#158 Pricing Effectively Based On Your Efficiency

Summary

Owned and Operated - Episode #158: Pricing Effectively Based On Your Efficiency

Hosts: John Wilson & Jack Carr
Release Date: December 31, 2024

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Introduction & Context

In Episode #158 of Owned and Operated - A Plumbing, Electrical, and HVAC Business Growth Podcast, hosts John Wilson and Jack Carr delve deep into the intricacies of pricing strategies within home service businesses. This episode, titled “Pricing Effectively Based On Your Efficiency,” focuses on how businesses can optimize their pricing models by understanding and enhancing their operational efficiency.

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Business Growth Highlights

John Wilson opens by highlighting the impressive growth their business has experienced, stating, “This year has been a really big ride for us. We invested a ton into growth. We invested a ton into marketing. And like, we're up. We're up actually 50% still year over year. 49.8 to be exact.” (02:00). This significant uptick is attributed to strategic investments in marketing and process optimization.

Jack Carr echoes this sentiment, adding, “We're up year over year, estimated by the close of this year, 100 plus percent.” (01:14). This growth not only surpasses industry averages but also sets a robust foundation for future expansion.

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Focus on Pricing Strategy

a. Setting the Problem

The conversation pivots to the challenges of pricing, especially in the plumbing sector. Jack Carr explains, “We were, I think, really close to market rates. People are happy with their pricing, our guys are happy with the pricing. There's no issues with pricing on the H VAC side.” (07:14). However, discrepancies arose in the plumbing department due to incorrect pricing entries, leading to significant operational headaches.

b. Pricing Formula and Framework

John Wilson introduces a fundamental approach to pricing based on business overhead and operational efficiency. He states, “You take your overhead, you take your efficiency, and you figure out what you need per hour.” (08:38). This method ensures that pricing not only covers costs but also aligns with the company’s efficiency levels.

He further elaborates, “Efficiency is the big nut to crack here. So you take your overhead, you take your efficiency, and you figure out what you need per hour.” (10:15). By assessing factors like overhead costs and technician productivity, businesses can establish a pricing model that sustains profitability.

c. Managing Discounts and Dynamic Pricing

The hosts discuss the delicate balance between maintaining set pricing and offering discounts to secure business. John Wilson emphasizes the importance of “strategic dynamic pricing” versus “out of control discounts,” stating, “Dynamic pricing to fill the board is strategic and those are two different things.” (24:28). This strategy allows businesses to adjust prices dynamically based on current demand and operational capacity without undermining overall profitability.

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Sales Training and Team Alignment

A significant portion of the discussion centers on aligning the sales team with the company’s pricing strategy. John Wilson shares his approach: “Take away the rights. Like, hey, great, can't trust you with this. No problem at all. You will not be able to discount.” (24:05). By restricting unauthorized discounts, the company ensures that pricing integrity is maintained across all customer interactions.

Jack Carr adds insights on training, highlighting the necessity of educating the team on the value proposition and cost structures: “What does the training look like around that? Because we've gone through the training on like why we have to be priced this way…” (26:10). This education helps the team understand the rationale behind pricing, fostering better adherence and reducing unnecessary discounts.

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Compensation Structure and Incentives

The episode delves into how compensation structures can influence pricing behaviors. John Wilson discusses tying bonuses to critical financial metrics: “For frontline managers, 60% of your bonus is based on gross margin. 30% is based on EBITDA. The final 10% is did you complete your rocks.” (35:00). This alignment ensures that employees are incentivized to focus on profitability and operational efficiency.

Jack Carr shares his experiences with performance pay and the pitfalls of unguarded discounting, noting, “Allowing people to discount combined with performance pay without any kind of guardrails creates this really bad situation.” (28:10). Implementing safeguards, such as reducing commissions when discounts are given, helps maintain pricing discipline.

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Open Book Management

A key strategy discussed is open book management, where financial metrics are transparently shared with the team. John Wilson explains, “We have gross margin trackers up there. Like, hey, our materials have to be like 22% and if we're over it, like people are scrambling.” (34:01). This transparency empowers employees to make informed decisions that align with the company’s financial goals.

Jack Carr appreciates this approach, stating, “More of an open book type mentality with their company.” (34:24). It fosters a culture of accountability and collective responsibility towards achieving financial targets.

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Key Takeaways and Conclusion

John Wilson wraps up by emphasizing the importance of understanding both gross margin and gross profit, stating, “Divorcing those two concepts is really important because when you start playing the gross profit dollar game and you understand the nut that you have to crack every day, that's when pricing starts to make more sense.” (21:35). This nuanced understanding allows for more strategic pricing decisions that support sustained business growth.

Jack Carr concludes by reflecting on the practical applications of their strategies, expressing optimism about future growth: “October was awesome. I'm excited.” (41:05). Both hosts encourage listeners to implement these insights to navigate pricing challenges effectively.

