Heavy Duty Pricing
By Norman Horton
September 20, 2001
Those of us that are heavy duty towing and recovery operators are faced with many challenges, not the least of which in today’s economic times is staying in business. It definitely takes the “p” word (profit) to stay in business. With things changing as rapidly as they have in the past few years can we stay the same without making the positive changes in the qualifications of personnel, upgraded equipment, and of course, pricing? I think not.
While it is fairly cut and dry to determine the price of towing trucks up and down the road, when it comes to recoveries, it becomes a horse of a different color. To be on the safe side let’s review the three factors that determine the pricing of your tows:
1. How much your customers are willing to pay.
2. The price per mile or per hour (depending on which way you charge) based on (a) what it costs to run your truck plus (b) the desired profit margin you want.
3. What your competitors are charging. .
Somewhere between those three factors you'll hopefully come up with a price that will give you the most runs with the greatest profit.
If you lean too far toward how much a customer wants to pay then you'll have all the tows in the world but you will be broke. Why? Because the amount your customer wants to pay is $0. They make insane asylums for customers who want to pay money for towing and recovery.
If you concentrate on making a killing off of each tow based on your cost you may not run much at all. Keep in mind when you are determining your cost that the cost you need to use to use to decide whether or not to take the tow should be your variable or rolling cost, which would be your fuel, oil, tires, maintenance, repairs and your driver because all of these are needed to keep the wheels rolling. Your fixed cost such as insurance, lease payments, overhead, etc., are time based which is why you don’t use them in your pricing matrix since their cost per mile can change drastically depending on the miles you run. For example if you paid $5000 in a year's time for your insurance and you make only one tow during that year of 10 miles, it would cost you $500 per mile for your truck insurance alone. But, if you run 50,000 miles than your cost per mile for insurance is .10 (ten cents) per mile. Did your out of pocket insurance costs change? No, just the miles that shared that cost.
So the more you run the less your fixed cost per mile is, whereas your rolling cost will usually stay within a pretty tight range. If your rolling cost is .75 per mile for fuel, driver, oil, repairs and maintenance and you make a tow at 1.00 per mile, than you have .25 per mile left over to go toward your fixed cost. Once your fixed cost is paid, then that .25 per mile will go toward your profit.
So you could charge a ridiculous amount per mile, say $200 per mile and you would pay for your rolling cost and most of your fixed expenses in short order. However you wouldn't have any customers.
The other factor is what your competition is charging. While a lot of us get confused and think that what a competitor is charging is all that a customer is willing to pay, that is far from the truth. In most customer surveys, price ranks 5th or 6th in what a customer is looking for. Customers will pay a premium price for good service and if your service is of a higher level than your competitor's and it is marketed properly, you can get a 10 to 15% premium over your competitors, unless you consider those operators running without proper insurance, workman's comp or paying their employees under the table your competitors.
What I'm saying is that there needs to be a balance in your pricing and the balance needs to be between the amount of profit you want to make on each mile or hour of each tow and how much you want to run. If you charge more you will run less and have a higher profit per mile. If you charge less than your competitors you'll run more and have a lower profit and if you charge too little you'll actually be running in the hole. While for the most part no one can tell you what to charge, you need to adjust your pricing to give the type mix YOU need.
How can you use this information? One way would be if you are running so much right now that you cannot take care of your customers properly. If you have trouble finding drivers and adding another would involve an additional truck, expense and commitment that you might not be willing to make at the time. Raising your prices should slow your volume down while at the same time increasing your profit. You may find you actually have more money in the bank by running less. If you're charging way over your rolling cost to run and your trucks are sitting all the time, you might want to consider dropping your prices a little, provided it is still above what it costs you to run.
The next type of pricing we need to look at is heavy-duty recoveries. The first area is run of the mill winch outs such as when a trucker pulls off the side of the road after it has rained real hard for the past 3 days. You run a line to him and pull him back on the road. Another scenario is when a driver cuts a corner too sharp with a 53’102” and rolls his tandems off into the ditch. You back up with your hydraulic pick up the tail end of the trailer, move it over and set it down on the ground. Since it takes you longer to do the paper work and get a comcheck than it does to do the actual work (which is why you need to have about a 2 hour minimum) you would have to agree that these are not $3000 jobs. They really don’t require all the skills and expertise of your best drivers or the full capabilities of your recovery unit. These types of jobs need to be billed out by the hour or at a flat rate. For example, you may have a contract with a concrete mixer company where you have a flat rate of $250.00 to $300.00 for pulling a mixer out. That way your customer knows what to expect. By the way, knowing what to expect is half the battle.
Major Recoveries seem to be the biggest cause of confusion and fighting between towers and their customers. The reason there’s not as much problem with the first two types of business (towing and minor recovery work) is that your competitor is only a phone call away. And because he is only a phone call away you don’t want to lose the call. You treat the customer reasonably so you can make a living and get that call back. The major heavy recovery accidents are often law enforcement tows where the customer doesn’t have a choice.
Before I get into the different means of pricing a major recovery job and some of the pros and cons of each let me do some meddling.
