Furthermore, I get my ideas from reading my mail and e-mail and answering the phone. Recently I received an e-mail from a contractor who posed a number of well thought-out questions. Here I'll address a couple of interrelated ones dealing with diagnostic fees and service agreements.

Diagnostic Fees: The contractor asked how I figure a proper diagnostic charge. He observed that the diagnostic fee I described in a recent PM article seemed to be at a loss.

Nonsense. If you correctly allocate all of your overhead against billable hours, there is no need for a diagnostic fee. The revenue is pure profit.

A "requirement" to charge a diagnostic fee, trip charge, truck charge, first half-hour charge, what have you, is a relic of the old time-and-material pricing mentality. Time and materials contractors didn't feel they could charge what they needed for an hourly rate, so they resorted to gamesmanship to pad the invoice. It's ironic. These are the same contractors who self-righteously assert that flat rate is deceptive, yet they themselves are the masters of deception. If you price properly and flat rate, unapplied time and every other cost of running your business are built into your hourly rate, which you know but do not quote to customers.

Why do I advocate a diagnostic fee if it isn't needed? A diagnostic fee serves several purposes. First, it prevents nuisance calls from do-it-yourselfers who want you to come out to their house and find out what's wrong so they can run to the local big box retailer and play plumber. They still might do it even when you charge a diagnostic, but at least this way they pay you something for your professional consultation.

A diagnostic fee is also a way to classify your customer base. Many contractors are beginning to use a two-tiered response charge. Customers who are willing to pay a higher charge for more immediate service are sending you the message that they want a higher caliber of service and are willing to pay for it. I want to know who these people are because I'm going to devote more of my resources marketing to them. They are special people, and I want to treat them that way.

Another reason for a diagnostic fee is that it gives your call takers something to quote to the customer. Many customers want to know over the phone what a repair costs, and they don't like it when they're told, "I dunno - have to see when we get there." By offering a diagnostic, you give them a solid number they can get their arms around. They still don't know what the total cost of the job is, but at least they know something. Besides, it makes sense to most people that prescription without diagnosis is malpractice.

The final purpose of a diagnostic fee is to give you something you can readily give away. You can offer dollars-off discounts equal to the diagnostic fee for targeted groups, such as senior citizens, friends at the Rotary Club, and so on. You can give away gift certificates to people entering drawings at a home or mall shows. You can waive your diagnostic fee for service agreement customers.

Done right, a diagnostic fee becomes a marketing tool.

Service Agreement Pricing

Remember, maintenance work is performed on your schedule. It is not demand service, but planned service. It fills in the gaps of demand service. No one in the service business has steady work all of the time. The service agreement addresses that. When calls are light, you send your people out on maintenance calls. Of course, you should make sure your customer understands this use of downtime, which is one of the reasons they get such a great price.

When pricing a service agreement, you do not need to allocate the same burden you use for demand service. Most of your service operation is built to support demand service. Maintenance actually places very little added burden on your operation. It is incumbent upon you to attempt to allocate to the maintenance department only those costs that are required for maintenance.

Look at the line items on your P&L and decide whether you could reduce your costs if you eliminated maintenance. The amount you could reduce your costs is the amount you should charge to maintenance and the burden you must build into the service agreement. If you haven't started offering a service agreement, determine the additional costs you will incur, and that becomes your burden.

Take advertising, for example. If you eliminated service agreements, would you reduce your advertising costs? I think not, or at least very little. Most service firms do not spend much money advertising service agreements. So removing the advertising portion of your overhead from your service agreement pricing makes sense.

You will find that the overhead burden for maintenance is far less than demand service. Essentially, the service agreements primarily need to cover marginal costs, which means the cost of your field personnel, plus a little bit more. Many contractors know this intuitively, though few have made the actual calculations.

Maintenance is also terrific for training. You send your least senior personnel out on service agreements because the technical demands are lower. Thus, your marginal costs for service are also lower than demand service. At the end of the day, a service agreement is a profit marker, even when competitively priced.

Remember, service agreements must be a good value for the customer. While you are providing needed maintenance and inspection work that will allow your customers to get good value out of their plumbing, that often is not enough. Design your service agreement with an eye toward maximizing customer value in tangible and visible ways. Make sure you do things that customers won't do for themselves, such as cleaning out faucet aerators and completely flushing the water heater.

When finished, give the customer a comprehensive report of all the things you've done, and any findings. And, for added value, waive your diagnostic fee for any service agreement customers.