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Notable Quotes

• John Wilson: “Efficiency is the big nut to crack here. So you take your overhead, you take your efficiency, and you figure out what you need per hour.” (10:15)

• Jack Carr: “We're up year over year, estimated by the close of this year, 100 plus percent.” (01:14)

• John Wilson: “Pricing should be strategic. Dynamic pricing to fill the board is strategic and those are two different things.” (24:28)

• Jack Carr: “Allowing people to discount combined with performance pay without any kind of guardrails creates this really bad situation.” (28:10)

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Final Thoughts

Episode #158 offers invaluable insights into the delicate balance of pricing and operational efficiency within home service businesses. By sharing their experiences and strategies, John Wilson and Jack Carr provide a roadmap for businesses aiming to optimize their pricing models to drive sustained growth and profitability. Listeners are encouraged to implement these strategies and adapt them to their unique business contexts for maximum impact.

For more information, visit www.ownedandoperated.com.

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Timestamps Reference:

• 00:00 – Introduction
• 01:14 – Business Growth Highlights
• 02:00 – Continued Growth Discussion
• 07:14 – Pricing Challenges in Plumbing
• 08:38 – Pricing Formula Introduction
• 10:15 – Detailed Pricing Framework
• 21:35 – Gross Margin vs. Gross Profit
• 24:05 – Managing Discounts
• 24:28 – Strategic Dynamic Pricing
• 26:10 – Sales Training Insights
• 28:10 – Compensation and Performance Pay
• 34:01 – Open Book Management
• 35:00 – Compensation Structure
• 41:05 – Conclusion and Future Outlook

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This summary is intended for informational purposes and reflects the discussions and content presented in Episode #158 of the Owned and Operated podcast.

Transcript

[John Wilson]

Pricing should be strategic. Open capacity costs, real money. I had to spend $130,000 on marketing last month. The carrot is, here's why this works for you. Here's why this is a win for you. The stick is like you're just going to do it. Can't trust you with this. No problem at all. You will not be able to discount. We had a couple major pain points earlier this year and those pain points were, how do we contact our unsold estimates more frequently? How do we book our membership appointments faster? How do we stay in contact with customers and let them know that we have promotions? And how do we run a speed to lead process for Angie's leads? When looking around for solutions, we saw a couple great softwares on the market, but our favorite one was Hatch. So when we started using Hatch, we had just switched over from another vendor. And Hatch's user interface was so easy, it directly tied into Service Titan. It automated the work workflow of five or six employees a day. We're now in contact with hundreds of additional customers. We're selling a ton of our unsold estimates, and it's easier than ever to book our membership follow up appointments. So Hatch has been a really big win for us. In order to book a demo with Hatch, click the link below.

[Jack Carr]

Welcome back to Owned and Operated with your hosts, Jack Carr and John the Maniac Wilson. I think I actually gave that title to Rich last time, so I don't think I can give you that title.

[John Wilson]

Yeah, yeah. You're gonna have to come up with some other ones. But I, I didn't mind being the maniac. It was good. It was good. You did really good.

[Jack Carr]

Thanks for the, thanks for the, the kudos. What's going on, John? How are you doing, man? We haven't done one of these, by the way. No guests, I know. No, just John and Jack. And it feels.

[John Wilson]

I miss you, man.

[Jack Carr]

It feels good.

[John Wilson]

I miss you. This is good. This is good. No, I'm good. So we're. It's. It's November 6th and day after election day, if that matters to anybody. And so November 6th and November's been kind of weird, but October was crazy. I think we talked about this a little bit, but October, you know, we. This year has been a really big ride for us. We invested a ton into growth. We invested a ton into marketing. And like, we're up. We're up actually 50% still year over year. 49.8 to be exact. Percent year over year, which is obviously crazy. And I know that that's not most people's reality right now. And October was just no different. We were up a little bit over 50% and we set a new record in October, which was pretty crazy even if we discount the fact that there was 23 working days. Our average day. Yep. Our average per day was still much higher.

[Jack Carr]

So I'm not going to make a big deal out of this or anything, but we're up year over year, estimated by the close of this year, 100 plus percent. I'm just saying, not like a big deal or anything.

[John Wilson]

Okay, I gotta catch up. I gotta catch up. I get it.

[Jack Carr]

Given the amount of millions is like one month of your revenue generation is our entires.

[John Wilson]

That's still a big win.

[Jack Carr]

No, I'm just joking with you. But that's really neat like that. Really. It's kind of cool to see where we were last year and all of the, the things that you've been putting into place, the bets, the investments that, you know, kind of the big boulders and now they're starting to pay dividends. Like it's working.

[John Wilson]

Yeah, yeah. I think I really do need to relisten to some of these. But yeah, I mean, look, if you want to know how we did it, listen, because that's how we did it. Like we talk about it really openly in here, but yeah, big year. And then one of the big things we're trying to tackle right now is we're in budgeting season. This is the first time we've ever budgeted, seemed relevant because we were always growing so fast. But what I have since learned is you can just budget for growth. So we are aiming at about 34 million next year. That's our on budget target. And we believe we have all the different mechanisms to get there. And delightfully, all we have to do is repeat October a bunch of times. So it's not even. It doesn't feel out of reach in any way. October actually like despite being a giant month for us, didn't feel like this like ungodly press to hit numbers. Like it just sort of happened naturally because now we do, you know, the daily budgets, 130 grand a day. So we're just.

[Jack Carr]

So you're moving from 100 grand a day to 130?

