Experts debate raising prices during busy times
Just about everyone is familiar with Uber’s dynamic (or surge) pricing model, which increases or decreases fares based on the supply of drivers compared to the demand of riders. So, for example, if only one driver is available and 10 people are asking for a ride, then Uber automatically increases the fare. This is not a new pricing model, as hotels and airlines have been using it for years.
But now, some are calling for the same model to be used in the HVACR contracting world, especially during peak times like summer, when demand for technicians often outstrips supply. While this may raise profits in the short term, some believe that it could lead to frustrated customers in the long run.
SUPPLY AND DEMAND
It all boils down to supply and demand, said Chad Baumann, sales and marketing manager, Baumann & DeGroot, Holland, Michigan.
“As a whole, the HVAC industry is understaffed, and we are a weather-dependent industry,” he said. “When it gets swelteringly hot or bitterly cold, our demand skyrockets; however, we don’t have reserve technicians or a slush fund of additional labor to match that, so we are forced to work overtime. When our whole staff is working overtime to accommodate the workload, we can’t afford to be working at regular rates.”
That is why pricing at Baumann & DeGroot usually increases slightly during busy periods. Baumann estimates that the company may charge about 10 percent more during peak times than they do at slower times of the year in order to cover overtime.
Because HVAC contractors sell a commodity — much like oil or precious metals — supply and demand will dictate the margins as well as the pricing levels, said Jason Ellington, president, Ellington Air Conditioning and Heat, Rockledge, Florida.
“Granted, we are not mining for platinum; however, we only have so many labor hours in a month that we can sell,” he said. “Therefore, recognizing the scarcity of supply is paramount.”
Contractors can take some of the peaks and valleys out of their businesses by offering discounts or incentives during the slow seasons.
That said, the strategy of raising the price as demand increases isn’t any different than in any other corporation, added Ellington. And by employing such a strategy, he believes contractors can take some of the peaks and valleys out of their businesses by offering discounts or incentives during the slow seasons.
While noting that the dynamic pricing model could work in the HVACR industry, Rich Morgan, president, Magic Touch Mechanical Inc., Mesa, Arizona, adds that it can come with its own set of problems. One of those problems could be customers who are expecting to pay a certain amount based on prior service, and they are caught off guard when charged a higher price during peak season. Another problem could involve customers comparing notes about the price they paid for service, and if it’s substantially different, they could become angry and take out their frustrations in online reviews.
“While it may make sense to us as contractors and seems reasonable enough that you would think the general public would understand, unfortunately, there are many people who will not,” said Morgan. “Even at everyday consistent pricing, when a customer starts shopping around and finds a lower price from a one-man-show (or starts pricing components online), we can explain overhead cost differences until we are blue in the face and rarely sway their determination that we are ‘rip offs’ and ‘scam artists.’ Read any 1-star contractor review, and they almost always contain one of those phrases or similar verbiage.”
Dynamic pricing may also not work as well on the commercial side, where long-term preventive maintenance agreements, for example, are typically negotiated up front and costs are either fixed or adjusted annually. When it comes to service work, overtime is the tool used by Pleune Service Co., Grand Rapids, Michigan, to dampen demand during peak times, said president and CEO, Ken Misiewicz.
“If customers need us, we’ll come out 24/7, no matter what, but they have to decide if the after-hours cost of overtime is worth it to them based on their situation,” he said. “While we do run service calls after hours on a regular basis, it’s just as common for a customer to have us come out the following day on regular time. Overall, we’ve found the best strategy for us is to be steady and consistent because the majority of our business is with long-term, repeat customers, and we certainly don’t want to come off as a moving target or trying to take advantage of a short-term situation.”
With that in mind, it’s important that contractors don’t lose sight of the fact that peak seasons usually result in a lot of overtime, and those additional labor costs are often not accounted for in many pricing structures, said Ellington.
“The real trick to all of this isn’t so much a question of should we match supply and demand to pricing, but more of a question of how do we do that.”
Indeed, coming up with the right pricing strategy can be tricky…