………………………………………………………..$__.00
At this point in the presentation, the customer can elect to either go ahead with the repair, agreeing to the total price, or they can decide not to go ahead and pay only the service call and diagnostic fee.
Note: While it’s not necessary, you may decide to design a simple estimate form that allows the technician to list the items above, and have the customer consent by signing the form.
UNDERSTANDING YOUR COST OF DOING BUSINESS
AND DETERMINING YOUR CATEGORY PRICING
It’s important to know what your CODB (Cost Of Doing Business) so you’ll know how much it costs you for each hour of labor you provide to customers when performing repairs. And knowing what it costs you for each hour of labor you provide is a critical factor in implementing the Category Flat Rate System into your business. You need to plug your hourly rate into the program in order to allow the system to calculate all the flat-rate jobs that are listed. Determining your true cost of doing business isn’t easy. To do it effectively often involves understanding all of your overhead costs and using all available records for at least a full year, involving a series of P&L (Profit & Loss) statements. While we’re not going to cover P&L statements in detail here, we will attempt to give you some insight on understanding your overhead so you can come to an understanding of what your hourly rate should be.
One way to calculate your hourly labor rate is to consider five factors:
1. Overhead Ratio
2. Average Daily Wage
3. Average Daily Total Cost Burden
4. Total Daily Productive Hours
5. Percentage Profit Goal Average
OVERHEAD RATIO
A first step is to determining your overhead ratio is to decide how long a time period you wish to use for your calculations. You should use at least 3-6 months, but a year’s records will give you better accuracy. For the length of time selected, add together all expenses except technical payroll and any expenses that are incurred for parts only. These expenses are defined as your total overhead expense.
These include:
1. Office payroll cost, including your own salary if you are self-employed but not a technician. (If you are also a technician, the technical part of your salary needs to be added to the technical payroll.) Be sure to include a salary for your spouse, or any other family members that work in the office. Also under this listing, be sure to include all payroll taxes paid out for technical and office personnel.
2. Rent or mortgage payments.
3. Utilities including phone, water sewer, gas, electric, and garbage.
4. Insurance, including liability, auto, unemployment, health, property, employee, and Workers’ Compensation.
5. Automobile expenses such as gas, oil, tires, car washes, maintenance, and repairs, and of course, any vehicle payments. If your vehicle is also used for personal use, check with your accountant to know what portion to deduct.
6. Advertising, including all print, radio and TV ads and promotions, vehicle painting, printing, postage, signs, etc.
7. Office equipment and supplies.
8. Answering service, radios, cellular phones, etc.
9. Educational materials such as magazine or newspaper subscriptions, videos, books, microfiche, and service manuals.
10. Memberships to professional organizations.
11. Tools, technical equipment and uniform costs.
12. Travel and entertainment.
Anything relating to parts should only be used in your calculation of your parts markup because parts are inventory. And the revenue generated from inventory sales should be calculated separately so as not to confuse the revenue issue, which often leads to underpricing labor prices.
AVERAGE DAILY WAGE
To calculate your technical payroll and use that figure to understand your overhead ratio, you need to understand Average Daily Wage. Once your average daily wage and your total technical payroll are understood, your total overhead expense is divided by this figure in order to give you your overhead ratio.
Example: If your total overhead expense for the period was $29,100 and technical payroll for the period was $19,400, your overhead ratio is 1.5. This means that for every $1 paid to technicians, an additional $1.50 is paid out for overhead costs.
$29,100 ÷ $19,400 = 1.5
In many situations, an independent appliance service company is a one or two-person operation, with the proprietor running the service calls (and the proprietor's partner answering the phone). In these cases, the average daily wage calculation is often overlooked because there are no other technical employees to consider. However, if the proprietor/technician setup is what describes your appliance service operation, designing a system to pay yourself and then using that figure to calculate costs is something your should consider. It’s an effective way to have an overall understanding of your cost of doing business, and, if you grow your company and hire technicians, the system allows you to track individual technician costs effectively.
To calculate average daily wages paid to technicians, whether it’s yourself or someone else, first determine how many hours each technician works on an average day, then divide the number of hours worked by the number of days worked in that time period for each technician.
Example: In a three-month period, Technician #1 worked 627 hours in 75 days. The average number of hours he worked each day is 8.36.
627 ÷ 75 = 8.36
In the same three-month period, Technician #2 worked 600 hours in 70 days, averaging 8.57 hours each day.
600 ÷ 70 = 8.57
Once you have the average number of hours worked daily, you have to calculate the average daily individual wage. Multiply the average number of hours worked daily by the hourly rate of each technician.
Example: Technician #1 is paid $22.00 per hour, while Technician #2 is paid $16.00 per hour.
$22.00 X 8.36 = $183.92 average daily wages for Technician #1
$16.00 X 8.57 = $137.12 average daily wages for Technician #2
If you have employees who are paid overtime for extra hours, you need to calculate the overtime hours separately from the regular hours. Take the number of hours worked in this time period at regular pay and divide it by the number of days worked. Then take the number of hours-worked overtime in the same time period and divide it by the same number of days. Multiply each figure by the appropriate hourly wage.