The Hybrid Pricing Model: How to Balance Competitiveness and Profitability

Every month, your business starts at zero. Before you make a dime of actual profit, you have a "nut" to crack—your fixed overhead, salaries, truck leases, and insurance.

The primary goal of your pricing strategy shouldn't just be to hit an arbitrary percentage on a spreadsheet; it should be to ensure every single job contributes its fair share of dollars toward cracking that nut.

Many contractors struggle because their pricing model is unpredictable. They make too little on budget jobs and price themselves out of premium jobs. The solution isn't to work harder; it's to price smarter using a "Hybrid Model" that separates labor dollars from equipment markups.

OnCall Air offers the option to set your base bundle pricing targets to use a fixed dollar target instead of -- or in addition to -- the gross margin percentage.

In other words, you can set the system to target a dollar profit for your base price, say $2,000 for example, instead of the traditional markup percentage on your equipment costs.

And you can combine profit percentage and dollar targets to achieve a more balanced result.

As inflation and supply-chain issues drive your equipment costs up, these pricing techniques can help you stay competitive -- and profitable -- with your prices.

Because the techniques we explain below can offer you more flexibility in pricing your jobs to achieve the following:

The premise is that when you use a hybrid model, your high-end equipment won't be priced out of the market, and your budget line won't be underpriced.

If you rely solely on a target Gross Margin percentage, it's easy for your high-end equipment to price too high, especially when prices are increasing rapidly.

Instead, by targeting a dollar profit target on your labor costs, and a lower margin target on your equipment, you can potentially achieve a better balance in your pricing.

Let's take a look at an example to better understand this option for your pricing strategy.

Let's start by assuming you are quoting 4 options for a typical AC+Air Handler replacement job for a customer.

Your example cost on those components, as well as an assumed base labor & material for this type of 3-Ton job, is listed in the table below:

Your Cost Assumptions

So now let's take a look at three distinct scenarios of setting your pricing.

We'll start with the standard pricing scenario in OnCall Air, Gross Margin Percentage.

Let's assume we are targeting a 45% gross margin, then the resulting price would look like this:

Selling Price and Profit with 45% Assumed Gross Margin Target

Right, so that's pretty simple, and it's the base technique for pricing most jobs with OnCall Air.

But you might be thinking: "at $1,800 profit on the Good system, I'm under my target profit...and my price is probably too low for the market. And $4,500 profit on the Fantastic system sounds great, but at $10,000 am I pricing myself out of the market?"

Why is this happening?

Because the cost of the equipment is driving the margin calculation, so the retail price is adjusting proportionally based on the cost of the equipment, not on the cost of your labor and material (which doesn't change in this example).

But now, let's take a look at an alternate way to price this job...

In this example, let's assume we are targeting a consistent $2,500 profit for all 3 Ton jobs, regardless of the equipment we are installing.

Let's take a look at the pricing and profit now:

Price and Profit with $2,500 Assumed Gross Profit Target

So in this example, you're ensuring a consistent profit across all tiers. And your price at the low tier "Good" system is a bit higher, while your price at the top tier is much more competitive. In fact, it's $2,000 lower than the price with percentage pricing.

This approach allows you to price based on consistent profit targets, and present a more competitive price point at the high end. Of course, if the profit is consistent, it means that you won't make less profit on lower end systems, and won't make more profit on higher end installs.

But the great news is that this is not one approach or the other. Let's take a look at another model, that combines the advantages of both pricing techniques.

With OnCall Air's base pricing engine, you can use either of the approaches above, or you can also combine the two to achieve the ideal pricing scenario!

This "hybrid" pricing model lets you define a baseline gross profit dollar target for a job, and also allows you to realize an additional margin on the tier of equipment you sell.

So let's assume that instead of a 45% gross margin on the full job cost, we decide to use the hybrid approach as follows:

With these assumptions, the resulting pricing and profit dollars look like this:

Price and Profit with $2000 profit target and 20% Gross Margin on Equipment

The resulting price and profit projections fall in between the two previous models. The low end is not as low, and the high-end is not as high. But we're still able to capture a bit more profit based on the sale of a better system to a customer.

The chart below illustrates this in more detail. The yellow line is the hybrid model, showing a smoother line in between the two other models:

So how does this all work within the OnCall Air system? Let's look at that in the next section.

The pricing strategy is set as always in the admin section of OnCall Air, referred to as the Office.

But when you look at a pricing profile, you'll notice the layout has changed.

We've highlighted the key changes in the screenshot below, and after that we explain the differences.

The tagged features in the screen above are explained below:

A. Margin % on Labor & Material

This column allows you to specify a margin that applies to the Labor & Material separately from the Equipment.

If your goal is to continue using a standard percentage margin across the board, you can enter the same percentage here as you do in the equipment column.

B. Margin vs Dollar Targets

The margin target on the labor and material can now be specified either as a percentage, or as a dollar target. This allows you to accomplish the dollar-based profit pricing discussed in the preceding section.

Toggling with the $ and % button gives you the option to specify either, and you'll see the equivalent calculation displayed next to the item as a convenience.

C. Margin % on Equipment

The margin % target is specified separately on the equipment (in the past, this margin applied to the full bundle, including labor and material).

D. Specify Margins by Job Type

Finally, the system allows you to modify the margin dollar or percentage targets on any system type. This makes it possible to fine tune your pricing based on the type of job.

For instance, you could have a 45% margin on your Split system jobs, but increase the margin on your Condenser-only job. It gives you more options to reach the right target price.

As you can tell, there are several new options to power your pricing. You may be asking: "How can I try it out without impacting my current pricing?"

We recommend creating a new Pricing Profile to test, and then using the Bundle Manager to see the resulting retail prices with that profile.