[John Wilson]

Yeah, we're aiming at about 34 million next year.

[Jack Carr]

Very cool. No, that's really neat. I mean it's, it's interesting to see because I remember the processes that we were talking about early on, like when we started this almost a year ago, and the processes were different. You were dealing with still building and now it's just implemented and now it feels like you said it feels a lot easier given. Don't get me wrong, there's, there's still everything that crops up and kind of refocus and all this kind of stuff. But in a world where a lot of companies are having a lot of trouble, it does feel good to, to do well. I mean, we, we had an awesome October also. It felt like everybody that didn't buy in June and July because they didn't want to finally pulled the trigger. So we had a huge amount of sales in October. Not record breaking, but over, I think 140% of last year. Year over year for just a month, which is awesome. We're just going to try to continue that and we're ramping up.

[John Wilson]

Yeah.

[Jack Carr]

People and processes and vehicles to try and match that. So it's, it's definitely something. But let me ask you. So we kind of talked about it prior. So the, the big rock that we're moving right now is price. So do you want to dig into some price today, how we get there, you know what that looks like and when to give discounts, all that kind of stuff?

[John Wilson]

Yep. Because I actually think it ties pretty neatly to budget because that's how we, that's how we think about this. And this is something that we've gone back and forth on. I would say, I would say the problem that you're trying to solve, I'm not trying to like overblow it, but the problem that you're trying to solve, we have spent most of this year like working on. I don't think we're perfect, but I think like we've spent a ton of time on this, so I feel pretty comfortable. So how about you describe the problem and then we can start riffing on it.

[Jack Carr]

Yeah, so. So the, the problem initially started in plumbing. So hvx H vac, we have no problems. We were, I think we're really close to market rates. People are happy with their pricing, our guys are happy with the pricing. There's no issues with, with pricing on the H VAC side. We are still building the plumbing department and we had pricing set in based on our worked hour average to generate our flat rate. But within the mix, something got messed up and we entered in a bunch of prices wrong and it made it a nightmare for everyone. So we said, okay, here's what we're going to do. We are going to go ahead get PriceBook Pro. They have some great features. We're not sponsored by service titanium. Yet. Yet we still always have a chance. Service titan, if you're listening. But we utilize the feature. It's great. Like, it really helped us get to a baseline. But now, like, what are. It's not so much now the price. Exactly. Because I think. I still think we're priced accurately for the market. In plumbing.

[John Wilson]

Yeah.

[Jack Carr]

Because I know what other plumbing companies are doing from. From kind of secret shopping. Yeah. But now it's like, how. How to make it so that pricing does not become a sales issue. Does that make sense?

[John Wilson]

Yeah.

[Jack Carr]

Like, how do you get your team behind the pricing structure? Because I think this is kind of what we. In the trades, actually across all the trades. And I know I had this conversation two years ago in. In H vac.

[John Wilson]

Yeah.

[Jack Carr]

It's like, how. How do you justify to your team a 300p trap when they know that the part's $40 and so then they try to discount it and discount it and discount it to 90. And you say, guys, you cannot discount a 300 part to a 90 part just because you don't believe that it should be that like. Or you can't sell that based on you're not providing value in other ways, shapes and forms. So that's our world right now. And I know a lot of other plumbers are on the same page with me. I mean, I've talked to a few guys about this and same issues. So what's the magic bullet? Is there a silver bullet here?

[John Wilson]

No, I don't think there's a silver bullet. I think there's a lot you can do, though.

[Jack Carr]

Yeah.

[John Wilson]

So we, we can cover like, the, the spread of, like, steps you can take.

[Jack Carr]

I mean, can we. Can we start off on, like, where. How did you set. What was your mindset and framework around setting your work? Dollar average, whatever that is. I don't need to know the number. Yeah, but like, why that?

[John Wilson]

Yeah, yeah, we backed into it. So, you know, setting pricing. Pricing in the trades per hour can be anywhere from like 80 an hour to like, some. Some companies charge like 900. It can, it can be anywhere. So, like, basically I give you that range to say it can be anywhere along that line. And it. There's a few factors that you take in mind. One, what's your cost of doing business? Like, literally, what's your overhead? How do you cover it? And then how many hours a day to actually expect each technician to be hands on the tools, which is efficiency. So how much is your efficiency and the downside of being a, like a home service company is efficiency is actually kind of low because you have to drive in between jobs. So you might be a 30, 40% efficiency shop. And if you need $2,000 a day to cover your time and you're only working for four hours, then you might be at 450 an hour, which obviously sounds like a lot of money because that's what attorneys charge. But attorneys get 10 billable hours a day to cover that. So they might be doing five grand a day. Plumbers only need two. But efficiency is the big nut to crack here. So you take your overhead, you take your efficiency, and you figure out what you need per hour.

[Jack Carr]

And so is, is that, is that the, the basic formula?

[John Wilson]

Basically, yeah.

[Jack Carr]

So, but with that, right, you, you run into a few. Not, I don't want to say buts, but you run into a few things, right? It's like a. So I guess, how do you determine what do you need per hour?

