Thank you to Marine Klein, Head of Digital Marketing at Commusoft for this guest blog regarding pricing strategy in field service.
One of your field service engineers is out fixing a leak, and the project requires a valve. So he runs down to the local hardware store and picks up a valve for £13.
How much should you charge for that valve? After all, you didn't create the valve yourself, and it's not exactly a hard-to-get part. If you're like many field service businesses, you'd charge exactly £13.
The thing is, parts aren't just parts. They come wrapped in a messy package of your company's knowledge and expertise, how much you need to earn to stay in business, the value of your brand, and the value of the project for the customer.
And chances are, you're not charging enough for them...so let's talk pricing strategy.
Get off the Guilt Train
Some service providers feel guilty marking up parts for 'pure profit'. We get it: No one wants to look like an over-charging money-grubber, and consumers already think businesses earn sky-high profits. For example, when pollsters asked people what percent profit they think the average business makes after taxes, respondents' average answer was 36%. You probably already know that's about five times too high, but this perception can skew how much you feel is fair to charge for parts. After all, you don't want to play into the public perception that you're making out like a bandit by charging too much!
A big part of the problem is that the public—and many field service business owners—think a markup on parts is pure profit. The real truth is that the markup on your services and products is not profit. Markup allows you to cover your overhead, like employee wages, insurance, licenses, and taxes, and make a profit (which is only around 5% for the average business, by the way).
Without covering overhead and earning a profit, you don't stay in business, which isn't good for you or your customers.
The Pricing Dilemma
Now that you've gotten over the guilt of charging a markup on parts so you can, you know, actually stay in business and serve your customers...what pricing strategy should you use? There are so many philosophies on the correct way to price parts that it can make you feel like a primary school student in a calculus class.
For example, cost-plus pricing—where you add a standard markup—may feel like the simplest, most straightforward way to set prices. However, 'cost-plus pricing is frowned upon', says Tony Hodgson, CMA, United Kingdom Practice Leader at Pricing Solutions. 'It's sort of safe: You buy the part for £10, then add a 25% markup. But a customer might be willing to pay 100% more for that part because they're more interested in the end result. Will the part work? Is it high quality?'
Not only are you potentially losing out on revenue with cost-plus pricing, but this pricing strategy gets complicated when part prices fluctuate and customers wonder why an air filter that set them back £38 last year now costs £44. You're letting suppliers set your prices and dealing with the aftermath: angry and confused customers.
Then there's the idea of competitive pricing, where you set prices based on what your competitors are charging. You want to hit that sweet spot of not underpricing and looking like a low-value company, but not overpricing and losing customers.
However, there's a big problem with the competitive pricing strategy: If your competitors are other small- and medium-sized field service businesses, they're likely struggling with the same pricing questions you are! Ever hear the expression 'the blind leading the blind'? You don't want that.
Giving (and Getting) Value
These days, experts who pooh-pooh cost-plus and competitive pricing strategies are rooting for value-based pricing. 'You're looking at the whole service rather than just the part, and value instead of just cost', says Hodgson. For example:
- A £5 part for an old boiler that has to be special-ordered has more value to the customer than a £5 part you can buy at any hardware store.
- A £5 part that's going into a costly installation than a £5 part that's going into a cheap piece of equipment.
- A £5 part installed by a highly skilled engineer at a business that's known for quality service has more value to the customer than a £5 part installed by a less-reputable field service company.
- A £5 part that will restore heat to a residence in the middle of the winter has more value to the customer than a £5 part that's used in an annual tune-up.
The MarketingDonut website offers a simple calculation for figuring out your value-based pricing, which can apply to both parts and labour. Here's how it would work for a field service business:
- Figure out what the next-best option for your customers would be if you weren't available, and the price of that next-best option. For example, if your company didn't exist, perhaps your customers would head over to Second-Best Roofing, LLC, where they would pay £400 for parts and labour to have a vent installed.
- Estimate the cash value of the advantages you offer over Second-Best Roofing. For example, maybe you boast faster service and friendlier roofers. What do you think that's worth to customers?
- Estimate the cash value of the advantages Second-Best Roofing has over your company. Maybe Second-Best Roofing employs more experienced roofers. What do you think that's worth to customers? (We understand it's no fun to ponder the greatness of your competitors, but be honest here! You'll benefit in the end.)
- Add the price of Second-Best Roofing's vent installation to the value of your advantages, then subtract the value of Second-Best Roofing's advantages.
- That's (almost) it! Now, rather than relying on your parts suppliers or competitors to set your prices, you have a pricing strategy that's based on the actual value you offer to your customers.
We say that's 'almost' it because you may need to adjust your prices up or down based on your personal experience, judgment, and goals. If you do business in a high-income area and want your brand to look more upscale, for example, you may decide to adjust upwards. If you want to be known as a price leader and reach more customers, you may decide to scale down. Whatever you choose to do, you can feel confident that your parts pricing strategy is based on clear thought and careful analysis, and isn't a knee-jerk reaction to what others in the industry are doing.
Pricing parts can be difficult, but it doesn't have to be—especially if you use workflow management software for field service companies that lets you see exactly how much profit you're making from every job. The solution from Commusoft does this, and also lets you easily handle everything from dispatch and time tracking through invoicing and customer follow-up.
Even better, PartsArena Pro, the leading parts identification software for heating engineers out in the field, has just been integrated into Commusoft's solution. With these two helpful tools combined, users now have the power to easily identify the fault and part number required for their job through direct access to technical manuals, exploded diagrams, and parts number lists.
For more info on how your field service business can benefit from both Commusoft's workflow management software and easy access to PartsArena's huge database, call us at 01332 253 170 or email us at firstname.lastname@example.org.