One of the big problems I’ve seen in this industry is that people confuse towing with recovery. People complain “that you charge more for recoveries since you can’t charge enough on a tow” but they have completely missed the point! The real issue is that you don’t need a $250,000.00 piece of recovery equipment to tow tractors up and down the road. All you need to tow is a tractor with a quick swap on the back to underlift trucks, an inexpensive investment with a much cheaper operating cost compared to a recovery unit. That heavy recovery piece of equipment, those air cushions and the intensive (expensive) training is a huge expense that is not needed for towing and gets spread out over a much fewer group of customers or incidents than towing. (Remember our example of insurance?) As a general rule if you’re on rotation or if you’re on any type of law enforcement list you’re required to make substantial investments to meet their qualifications which means that those major recovery bills will be much higher! That’s a lot of investment dollars that get spread out over a very few jobs as compared to towing.
The second problem is the misconception that “one size fits all” when it comes to rate sheets. There is nothing wrong with having different rate sheets for different situations and billing using different methods for different circumstances. Can you imagine flat rating a wiring problem on a computer-controlled car? Have you ever looked at a rating book that a LTL carrier has? They have a ton of codes and variations depending on the shipment, i.e., how far it goes, how much it weighs, what type equipment it is, whether it’s bulky, whether it’s palletized, boxed or hazmat. It’s enough to make your head swim. Why? Because they want to maximize each opportunity they have when you’re trading with them. AND PEOPLE, THAT’S JUST BUSINESS!!!!
The third and perhaps biggest problem is communication. If you communicate with the customer about what his alternatives are and the results of each alternative and let him know what the price is going to be up front, then you can actually charge a premium over someone who doesn’t bother to communicate with their customer especially after you have done a good job and saved his load as quickly as possible (so his competitor doesn’t see his truck flipped over on the side of the road). If you involve your customer in the recovery process, even if its only to pick up your cell phone to call the customer and say “Hey, the top is blown out but since you got a load of computers I’m going to try to set it up with the load in there so we don’t have handling damage. By the way, I can’t save the trailer. Is that the way you want me to proceed or would you rather I unload everything? It I air bag it, it will cost this much. If I unload it will cost x amount and will take longer to unload it than it will to bag it. What do you want me to do? “ If you will notice only the results of the job are up for discussion. I guarantee you he will not ask you for a detailed description of all the equipment you used or how long each man worked after being in the loop. Besides, I don’t want my customer knowing how I do things because he may get the idea that he wants to be in the towing business too, after all, he already runs trucks.
Yes, you need an itemized report of the condition his truck was in, where it was at, the weather, the situation as it pertains to his truck and his equipment since he is concerned about his problem, not yours which is to get the truck up. You may even want to list a couple of scenarios in your write-up, for example, “We looked at two or three different ways to recover it (unloading and airbags) and we choose to use air cushions because we felt it would save the load.” The absolute worst thing you can do is itemize every little piece of equipment and list every minute spent on the site because you are performing a job for that customer. You are performing a procedure; you are accomplishing a task for him. You are not doing a time study. How many times has your “time study” been taken and used against you by an insurance adjuster because he goes to your competitor and tells them “Here is all the equipment your competitor used. This is what he did. This is how long it took him to do the job. Now what would you have done?” Of course he would have done it better and cheaper. We get so involved in the mechanics of pricing and making sure that the customer knows what pieces of equipment we brought out, how many people we had, what size trucks, how much cable we used, how many snatch blocks we used , how many times we went to McDonalds to get hamburger’s and coffee, as if the customer really cared about how we did our job, as if they really cared for a detailed description of all the tools we have in our “toolbox”. For example, think about a package that you need some LTL freight company to ship. The carrier wants to know what you have, how fast you want it delivered, the weight, and if it’s hazmat. THEN he or she will rate the shipment and give you a price. You can change your mind and choose three days instead of one day and he’ll give you the price for that. Don’t you feel better when you are given the prices and the choice of how you want it shipped?. I thought so. I always feel better when I can decide how to spend my own money.
Show me one tower that has gone to that carrier after they agreed on a price and time for delivery of their shipment that has asked for an itemized description of the number of trucks, the number of men, the number of docks that were used- and a complete time study of what it took to get that shipment from point A to point B and I’ll show you a guy that has a few bats in his belfry. Lets get real!!! Let’s get down to the basics and quit fighting over things the customer does not care the least little bit about. In fact, lets make it very, very clear (if you don’t believe me ask the customer). The customer cares about, “What is it going to cost me?” “How long is it going to take?” “Are you going to do a good job without tearing my truck up?” And, “Are you going to keep me in the loop and let me help make the decision on how you are going to spend my money?” Oh, by the way, if your customer does ask for a “time study”, it’s often so they can pick your bill apart. Remember what customers really want to pay?