[John Wilson]

Basically, it's efficiency. What's your overhead and what's the tech's earnings. That's going to be like the big things that determine what you charge an hour. And you could be good at $200 an hour, which again, might sound like a lot, but if you're only working hands on the tools for three hours a day, that might just be $600 a day, which isn't a lot to.

[Jack Carr]

Quote Ellen Rohr, though, right? Shouldn't it be. It really shouldn't be your current overhead. It should be the overhead if you were able to offer what you want to offer your team. So that means the vehicle, the 401k package, the benefits. And so I think a lot of people get stuck on that, right? Because the minute that you change and you add more overhead, you don't change your worked hour average, then you start losing. And then how does that. So then let me ask you a question then. So how do you write. So you, you create this, you come up. I'm just going to arbitrary number. 400, right? So you're $400 based on your efficiency, your overhead, everything. And that's how you price your jobs. What happens now, right? You have members, they get 10% off. You have a matrix for what happens when we don't have calls on the board, right, that you offer between 0 and 20% off for day of. You have people on site who are allotted in a special amount of price reduction to help generate a sale. So how does that function? Because realistically, right, if you start to stack a lot of these, you can get to a point where, hey, the Tech went out to the site, it was a member, so they got 10% off. They offered him additional 100 bucks off or whatever. And then now that's done and now your, your inside sales team is calling them two weeks later saying, hey, I'll give you another 10% off. And so that absolutely has destroyed that. That number correct? Or what am I missing?

[John Wilson]

Sort of, yeah, sort of. So the idea, like the big one is are you pricing right? So I think let's, let's start back there and we'll add a calculator. But like, you might need to be priced higher than you are. So if you're $150 an hour flat rate, like realistically maybe you have to be 300, which I know sounds like a lot. But again, if we're going off of efficiency and your guys, everyone, everyone is less efficient than they think they are. So if I open up your company and I like dive into service titan, I bet you think that you're 60 or 70% efficient and I bet you're actually 30 or 40. Like you guys are driving, they're doing whatever. So on one hand you have to get better because you're forcing a customer to pay for your lack of ability to run an efficient business, which I don't think is fair to the consumer. So you have to get better, you have to figure out your routing, you have to figure out supplies. Whatever it is that is preventing you from running an efficiency based model, you still have to be priced right. So we'll add the calculator. But like, let's say that we're working off like 300 an hour flat rate and your efficiency is 30%. So 30%, which I would say is actually probably like, okay, yeah, it's really hard for a company to get to 50%. So 8 hours times 0.3. So 2.4 hours a day of time times 300 bucks an hour. So that's $720 a day of revenue out of that truck, which is low. So you know, the things to work on there is like average ticket or whatever. So that's $3,600 a week. I personally would not be excited about those numbers, even at the high price. So this is a good example of like that's probably happening somewhere. And what do you do in that case is you teach them how to sell more stuff, you know, do sales training, that type of thing. Or you get their routes more efficient. Because if they, you know, they obviously need to ramp up because charging more doesn't really solve the Low efficiency. But you figure out what your price is, you figure out what your price has to be. And then once you figure that out, let's say it's this, $300 an hour. Let's just keep using that example. If you go down to, you know, 270 because you're, because you're, they're a member discount, and then you have to give another 10% off because you have open capacity, then, yeah, you're down at the 2 tens and maybe your break even per hour is 210. And that, that's back to the conversation of are we priced right? So maybe in this case, 300 isn't enough. So when we're working through break even, we want to be working through what's our break even by hour and what's our break even by month. Because most of our, most of the time when we're making strategic pricing decisions, that's really the nut that we're trying to crack. So I'm gonna, I'm gonna take like, I'm gonna take this hourly example. I'm gonna blow it up to a month. So overhead. So my overhead every month is $700,000. Real number, $700,000. That's my overhead. So I have to, in order to be profitable, I have to drive $701,000 of gross profit dollars. Ignore the margin, ignore anything else. I have to drive 701 gross profit dollars in order to be net profitable. Right? So all that we're trying to figure out with an hourly is like a condensed version of that. So if I'm $700,000 and I'm going to do $2 million of revenue, then, and I run at a 45% gross margin, was I profitable? Let's figure it out. I was net profitable by $200,000 that month. So 10% profitable. So I might in that case be a little bit froggy. Maybe I can get dynamic with pricing because Maybe I have two days left in the month. I did a 10% net profit month. I feel good about that. And I'm like, okay, my guys have nothing on the board tomorrow. I'm already 200,000 over my gross profit. Need I covered my overhead, I'm net profitable, and any additional dollar is just going to go float to the bottom. So sure, I'll take that 50% off job or 40% off job because it keeps my guys moving. I'm gross profitable for the month. And if you, if you take the hourly conversation and the worked average hour and you blow it up to monthly, like it's the same math. You're just dealing with bigger numbers, but it's the same math. So can I take a big swing down and get froggy with pricing because I've covered my break even? Does that make sense?

[Jack Carr]

Yeah. So you can get. You can get more dynamic and get more flexible after you reach that. That specific number. But I mean.

[John Wilson]

So I'll describe how we use this really quick.

[Jack Carr]

Okay, so that's a good. That's helpful.

