The future of the billable hour is simple. There isn’t one.
OK, let’s not get too excited. When I say that the billable hour has no real future, I mean as it is used now — as a stopgap to keep our home service businesses from losing money. And, heck, not losing money is a good thing.
Want to know a better thing, though? Making money. So, let’s talk about where the billable hour breaks down as a tool for turning a sustainable profit.
Most of us have used the billable hour as an accounting method to make sure we are able to pay the bills, cover our overhead, and, hopefully, make a little money when the year is over. The problem is that focusing on the billable hour loses the big picture.
The billable hour is based on the assumption that you can estimate your income for the next 12 months based on the performance of the past 12. You’re looking at the future with an optimistic eye. You are setting your prices based on hopes that you’ll at least get the same number of sales ticks as last year.
As an accounting tool, it works well. As a business management tool, it has a built-in flaw. The problem is if we don’t get enough sales, if the phone doesn’t ring as much as expected, we will lose money. What happens if you lose just one call per day than originally estimated? The change to your bottom line can be drastic sometimes. You can’t afford to get out of trouble without serious help.
Using the billable hour should make sense, but, the reality of the marketplace has changed for home service contractors during the last 20-plus years.
In 1995, I had heating, air, electric, and plumbing businesses. Business was good and steady and the phones kept ringing. To keep up with industry trends, we had gone to flat-rate pricing, my billable hour calculated by the book.
What happens to costs when we grow? We spend money. However, I was being taught that “The customer pays for everything.” So, if my costs went up, I was supposed to raise my prices. No one pointed out that controlling your costs is a standard business principle, but I wasn’t a business school graduate. When my workers’ comp insurance went up 400 percent, I simply smiled and had my flat rate books reprinted with higher numbers.
News flash: When prices go up, sales go down.
If your business lives and dies by the billable hour, you have to get every single profitable invoice you planned for. There is no allowance for error. Keep missing projections, and you can find yourself in a hole so deep you’ll have to refinance your house to stay in business.
The future of the billable hour is as a management tool to assess sales information on a daily or weekly basis.
What is the solution? Stop using the billable hour as a tape measure to figure how deep of a hole you need to fill with money. Start using it as a dashboard to feed you the information you need to steer your company.
The future of the billable hour is as a management tool to assess sales information on a daily or weekly basis. We must use it to make decisions to bring income back in line with what we forecast. So, you’re losing two sales per day on average. Let’s ask Mr. Billable Hour Calculator what that means. That means you have just gone from 15 percent down to 2 percent profit.
What happens now? The answer wouldn’t be to raise your prices. You’ve got to get those two sales back or maximize your existing sales to make up for the lost income. I guess it’s time to crack the whip on your technicians, pressuring them to up-sell to clients. The money has to come from somewhere, right?
No. The idea that you can force your technicians to ever sell enough is a myth. But there is a better way. Become retail thinkers. Take your typical big-box retail hardware store as an example. You’ll go in looking for a tape measure, and, lo and behold, you’ll find three different brands for cheap, ranging in cost from $4 to $7 or something like that. What are they thinking? How can they profit from that? If they sell enough of them, I guess it will help cover their overhead.
Within 30 feet, though, you’ll find a professional tape measure for $32. You’ll see the products go from commodity pricing to luxury, quality pricing. Do they have salespeople standing by to convince people to drop that much money on a tape measure?
No. If given enough choices, customers will end up buying more than you could ever sell them. Why can’t we do that in the home service industry? Well, we can, by offering a menu of options from basic to ultra-deluxe. The basic billable hour service, priced with a sensible profit margin, is a commodity. The top offer is the luxury item, what you could bring to the table if money were no object.
There is no future for the billable hour as we’ve always used it, as an accounting tool, but it has a long and useful future ahead of it as a management tool. With a few changes it can be used to plot a course to profitability and let menu-pricing get you there.
Pricing enthusiast Rodney Koop is the founder and CEO of The New Flat Rate, a home service menu-selling system designed to put profit directly into the hands of plumbing, electrical, and HVAC contractors.