Is your business struggling in the current economy? If costs are going up and your profit margins are shrinking, then it may be time to increase pricing and value for your services. But how do you increase prices and protect profit margins without losing customers and causing technician turnover?
“In my career, the most important thing I did in terms of creating prosperity, freedom, and wealth in my life was getting priced right,” says Ellen Rohr, ServiceTitan Brand & Industry Marketing Lead and Co-Founder of the Zoom Drain franchise.
“What I've learned is that rich, smart people in any industry, including ours, love to tell you how they did it. And I was fortunate enough to meet a guy named Frank Blau. He's changed so many lives. I'm one of his early disciples, and it's really been my life's work to carry on this message of getting priced right,” she adds.
As part of ServiceTitan’s Back 2 Basics webinar series, Rohr and ServiceTitan Senior Program Facilitator Megan Montgomery take a deep dive into the ServiceTitan software platform to show users:
How to use ServiceTitan’s tools to quickly and efficiently adjust pricing
Real-world strategies to combat inflation and increase profits
How to raise prices without blowing up your techs and your customers
“Prices always go up. They went up during the pandemic and they never really went back down, did they?” Rohr says. “So in the real world, we have to combat inflation and rising costs, and we still want to be able to increase our profits.”
Let’s get to it.
Who sets prices at your company?
If you allow customers or competitors to dictate how you set prices, that only leads down a “road to hurt,” Rohr says.
“Your customer isn't the one to tell you're priced too high. It's not their job,” Rohr says. “When I first started as a contractor, I called my competitors, assumed a fake voice, asked them how much they charged to install a water heater, and I charged a little bit less to get the job.”
But setting your company’s prices is not your competitors’ job either. It’s also not ServiceTitan’s responsibility to figure out your pricing, but you can use the software to make the process a whole lot easier.
“It's your job as the owner or manager to be able to set your prices,” Rohr says. “And it’s your job to raise your prices.”
Use a sound selling price strategy
Rohr feels so strongly about setting the right prices for trade services, she wrote a book about it called, “How Much Should I Charge?”
“Once upon a time, I would have given my left arm for this information,” she says. “If the competition isn't setting prices and your customers aren't, how do you figure out a real selling price?”
Taking what she learned from her mentor, Frank Blau, Rohr created what she deems a reasonable selling price formula that simply works. Granted, it’s not the only pricing strategy you can use, but she says it’s tried and true.
Start by creating an overall budget with specific goals in mind.
“If you don't like what your profit and loss looks like now — Sales - Expenses = Not Enough Profit — then a budget is a pretend profit and loss [statement] that's lined up with what you really want to have happen,” Rohr explains. “I want to spend this much on expenses, so I need to make the top line big enough to cover all those expenses to my desired amount of profit.
“That's how you put a budget together, and it's not that hard,” she adds.
Just remember, your budget for labor and overhead will include built-in costs, estimated costs, guesstimates, or hoped-for costs. In the example above, Rohr uses made-up costs for easier math, showing:
Labor costs for two technicians at $200,000 per year + total overhead costs of $400,000 = $600,000 break-even
Next, take those labor and overhead costs (the break-even number) and divide by your technicians’ total number of billable hours. If each tech brings 1,000 billable hours to the table, you’d have 2,000 billable hours.
$600,000 divided by an estimated 2,000 billable hours = $300 break-even per billable hour
Then, to inflate that dollar amount to reflect your desired amount of profit, you must divide by the reciprocal. Rohr explains the math in simple terms:
“If I want to inflate $300 for a selling price that would have a 25% [profit] margin, I would divide $300 by 0.75 to get $400. That's the selling price we calculated using our numbers, our history, and our budget to come up with that number,” she explains.
$300 break-even per billable hour divided by 0.75 (for 25% profit margin) = $400 per billable hour
If you’re not sure about changing your selling price strategy, Rohr offers a simple solution.
“If you're making a lot of money, if your dreams are coming true, and your numbers are all lined up, do more of that. If you're not making enough money, raise your prices,” she advises. “If you're not priced right, you won't be making enough money. This is one of the tools in your toolbox.”
Who pays when your costs go up?
The cost of doing business continues to increase, from paying for insurance and marketing to uniforms and fuel, so how do you manage that and who pays? Here’s a hint: It’s not you or your vendors.
“So often you, dear contractor, or you, dear manager, are thinking, ‘I can't raise my prices again; my guys will revolt. My customers won't buy it, and we'll just eat it.’ But that's not how business works,” Rohr says.
Other times, contractors turn to vendors and ask them for lower prices or discounts, but the vendors also need to make money to support their families and communities.
“Don't beat up your vendors,” Rohr advises. “Not if you want them to pull a rabbit out of a hat on a Saturday for you.”