[John Wilson]

So I need $700,000 of gross profit dollars in order to cover my nut. And that's an important number to know because once you know your break even and your break even is consistent, those are the two most important parts, then you have, you have all the information you need to make good decisions. Because if you're. If I cover my break even or if I'm close to covering my break even and it's the 20th of the month. 20th of the month, and I'll be in the black in a day or two, I can take 40% off. So. So the way that we use this is one. How do we make sure we can be dynamic with pricing? So we try to run lean. So we had Lucas on a couple, actually, I don't think his episodes aired. But what it does, it sort of covers this concept of like, how do you run lean enough to be dynamic? Because the lower you make your break even, the more dynamic you can run because you can like, take bigger swings. So right now we can take a 50% revenue drop to October, and I would have still been net profitable, which, like, that's kind of a superpower. That's amazing.

[Jack Carr]

That's gonna go really good.

[John Wilson]

It really does. So how lean of a shop are you running? How do you control pricing? And like, how do you use that as like part of your decision making? So if you're priced right, you should be able to take 10% off or 20% off to fill the board because you're tracking towards your gross profit dollar target. Wilson just wrapped up the year in the low 20s, and we were pumped. I mean, most of the industry did not have that same level of success. And when I think about who was a huge partner for us, like, top of the list was service scalers. We've been working with service scalers for a couple years now, and they've helped us drive best in class SEO, best in class PPC and dominate LSA and GMB marketing. They've been a huge partner for us. And we're really grateful for that partnership because it's helped us to take down 46% year over year growth. As we think about our budget next year, we're aiming for the low 30s. And one of our most strategic partners is going to be service scalers. They're going to help get us there. They're going to help us stay ahead of AI. They're going to help us keep our SEO relevant. They're going to help keep us on the top, exactly where we want to be. So make sure you check out service scalers.com. sam and his team over there is just a bunch of killers. So thank you service scalers for your partnership.

[Jack Carr]

So do you, do you take those swings early to try and front run some of that gross profit dollar though. So like week run one, you have a light board. Will you take that, that swing? Because, you know, hey, I need to take this swing now to just get some profit dollars, even if it's at, you know, 10.

[John Wilson]

So if I, I think a better way of thinking about it is like, what's, what's my zero? We don't do this by hour yet, but like, by day. Our daily budget is $125,000. Our daily break even is 70. So I can swing down to $70,000. And like, I should be good as long as I run at an appropriate gross margin. Now if I start, like, really getting crappy with margin, then like, my break even goes up. But that's really how it works. And we use a daily tracker to know where we sit. So what are materials, what is labor for the month? And how do we be able to sort of respond?

[Jack Carr]

Ironically, all these conversations lead back to the same point, which I tried not to talk about today was gross profit and gross margin. But it seems that, you know, every.

[John Wilson]

Well, pricing is gross margin.

[Jack Carr]

Yeah, that's half of the equation. Yeah, but I mean, in terms of like, so then, so then let's, let's pivot this conversation. That actually helps.

[John Wilson]

The mistake that small companies make when I see this happen is they get very caught up in gross margin versus gross profit. And I think this is like, if I was going to give a fundamental lesson on how to handle, how to handle pricing, how to handle anything is like, divide those two concepts out of your head.

[Jack Carr]

Okay?

[John Wilson]

Gross margin is a percentage, and a percentage is really important. You want to be north of 50% gross margin to run a healthy business. Ideally much higher. Right. Like 55. That'd be great. 60 would be amazing. But gross margin doesn't pay overhead. So if, if my need, I'm going to use my overhead again. $700,000. So let's say that I run a 60% gross margin month, but I only did half a million dollars of revenue. Well, that didn't do for me because my rent is still 20 grand a month and it's due on the first.

[Jack Carr]

So sorry, landlord, I only made 30%.

[John Wilson]

Yeah, I ran, yeah, I ran a 60% gross margin, but my gross profit, $300,000. Yeah. So I lost 400 grand. So divorcing those two concepts is really important because when you start playing the gross profit dollar game and you understand the nut that you have to crack every day, that's when pricing starts to make more sense. So the people that tend to be the most like rigid in their pricing are people that don't understand it. They went to some training, they went to some something and somebody was like, you have to stick to your pricing. You got to stick to your guns on this. You need that 50 some percent margin. And they have crews sitting for no reason because they just don't understand that like gross profit dollars is what keeps the lights on.

[Jack Carr]

So let me pivot though a little bit that that makes sense. I, I think we, if you've listened to the last few episodes, you've, you've heard it a few times. Yeah, but, but let, let's, let's attack this from a different angle. So sales training in terms of pricing. Right. So I think this is, this is where we are actually having the issue and like, so all, everything we talked about. Yeah, I'm with you on that one. 100. That makes sense. I'm with you. We're working on getting our gross margins weekly so that we can actually make these decisions. Like all this stuff is, is the playbook that we've been discussing, but from a sales perspective with people out in the field. Right. I, I guess my question is how do you allow your team to make those discounts on site and what do you do about objections that that from your team, not from customers, but from your team, that your prices are too high?