Now let’s look at the three methods of charging for rollovers or heavy-duty recovery:
1. By the hour
2. By the job
3. By the pound
Charging by the hour is the old fashioned way, which is quite practical when you’re out there with an old 600 or 750 Holmes mechanical, however it gives a lot of opportunity for the insurance adjusters to pick you apart and do a comparison with your competitor. Plus, it involves doing the time study and listing of all equipment, manpower and material to do the job, which is really none of their business. There are a few times it can be useful to use your hourly rate sheet on a major recovery in addition to your run of the mill minor recoveries. For example if you had a load of lumber spilled all over the road and the customer asked you to pick each piece up, resize and reband the load then I would look at this situation as if you would when you take your truck into the shop for a computer problem. They have to diagnose the problem, which is strictly on a time and material basis instead of flat rate.
The problem is that with today’s modern equipment, the training most towers have and the pressure to help with incident management by clearing the road quickly, charging by the hour is causing us not to get paid what the job is worth and has caused many towers to pad their bills by putting additional trucks out at the scene that were not needed to do the job.
By the job – which would address the investment cost you have. Some have gone to charging by the job with a good description of the casualty and the difficulties that are faced. This is a much more honest approach to billing than padding the bill with a bunch of trucks that aren’t being used. However it has 2 drawbacks even though it does more actually reflect the expenses that you have for equipment and training.
1. It takes a very experienced operator that can mentally figure what a fair cost should be for the job.
2. It does give us some creditability problems because we are “just pulling a figure out of thin air”. Since there is no visible basis of how the charges were arrived at, it doesn’t quite make you look real professional.
The third method is charging by the pound. It is a system I designed years ago out of a desire to treat not only the tower but also the customer fairly. This system takes the same concept that an LTL carrier uses and allows you to rate the job depending on the type unit, where it’s at, time of day, weather, whether or not it’s hazardous and the value of the load. It allows you to plug in the variables and come up with a flat rate for the procedure. Since weight is something all trucking companies are familiar with it is easily understood. They live and die by weight whether it be at the scale house, pricing the job shipments as an LTL carrier or tracking the revenue per ton mile as it’s done each year with the Pace report.
The concept is really quite simple because a roll over with similar circumstances should be worth about the same about of money. If you have a rotator, air bags and a another big hydraulic and you set up a tractor trailer in an hour, just because you have the money invested in the equipment does that mean the job is worth less than if someone brings out a 600 and 750, off loads it, sets it up and takes 8-10 hours? I think not. Why should the customer be penalized and pay more because you’re charging by the hour with old equipment and you take longer than someone else.
The flip side of the coin is why should the recovery operator who is well trained and has a million dollars worth of equipment on the scene get paid less because he’s good and fast? The advantage of using PPP is that you are able to give your customer a price before you ever start the job. You are able to give the customer a consistent rate that he’s being charged for that procedure regardless of the skill level or the equipment the tower has. The tower on the other hand is not penalized for trying to have better equipment and meet the requirements that many departments have for incident management
The down side is that this system like any other system, say, charging by the job and pulling some astronomical figure out of your head, or charging by the hour and charging for multiple pieces of equipment and men that you may not really be using, can be very easy to abuse.
For example are you using factors in PPP that really don’t apply? Or are you charging for inclement weather when you don’t really have any unusual exposure? That is just as fraudulent as charging for dollies on a little wrecker when you don’t’ use them. Or are you using PPP for a minor incident such as a winch out or a nose down trailer and rating the job as a full-blown major recovery when in fact it’s a minor recovery?
Yes, with the increases of insurance, equipment and training we need to be paid better than we were before, if for nothing else, just to stay in business. But we do not need to gouge customers to the point where they’re being charged astronomical rates that cannot be justified
A good rule of thumb on whether or not to use PPP involves a two-part question. If that tractor trailer involved in an accident is drivable when you finish and is something road service would ordinarily pay for without involving safety or insurance, then it’s not a major recovery that you should charge by the pound. It is a minor recovery and you need to charge accordingly.
So isn’t it ripping people off when you have charges for 1% of the salvage value of the cargo? No, because in today’s times you are responsible for secondary damage and if you recover that load for an insurance company you didn’t cost them 1%, you saved them 99%, a lot cheaper than the 4% premium the insurance company charges you for physical damage on your trucks!. Also, if the companies know they will be paying a percentage of the declared value of the cargo they will not be inflating the cost of it as we’ve had some companies do to try and let you recoup some of their losses if you happen to “step into it”.
And finally, why would you charge a hazmat surcharge? First of all you’re putting your people, your reputation, your insurance, and even possibly your life at risk for what? A few thousand dollars? You have the exposure, you have the liability, you have the risk. Now where is the reward for accepting that? There is not an insurance company on the face of the earth that will share your exposure for towing without taking a premium from you. So why should we be expected to put our reputation, lives, and equipment on the line for the same price we would get for winching a truck out of the mud. Fair is fair and that brings me to my final point.
When you are doing your pricing, no matter what method or methods you use, whether it by the mile, by the job, by the hour, by the pound or by the whatever, BE FAIR. Be fair to yourself, be fair to your customer and above all, remember an important part of understanding fairness for both parties is the communication you and your customer have with each other.