Pricing: Response Charges Part 1

January 28, 2004

By: Matt Michel

Resolve to get your business fiscally fit and back your resolutions with specific actions.

The fastest way to a strong bottom line is to build the top line. While the small business owner must always watch expenses, no one can save their way to prosperity.

The surest way to build the top line is good marketing. The four P’s of marketing are product, price, place, and promotion. Over the rest of this Comanche Marketing series, we will deal with each, but will start with pricing. For service companies, pricing breaks down into four areas:

1. Your response charges
2. Your service rates and material mark up
3. Your replacement pricing
4. Your service agreement pricing

Let’s start with response charges. Few service companies put much thought into response charges. They charge about the same as their competitors charge. Or, they charge what they’ve always charged. There’s no thought. No strategy.

Response charges are called by different names. Whatever the name, a response charge is the price you charge to show up at the customer’s house and present them with a repair estimate. This encompasses trip charges, truck charges, first half hour charges, first hour charges, diagnostic charges, troubleshooting charges, and so on.

Response charges cannot be examined in isolation. Your hourly rate must also be considered. It gets messy because many companies use response charges to supplement their hourly rate. They charge a diagnostic fee so they can keep their hourly rate artificially low.

This is especially important for companies charging time and materials (T&M) because most consumers simply do not understand (or care) what it costs to run a service company. Present them with your true hourly rate and they start hyperventilating.

T&M companies must balance their response charges with their hourly rate. The true hourly rate equals the response charge plus the hourly rate. For example, if a company has a trip charge of $45, and then professes to charge an hourly rate of $60, the true hourly rate is around $105 (i.e., $45 + $60), depending upon the average length of repairs per job.

If the average repair is less than one hour, the true hourly rate is greater than $105. If the average repair is more than one hour, it is somewhat less than $105.

When a T&M company changes the response charge, the company changes its true hourly rate. For example, a T&M company that is marginally profitable may find itself operating in the red if the response charge is changed and the hourly rate is not increased to offset it.

On the other hand, a T&M company that wishes to be perceived as charging less can lower its hourly rate and offset it by a change in the response charge.

For example, a T&M company may charge a trip charge of $30 and an hourly rate of $75. If the average repair is 30 minutes long, the company’s true hourly rate is $135. Because the company is encountering price resistance over the $75 rate, they can lower their stated hourly rate to $50, and invoke a one hour minimum. Though the company appears to charge less, the true hourly rate increases to $160 ($30 minimum, plus $50 across an average time of 30 minutes). Like I mentioned, it gets messy.

Flat raters are not immune. They often fail to consider the impact of their response charge on their true hourly rate. Like a T&M company, a flat rater should consider the impact to the bottom line that results from a change in the response charge.

Yet, flat raters have a luxury T&M companies do not. The flat rater can easily shift dollars out of the response charge and into the base service rate, regardless of appearances to the base rate because it is hidden from the customer and bundled into the flat rate.

Regardless of your pricing method, the response charge should be set by design, not happenstance. Ideally, your hourly rate should be set at the level where you do not need the revenue from your response charge to be profitable. Then, you can use the response charge purely as a marketing tool.

From a marketing standpoint, there are four common marketing approaches, which will be covered in the next article.

Source: Comanche Marketing. Reprinted by permission.
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Copyright © 2003 Matt Michel

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