[John Wilson]

I'm gonna first start with. I know I just said you can get dynamic with pricing and I know I used froggy a few times. I think that's a funny word. I also think I said strategic a few times too, because pricing should be strategic and everything should be strategically dynamic. And what that means is you have control over it. So out of control discounts is a problem.

[Jack Carr]

Correct.

[John Wilson]

But dynamic pricing to fill the board is strategic and those are two different things. So I think it is fair game to completely lock discounts from Your team's capability.

[Jack Carr]

So that's what we just did.

[John Wilson]

Yeah, I think that's completely fair game. And I think stripping commissions down to the bone, if they don't sell to retail, I think that's also fair game. Like their job at the end of the day is to sell to your price book. Like that's it. And your prices are probably fair. Unless you're charging $2,000 an hour. Like your prices are probably fair and market. And then just doing a lot of training on around like, hey, why does this cost this much? Why does it need to work like this? That's how we would approach it. But yes, pricing should be dynamic, but it should be strategic. And if people are discounting your margin and without your say so.

[Jack Carr]

Correct.

[John Wilson]

Then that's when it needs to get sliced.

[Jack Carr]

But so then how do you handle the training portion on that? Because. Right. I mean, I feel like I'm beating a dead horse here. Like. And so part of the reason we went with Price with pro is they actually have a regional pricing like tool in there that tells you how close you are to the people around you in your market. And so we're using that kind of as a proof to just say, hey, like we are the average price. Look it like, yeah, this, this culminates all the data. But like what does the training look like around that? Because we've gone through the training on like why we have to be priced this way. Who pays for the trucks? Who pays for this? Who pays for. That's all the customer at the end of the day. What, what does, what's the training to. Maybe it's like an objection overcoming price, objection training or, or overcoming like your mentality of putting yourself in the customer's shoes. Like where does that training start and finish in your world?

[John Wilson]

You do need to do some of that. I think you need to do a lot less of it than you need than you think. Everybody knows everything's expensive and they've worked at other shops. So it's no big giant surprise that other things cost a lot of money.

[Jack Carr]

Yeah. I mean especially their ex Hoffman employees. And we're less than Hoffman.

[John Wilson]

Yeah. So I'm so like my take is this is a classic John's. I have two phrases for this. So one, it's easier to force people to do their job than ask them.

[Jack Carr]

Yeah.

[John Wilson]

So like take away the rights. Like, hey, great, can't trust you with this. No problem at all. You will not be able to discount. Happy to do it. Let me know when you're ready to you know, earn those rights again because they know, like, they're coming from somewhere else that's more expensive than you. They're just throwing up objections so that you try to make it a little bit easier on them, but it really doesn't matter. You know, if this was 10 years ago and everyone was like, oh, my God, flat rate. No, 20, 24. Everybody understands how this works. Like, let's stop bullshitting around. We have people come to us from shops charging, like, literally twice and complain about our pricing. And I'm like, I know that. I know they're hourly. Like, it's literally twice. Like, I know their owner. Like, you, like, stop being dumb. The other one's carrot than the stick. So my typical way of change management is going to be carrot than the stick. The carrot is, here's why this works for you. Here's why this is a win for you, the customer, the company. The stick is like, you're just gonna do it.

[Jack Carr]

Yeah.

[John Wilson]

And that. That's. It's usually my progression.

[Jack Carr]

It sounds like we're doing the right things then, because that's what we've moved forward with. And then, you know, I think it was a bit of a model issue as well. I mean, to. To be blunt, and maybe I'm saying too much on. On recording, but, you know, we. We went from. I think the issue came back to, like, when you allow those discounts to kind of run rampant. What we were seeing was this feeling like allowing people to discount combined with performance pay without any kind of guardrails creates this really bad situation where.

[John Wilson]

Well, we've had that too.

[Jack Carr]

Yeah. The tech. The tech views it as like, okay, I can make. I could charge full price, make my commission or zero. Or I could charge this lesser price, still make a commission and not make zero. Like, this is a for sure middle ground.

[John Wilson]

And that's why I feel like all the gurus will be like, did you do sales training? Did you do whatever? And it's like, no. Like, these guys literally know this. They know, and you're just being taken advantage of. They were at a shop that was charging 400 more dollars an hour than you. They know all of it. They're just throwing up a stink because you haven't docked their commissions yet. You dock their commissions and boom, it goes away.

[Jack Carr]

Yeah. So we started that this week. Actually is letting them know, like, if the amount of commission that we lose on this is the amount or the amount of margin we lose on this is the amount of commission, it comes from somewhere, and that is your Commission structure, unfortunately. So it sounds like we're making all the moves. We're just in the early stages of it and like a big warning to people as they start moving into performance pay and allowing discounts and all this kind of stuff. Like this is definitely one of the pitfalls. We have felt it for the past few weeks and now we're not going to feel it anymore.

[John Wilson]

As well as six months to get there. You know, we had, because we had full, we, we had people like getting full commission on like 20 off and it's like, yeah, I mean that sucks now I don't think they need zero. But again. And they were just sort of taking advantage of the system too. But yeah, so, but again everybody knows it's just like we're gonna pretend to throw up a stink. We're gonna pretend, oh no, that's not fair. Like the last place they were at did that and it's because yeah, a business needs to cover its rent. It's not a complicated concept. I think like they pretend to be dumb but like they all get it. Yeah.

