Question: What is the best way to assemble install pricing?
Gary Elekes; Founder, EPC Training:
Lots of variety on that one. You’ll get a difference of opinion depending on the application we’re doing business with, so I would qualify the answer to this question with, “it depends on the market area you’re working in and the applications you’re working with.” So for example Miami, we’re going to be doing pretty much straight cooling only, so that would be a very different application than, say, the Northeast where we might be doing hydronics and we might be doing some plumbing incorporation with heating and air conditioning, home comfort, those sorts of things. So application matters and if we distilled that down to, OK, we’re going to take the 80% of the United States and Canadian geographic zones where applications are pretty similar – such as split system air conditioners, gas furnaces, split system heat pumps, maybe package units – those types of systems that you would consider to be common. So things like VRF and some of the mini-splits and ductless, we may not include those in the application, although we can use the same systems, but the number will be a little different; the times and the tasks in the installations will be a little different. But the very first thing I do is I always define the applications and say, “OK, what are my marketplace applications? What is my 80/20 principle?” The second thing that I do is I look at the actual task times that relate to those principles. So out on the EGIA website I even have a spreadsheet where those task times are already broken down. They’re not fully organized around every single individual business, but they’re generic. So what I would do with the men, if I was going to take a company in Chicago or Sacramento or maybe Orange County, is I would sit down with my men and I would say, “Here’s the basic list of what I have, let’s talk about what we’re doing and how we’re doing it.” What do we do on the job on the application? And how much time does it take? So you create the task times around that and that gives you your labor component. So labor is going to be one area that we’re going to deal with; obviously we have material, we have equipment, you might have subcontracts. In Phoenix, we use a lot of cranes to do equipment set on roofs that are package units. We can do three in a day as long as the crane is available; if the crane isn’t available, that changes things. So this is just an example where you look at the application, you look at the tasks, and you organize all of the tasks that go into that particular structure and you cost it. Then the next layer of that is, well, how do I want to actually price the work? Many companies will use markup, multiplier and divisor. As you know, I’m not a big fan of that for the obvious reason, which is that it doesn’t deal with labor any differently than it does material. And so a high-material, low-labor job is a very good job for us. A high-labor, low-material job is a more difficult job because it tends to increase the cost of overhead. So because of that, the idea that those – the markup, multiplier and divisor method – treat them equally as if there are no differences; that’s not the best methodology. It’s definitely the simplest methodology, it’ll get you to a price point, but there are legitimately probably four or five good reasons not to do it. So if that’s where you are, I’d urge you to look at something like gross profit dollars by day – either by crew or by man – and that is just as simple as organizing, “Hey, what do I want my gross profit to be on this particular product and application?” And assign that number and make sure that that covers up the overhead per day per crew, so that’s a step in the process as well. And then you have to go behind that as well, meaning that now that you have an individual strategy, and you’ve priced a particular job, I think it’s important for us to understand the retail, versus just contracting mindset. You want a pricing strategy, so you want positioning, and you want to be able to understand the psychology of the high-end and the low-end, and how consumers perceive high-end and low-end products and services, and they tend to buy in the middle. And we’ve talked about this on a previous call – 83% of the consuming public will choose the middle position, and they do that because they feel that’s the best place for the price-value relationship. We talk about that all the time – perceived value is equal to perceived benefits divided by the price. Well the perceived benefits in the center position tend to be the most chosen one – 83% of the time – so as you’re breaking down your cost, you’re breaking down your applications, you’re breaking down your prices, and you choose your strategy, that next step is to organize into a positioning strategy that allows you as a company to promote your sweet spot. For us that might be 16 SEER, 2-stage, variable-speed technology, maybe with a variable-speed air-handling system, a nice wifi stat, maybe one or two indoor air quality products of choice. So we’ll give the customer five options, they can choose one or two, so they’re really building their own platform, and obviously we’ll walk them through those choices. So that price positioning for us, that would be the center position, that’s the one we would treat with the most benefits, the most value, the price-value relationship would be at the best possible solution for the consuming public. That doesn’t mean we’re selling exclusively that, it just means we know that’s the one our marketplace will most likely benefit from the most, so we’ll structure the positioning strategy to highlight that. So just imagine you were looking at a price page or a purchase page and you had a giant highlighter around that, that’s kind of the idea we want you to see when we’re creating credibility, likeability and so forth. And then the final part of that has to be that you understand – with respect to brand names, brand strategy, your brand promise, your warranties, your guarantees – the things that are necessary for you as a retailer to be strong and to be able to offer a client something that’s powerful and unique in the marketplace, that sets you apart from the everyday competition. “I’m going to do it as a quality installation” is a not a unique selling position; it’s not a brand promise. It’s not strong enough; it doesn’t draw the attention to the consumer. And frankly everyone can say that, so it doesn’t represent something that makes you unique. Giving a 20-year parts and labor warranty – I’m not advocating you do that, I’m just giving you an extreme example – if I said, “I’m going to give you a 20-year parts and labor warranty on this particular product and service, and the other products and services carry a 10-year warranty,” that makes you pay attention like it was highlighted with a bright yellow marker, so you would look at that and say, “Wow, that looks like a pretty good warranty, tell me more about that.” So the goal in setting up the pricing, the positioning, and the overall strategy, is to make sure that you have some brand promises, some warranties, guarantees, extended warranties, additional products and services, that all wrap themselves around those types of structures. So start with the idea of applications, then move into task times, then move into a pricing strategy, then move into the idea of sales process, guarantees and warranties and I think that’s all pretty much in the pricing models if you look at the Best Practices site [on egia.org].