By Paul MacDonald, Expert Service Program
Unless you are selling a commodity, knowing your cost is fundamental to setting the selling price in every sales transaction.
In the appliance industry, selling finished products and/or parts is a straightforward mathematical calculation: Acquisition cost plus either markup or margin equals the selling price. Retail appliance dealers work on margin rather than markup, whereas appliance service companies work with a mark-up on parts sold during a repair transaction. In either case, without knowing the true cost, it is impossible to determine a fair selling price.
Setting profitable service repair rates can be especially difficult, as there is a plethora of costs associated with running a call. We must calculate the technician’s and support staff’s hourly wages; the rent and utilities; the technology to receive and record the customer’s information; and the vehicle, fuel and insurance to get the technician to the customer’s home and back.
Let us also not forget the hours spent training the technician and the special tools and manuals need to diagnose the customer’s problem. Don’t kid yourself, the microprocessors found in today’s appliances require equally sophisticated technician tools and knowledge. Then there’s waste removal and recycling costs, and workman’s compensation and healthcare costs. The list of costs behind every knock on a customer’s door is long, and must be factored into every service call.
So how do we do that? Unfortunately, most servicing dealers don’ t know, and consequently go about the business blindly, hoping there is enough money left over to not only pay the bills but contribute to the bottom line. Today’s service business is not like the old days; it is tougher to make it work. But the good news is the appliance repair business has never been better, and there is a lot of money to be made fixing refrigerators, washers and ranges.
The trick to profitable appliance repair is knowing the hourly cost to run your business and how efficient your operations are. Efficiency is determined by how many first call completes you can achieve in a day — essentially, how many of your technician’s hours you charge a customer for each day.
Begin the equation by determining how many technician hours you have available to sell. Three hundred sixty-five days, less vacations, weekends, statutory holidays and sick days, multiplied by work hours each day is how many hours you buy from your technician in a year. Then calculate the gross hourly wage — not the net wage, but fully loaded and spread across those hours you can resell. Remember, you still must pay when your tech is on vacation or home sick.
To determine your hourly operating cost, divide the service department’s overhead less the tech’s wages by the number of available technician hours. By adding the gross hourly wage and the hourly operational cost, we’ll know the hourly breakeven amount. Add a modest profit of 20 percent to 30 percent and we’ll have determined the gross billable rate per hour.
What happens next is the magic or the downfall of all service companies. It is impossible to resell 100 percent of all available technician hours. Much unbillable time is spent pre-screening and pre-diagnosing calls. The time it takes to research, order and receive parts, and to drive to and from service calls, is hard, if not impossible, to charge for. Minimizing this non-billable time is referred to as the efficiency of your department and must be applied to the gross billable rate per hour to determine what our average service invoice price needs to be. Once we understand this number, we can set our service rates accordingly.
Sound complicated? It is! There is a mathematical process to setting your service rates and it is based on technician wage plus overhead plus profit multiplied by department efficiency.
If you are a member of the United Appliance Servicers Association (UASA), you can get an assist with the calculation by downloading the group’s Cost of Doing Business Calculator. It provides an Excel spreadsheet specially designed to calculate your service rates based on your cost of doing business and efficiency. Just fill in the yellow highlighted cells.
Calculate your hourly costs to set service rates that deliver profits. This calculation must be made annually or after any change in your service business costs.
BrandSource service consultant Paul MacDonald ran his own 38-tech service business and is a past president of the UASA. He currently operates the Expert Service Program, which helps servicers run their operations more efficiently and profitably. You can reach Paul at (647) 500-7785 or Paul.M.MacDonald@gmail.com.