[Jack Carr]

Which is fair in the beginning. Yeah.

[John Wilson]

Like I, I have just such little patience for like if you're genuinely a new tech, I'll be super excited. Like I'll be really happy to walk you through it and like explain how this all works. But like if you've been at a few other shops and the other shops are more expensive than us and you're just trying to play games like my, my tolerance is almost zero for that. Just because it's like, you know, you've been trained at four shops now. The one track exercise, like, you know, you think you're going to take advantage of it just like shut up. Very low patience for that, for that type of bullshit.

[Jack Carr]

Yeah, it's, it's, it's fun going through these, these lessons but honestly that's how you get through them in the long run. Right. And so yeah, it is what it is. But that's interesting. Do you think though bullshit aside, what are some like really good sales training exercises that you provide your employees that you feel like.

[John Wilson]

Yeah.

[Jack Carr]

Whether H Vac just kind of really general now that have these exercises have really opened their eyes or yeah.

[John Wilson]

Shown them like, oh, I think explaining the value that. So like hey, we bring 20 year tradesmen. They're like this is their craft, like this is what they do. We bring four trades, we bring all the expertise, we bring capacity which is kind of a big deal. Like one man in a show, one man trucks or one man shows or Whatever they, they don't have capacity. So like, yeah, they might be half the price but they won't be able to fix your toilet or water heater for a month. We can do it in an hour and that's a big deal. But open capacity costs real money. Yeah, scale costs real money. Like our ability to be there and be there fast. Our ability to pick up someone's emergency phone call at any given time cost me a hundred thousand dollars a month. And I think, I think we talked a little bit about this with Ellen, but we've started doing open book management partially for this reason. Like guys, this is like, this is real money. This is real. There's a hundred trucks on the road. This is real. I had to spend $130,000 on marketing last month. That's not like fake. That's like, no, that was $130,000 out of our bank account. Call center's a hundred grand a month. Like that's just what it costs. I don't know what to tell you. So yeah, being able to like just here it is, is helpful. But also the, the value prop we bring is we can pick up your phone call 24 7. We're seven day a week shop. We have capacity that nobody else has. We can solve virtually any licensed mechanical problem in your home. And we have incredible tradesmen to solve those issues. Well also then that should be expensive.

[Jack Carr]

Yeah. And we'll take care of you. There's so many.

[John Wilson]

Yeah.

[Jack Carr]

Half baked chuck and trucks that we go in behind and fix their issues because they just never answer the phone call for you again. We at least solve your through your problem. So that, I mean that's good. It sounds like it's less of a training and more of just like hey, really high level. This is it. Like this is our value.

[John Wilson]

I think it's both.

[Jack Carr]

And it costs money.

[John Wilson]

Yeah, I think it's both. I think. Yeah, I think it's both. But I think also explaining like we have technicians that really want to understand like hey, where does the business need to be at? And I think this is just like how much do you share? Like the more opaque it is, the more like fight you're going to get. But like we'll just tell people, like everyone in the company can just ask and be like what's our labor percentage have to be? What's like it's up on the TVs. Like it's just up there. We put gross margin trackers up there. Like hey, our, our materials has to be like 22% and if we're over it, like, people are scrambling. So that trap exercise earlier, like, like most of the company would be able to look at that and be like, well, yeah, we're over on materials. Like duh, that's a pricing problem. So I think like how much do you share helps.

[Jack Carr]

Yeah. More of an open book type mentality with their company. Interesting. And yeah, yeah, I know we, we kind of, it was once again we have touched on it with Ellen. But like where do, where, where do you stop on that? Where, where's your stopping point for people who are thinking about going into that. Right. Like myself, like if I want to open the books, then where, where do you, like, where's off limits? Where do you keep.

[John Wilson]

Yeah.

[Jack Carr]

Where do you put behind the curtains?

[John Wilson]

We've just started, we've just started doing down to net with our leadership just because it feels relevant. So yeah, but it's also like we're tying people's bonuses to it. So like, hey, in my mind if, yeah. So the. Well maybe this, maybe this is part of the conversation. So like there's a way to do. Depends on where you sit in the company. Your weight of your bonus is different and the weight is going to be based off of revenue, gross margin, EBITDA and your EOS rocks. So maybe we do a whole interview, you know, talk just on like management bonuses. But those are the four things that we weight leadership bonuses on. So if you're a frontline manager, like service manager, install manager, 60% of your bonus is based on gross margin. Like did you hit gross our gross margin or gross profit targets. 30% is based on EBITDA. Did we run, Were we successful as a business? Like we should all care what our earnings was every month and we have to hit budget and the final 10% is did you complete your rocks? Your, you know, we're at EOS company. So like did you do what you said you were going to do? One of our core values is accountability. So we tie your compensation to it. So those are the three ways that our frontline leaders. And that's, you know, 100% total. If you're a senior leader, then it might be 60% EBITDA, 30% gross margin, 10% rocks. So it's like where you sit inside the company determines, you know, like how much weight each portion of that has. If you're a salesperson, you have a ton of gross profit control. So like if you discount your, your commission gets discounted because your revenue mainly and then gross profit second because you do control gross profit so that's how we think about comp. It covers a few different areas, but yeah, we do track it down to net. So when we're, when we're sharing our results each month, like, hey, did we hit our net margin target? Yes. No. Do we hit our gross margin target? Yes. No. Did we hit our revenue budget? Yes. No. And then each person, you know, they have like a calculator that they can figure out how much they made off of that. So we think it's, we think sharing openly is needed because we're basing their compensation off it.