Who pays? Your customers pay. That’s Business 101, she says.
“Your customers pay for everything. They pay for your mistakes. They pay for a little bit of extra so you can try things out. Your customers have to pay for everything, including R&D [research and development]. So a selling price increase is indicated when your costs go up,” Rohr says.
How to get buy-in for increasing prices
Sure, you can skip all of the selling price strategies and just raise prices to reach your desired profitability, but will your customers and service techs give you complete buy-in?
Rohr thinks contractors in the trades have a self-esteem problem, which means they don’t know the value of the services they provide.
“In plumbing, we keep good water from bad water. Drain cleaning, we prevent more disease than doctors will ever cure. Electricians wrangle lightning; they power the internet. HVAC contractors keep us safe, warm, and protected,” Rohr says. “There is no one on the planet, I would argue, who does more for the survivability of mankind than tradespeople.
“Understanding the value you bring to the lives of your customers is really essential for you, your techs, and your customers when buying into your prices,” she adds.
Getting buy-in really comes down to the confidence with which you and your technicians present pricing to customers.
“Ultimately, if you buy it, and your techs buy it, your customers will buy it,” Rohr explains.
Explain your reasoning for the price increase, and show techs the budget and your math. The more techs understand the reasons for why, the more buy-in you’ll get.
“And when your team buys it, so will your customers,” she says.
The first time Rohr raised prices at Zoom Drain, she immediately purchased branded uniform shirts for her team, which had a big emotional effect on the entire company.
“When you raise your prices, you can raise your standards and you're raising your value, which makes it easier for everybody to buy in,” Rohr says.
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Who’s managing our pricebooks?
How are service businesses managing cost and price increases in their pricebooks? To find the most success, it’s critical to have a system or point person monitoring all of your costs and making timely adjustments to protect your profit margins, Montgomery says.
“At ServiceTitan, we have tools to make that job easier to ensure we're updating our prices and keeping those margins safe,” she adds.
With the dynamic pricing feature, you can set up automated rules for updating costs, prices, and billable rates. Dynamic pricing is part of the Pricing Builder tool, designed to help contractors automate updates and changes to their pricebooks by setting dynamic pricing for residential flat-rate businesses or client-specific pricing for commercial businesses.
“When I update my costs, if I need to adjust my billable rate, I can do that and my prices will fall in line like I need them to, based on those rules I set up,” Montgomery explains in her demo presentation.
Focusing on the core set-up for dynamic pricing and residential flat-rate businesses, Montgomery clicked on a pricebook, then opened Pricing Builder to create a rule for dynamic pricing. To create the rule, start by selecting the category for which you want to apply the change.
“This is where I establish what rules apply where,” Montgomery says. “I can have multiple rules that apply for different ones.”
It’s also where you can plug in Rohr’s billable-rate formula.
And if you need to re-evaluate billable rates on a regular basis to factor in rising costs and changing labor rates, the dynamic pricing feature allows users to make bulk updates and rule changes as needed.
Next, set your markups. And use the “hover-to-discover” feature, Montgomery emphasizes, to see a break-out of the different rates to be factored in.
“If I want to do a percentage markup, a dollar markup, gross margin, or multiplier, this is showing you how it's calculating that,” she says.
The tool also lumps any surcharges into the price of your product or service, Montgomery says, such as customer credit card or travel fees.
That’s the basic set-up for dynamic pricing rules. If you want to add complexity, such as adding pricing rules for after-hours calls or more difficult jobs, you can add three levels of options without needing to duplicate your pricebook. A recent upgrade to the dynamic pricing tool also allows you to round prices up to the nearest dollar.
Once you’ve established your rules, you can pull up a particular service in your pricebook to see all materials and equipment factored in.
“If you want materials and equipment to be factored into those markups, they need to be attached here, or they need to be included in an item group,” Montgomery explains.
Next, click preview price. You’ll see anything set under the dynamic pricing rules, and you can also preview prices from your estimates and invoices.
“This is where it shows you exactly where it came up with your price,” Montgomery says. “This is how you can check yourself, check your margins, make sure everything is set the way that you want it to be set.”
As you move forward with a price increase, be sure to check for accurate allocation of hours for each task and up-to-date material and equipment costs.
“This should all tie together with your financials,” Rohr says. “The bottom line is, if you're making a lot of money, if you're hitting your desired amount of profit, then I would say your pricing is good. If you're at a point where you're not making enough money, you're going to look at your selling prices, at those costs line by line (actual to budgeted for that overall), and see where the leakage could be.
“And then you can use your pricing to accommodate for a legit price increase, or operationally tighten up a system where you might be losing money,” Rohr says.
