RAISING your hourly service rates
Feb 1, 1999 12:00 PM,
History is replete with allegedly crazy people who, in actuality, were notonly sane, but also actually changed the way people think. In the late 15thcentury, Christopher Columbus begged throughout Europe to raise money for amaritime journey via a western route. He based his expedition on theconcept that the world was round. People laughed, adhering to the notionthat the world was flat and sailing westward would mean falling off theedge of the world. Eventually, Columbus succeeded in convincing QueenIsabella of Spain to finance his expedition. As it turned out, he wasright; the world is round. His willingness to believe and ultimately act onthat belief brought him riches beyond his wildest imagination.
Similarly, in the 1960s, an MBA student submitted a business plan to startan overnight letter and package delivery service. According to his paper,the market was ready for this type of service. His professor gave him a lowgrade, and many discounted his idea, calling him crazy. Today, his businessplan is known as Federal Express, a company with more than $11 billion inrevenue.
Although I cannot claim to have changed the world as these innovators have,we have something in common. I have also been called crazy, especially whenit came to hourly service rates. In my many face-to-face meetings withsystem integrators and service providers, I have found that more than 80%undercharge for their service work; most bill between $45 to $65 an hour.
The scene has played out many times. I tell companies to raise hourlyrates, and they, in turn, tell me I am crazy. Their logic involves two waysof thinking. First, there is a fear that increasing rates will costbusiness. There also exists a complacency in the thinking that the profitsare already sufficient; a company may pay its technicians $15 an hour andtherefore believe that profits are high enough. It is easy to keep thecurrent price structure intact and avoid rocking the boat. These two mostcommon excuses, however, are, in fact, nothing more than excuses.
The fear of losing businessWhen it comes to getting service on a system installed by your company,corporate managers are concerned with one thing-resolving the problemquickly and painlessly. By the nature of their jobs, managers shun risk.Besides, if the service is good, most clients will think along the samelines. They, too, will be resistant to the notion of changing to companiesunfamiliar with their systems. My company based its service strategy on asingle rule: If clients are going to complain, let them complain aboutprices, not quality; if quality is poor, the amount charged is irrelevant.
In our specific market, competitors charged an average of $60 an hour, butwe charged $95 an hour. In the vast majority of cases, however, clientsnever questioned price. Their concern was fixing the problem quickly. Thebottom line is that if you provide clients with superior service and keepthem content, your hourly price should be approximately $10 to $30 higherper hour than your nearest competitor’s. Your clients will reward goodservice with their business. If, on the other hand, service is poor, thenthey will inevitably seek out your competition.
I’m already making a killingThere is also the belief that profits are already sufficient given theaverage hourly pay of a company’s technicians. Some simple math, beginningwith job costing, will determine whether or not that belief will hold true.
The first cost is the raw hourly rate. Although technicians are in shortsupply, assume the average hourly rate is $18. The standard benefitspackage, averaging around 30%, adds $5.40 to the cost of a labor unit,bringing it to $23.40. No technician or service department is completelyefficient, so there is always some down time-training and shop time-of 15%to 20%. Call backs add another 10% to this number, adding $6.84 to thehourly cost for a total of $30.24.
Do not forget about service vehicles. The hourly cost for servicevehicles-including acquisition, equipment, maintenance andinsurance-usually varies between $5 and $10 an hour, depending on themarket. Assuming an average of $7.50 an hour, this brings the total hourlycost for service to $37.74.
On top of the $37.74, we need to add overhead. For most integrators,overhead ranges from 25% to 40%. Assuming an average overhead of 33%, thisadds $12.45 to the hourly cost, bringing us to more than $50. Based on ournew math, charging $60 an hour and generating $10 in profit is definitelynot a good return on investment. When you charge $60 an hour for service,you are not making a killing; you may actually be getting killed in theprocess.
Most companies are afraid to raise hourly rates, but when you increaserates $10 to $15 an hour, 90% of your clients will say nothing. They willsimply pay the bill. The other 10% may want to negotiate. If the client isbig enough, compromise. If the client is important to your business andcomplains, then you do the smart thing-blame the accounting department formaking a mistake and let the client win.
My reaction is a little different when people call me crazy. I take it as acompliment. To me, crazy means a visionary with a different way of lookingat the world, and after reading this article, if you raise your hourlyservice rates, you will more than likely add significant, clear profit toyour bottom line and think that this crazy guy was right after all.