[Jack Carr]

Yeah, that makes sense.

[John Wilson]

And we want people celebrating when we hit 20% net margin months, not just me as the ownership, as a part of the ownership group, but like, we want like everyone to be like, yes, we did it.

[Jack Carr]

That's a real thing.

[John Wilson]

We did 22 last month.

[Jack Carr]

Sweet, man. That's super helpful. I think that that gives me some direction here today and hopefully it helps out the listeners who are also doing pricing issue. Because I know that like when you, you're saying that, like you're just getting that down, like you feel like I'm.

[John Wilson]

Like, yeah, we're like a few months into it, I would say that this is something we've been working and it became way more relevant because we added inside sales. So all the way up until last year, like late last year, we were like, we were that small company that was really rigid with pricing because we didn't understand that an empty day is the worst enemy. It's like an empty plane seat is the worst enemy.

[Jack Carr]

Yeah.

[John Wilson]

Because an empty plane seat, like it costs X amount of dollars to fly that plane. An extra 50 bucks sure would be helpful.

[Jack Carr]

Yeah.

[John Wilson]

So that's, you know, the enemy of success is just like what could have been. So we try to fill all our plane seats. So we only got this dialed in because inside sales really accelerated it. And then H vac sales has really, really also accelerated a lot because that's a little bit more of a sales driven thing than plumbing and electric. But as we've gotten better at it, we've dialed in commissions, we've negotiated materials, we've nailed down the inside sales program. We've figured out like more capacity. So like, if I'm open tomorrow, what does that mean for my discount? If I'm open two days from now, what does that mean for my discount? Yeah, because ultimately the only thing that we know that we have to hit every day is daily budget and filling the board.

[Jack Carr]

No, that makes a lot of sense. Let me ask you one Last question, super nuanced, tactical, specifically for myself, just because I'm selfish here. So inside sales versus performance pay. Right. So you've started an inside sales program or, you know, you've tasked somebody internally in your company to do inside sales. Your frontline team, your service techs, they're paid partially based on commissions of sales. Right. So what does your inside, like the, the dynamic between, how does it flip over to inside sales? What's the time frame, if you don't mind setting this live or on recording. But what is that, that time frame? And then what does the commission change to? Is it changed to a spiff? Does it just completely go away? What does that look like? And then on top of that, how does that affect flips rather than like actual flips, like unit flips and large ticket flips versus sales.

[John Wilson]

Yeah. So our. It basically flips at 24 hours. Everyone says they're going to follow up, but like we need control over that because the job is to fill the board. Like ego just doesn't matter. And if we discount, we take gross, we take off of anybody in the company. Like we're going to take some percentage off. So inside sales, maybe it's a 3, 2, 1, where if they discount, it goes from 3% to 2% to 1. But yeah, we discounts, get discounted commission. So after 24 hours, flip it to 24 hours after.

[Jack Carr]

No, no. And then the tech gets zero dollars from that if they don't sell on flight. Essentially.

[John Wilson]

Yeah.

[Jack Carr]

Okay, that's, that's what we figured. I mean, I can't imagine a system that works the in any other way. But I just want to make sure I'm not out of left field. Plus I'm. Plus I'm pretty sure most anybody that does inside sales does it some way similar to that time frame changes, percents change. But essentially that's the, the root. And then with that. Right. That doesn't equal a flip though. Right. So if, if you go out and you flip a water heater, you don't sell the water heater on site, but you flip it over to a salesperson. Right. A plumbing comfort advisor or project manager, they still get the flip percentage no matter how long that goes out. Correct.

[John Wilson]

Right.

[Jack Carr]

So I just wanted to make sure that we weren't off and being a bunch of assholes.

[John Wilson]

No, I think you're good.

[Jack Carr]

Awesome, man.

[John Wilson]

Well, this was a good conversation.

[Jack Carr]

I like it. We, we hit a lot of tactical, we hit a lot of nuance. And then we also hit a lot of high level on, on kind of theory and how you should be doing stuff from kind of 3200 foot. So that's that's awesome, man. Good for you. October was awesome. I'm excited.

[John Wilson]

October was good. And what's been really fun is, like, November is going to be a little bit weaker than budget unless we can really, like, go crazy and turn it around. But because we've, like, really nailed down our, our break even and overhead, like, we're still going to be great, which is really, really nice.

[Jack Carr]

Very cool.

[John Wilson]

For about a decade.

[Jack Carr]

Yeah, Right? It's only, only eight years, Nine years to get there.

[John Wilson]

Eight years.

[Jack Carr]

Awesome, man.

[John Wilson]

Crazy. Thanks, everyone, for tuning in to Owned and Operated. If you like what you heard, check out Owned and operated dot com.