Tuesday, April 12, 2016

How to Grow Service Agreements

The formula is simple and time tested.  In the air conditioning industry, profitable replacement sales are the fruit of a strong service agreement program.  Service agreements grow from the seeds of tune-ups.  Spring is the perfect time to seed your business with tune-ups.

The Benefits of Tune-Ups
Empirical research has long shown that tune-ups are beneficial for homeowners.  They restore efficiency, lowering operating costs.  Though it is hard to isolate, the operating cost savings alone exceed the cost of a tune-up.  In addition, tune-ups recover lost cooling capacity.  They prevent break downs.  They extend equipment life. 

A cynic might ask why a contractor would want to do that.  Isn’t there more money in repairs and replacements?  Of course.  But the real money comes from a broad, loyal customer base that turns to you again and again at higher margins.  Tune-ups allow you to get your foot in the door, leading to service agreements, and then repair work and system replacements.

Around one out of every 15 systems will be replaced in a given year.  When you tune-up older systems, the odds favor the least sales oriented technician stumbling across a few systems that should be replaced.  This is why one out of every ten maintenance or service calls should result in a system replacement lead.  If you do not perform the tune-ups, you will miss these opportunities.

The Real Value of a Tune-Up
Some contractors do not push tune-ups because they do not think they make enough money on them.  If the tune-up is fully burdened with the same overhead as your service department, that’s probably true.  However, service department and company overhead exist whether a company pursues maintenance work, or not.  Thus, the maintenance department should only be burdened with overhead that would not exist without maintenance (plus direct costs, of course).  The added revenue from maintenance should exceed the additional costs incurred by the program.

While you will not recognize this in your books, divide the value of a replacement lead by ten and add that to your tune-up revenue.  That’s the real value of a tune-up.

Marketing Tune-Ups
Because they are necessary and affordable, tune-ups are great services to market.  This is especially true in the spring when summer heat looms.  Most people know they should get their air conditioner tuned up.  If they have experienced a break down in the preceding year or two the awareness levels are greater.

You might need to compete with some guy performing a deeply discounted “kick and check.”  If so, your marketing must be somewhat educational.  Explain what is done, why it matters, and how it differs from an inspection only type kick and check.

The key benefits for consumers are breakdown prevention, restoration of lost cooling capacity (i.e., greater comfort), equipment life extension, and operating costs savings from restored efficiency that exceeds the cost of the tune-up.  In other words, tune-ups are free.

The Service Agreement is a Marketing Program
If customers are convinced of the value of a tune-up, then it should be easy to persuade them to invest in a service agreement.  After all, if you price your service agreements correctly, the service agreement costs less than two tune-ups and provides other benefits like priority service, discounted repair pricing, and so on.
 You may wonder why you should discount maintenance with a service agreement, not to mention the other benefits.  It’s simple.  The service agreement binds the customer to you.  It will keep the customer from calling a competitor for maintenance or service. 

Service agreements also lower your marketing costs.  It really is true that it costs around five times as much to get a new customer as it does to keep an existing one.  Service agreements help you keep customers so you do not need to spend as much on marketing to attract new customers.  Plain and simple, the service agreement is a customer retention program. 

A service agreement program is also an employee retention program.  Your super service techs may not want to perform tune-ups, but getting paid to do maintenance beats getting sent home when the call volume is slow.  Getting paid keeps techs coming to work.  Sending them home gives them time and incentive to see if your competitors do a better job than you do maintaining a steady call volume.

Since service agreements are pre-paid, they also help with cash flow.  Just make sure you do not spend the cash before you pay your technicians to perform the work.  A simple approach used by many contractors is to create a separate bank account for service agreement revenue.  Each month, they draw 1/12th of the account’s balance and recognize it as income.  The pure approach is to recognize half of the income at the time the first tune-up is performed and the balance when the second is performed.

Don’t Discount For Service Agreement Customers – Charge Everyone Else More
In reality, you should not discount your billable rate for service agreement customers.  You should charge everyone else more.  Since they cost you more to serve than your service agreement customers, they should pay more.
Calculate the billing rate you need to meet your targeted net profit.  This becomes the rate you use with service agreement customers.  Divide it by one minus your service agreement “discount” and you have the rate everyone else pays.  For example, if you calculate a billable rate of $250 per hour and want to offer your service agreement customers a 20% discount, divide $250 by one minus 20%.  $250/(1-20%) = $250/80% = $312.50.

You should use a similar approach with maintenance pricing, recognizing that while you want to at least break even on service agreements on a marginal revenue/marginal costs basis (i.e., charge enough to cover the added direct costs and additional overhead required), this is a marketing program.  Set the final price of your service agreement and tune-ups for non-service agreement customers for marketing purposes.  Make sure that the price of a pair of tune-ups exceeds the price of your service agreement.

Perpetual Agreements
More and more contracting companies are charging for service agreements by the month, dinging customer credit cards.  This lowers the apparent price to the homeowner. 

Affinity Agreements
An affinity agreement is customized for an organization or charity that a large number of people support.  The organization receives your standard sales spiff or commission for every affinity agreement sold and marketing the agreement to their patrons is their responsibility.

Use Modern Collateral
The service agreement was introduced to the industry in the 1980s and many contractors haven’t upgraded their printed collateral material since then.  Make the service agreement sales oriented.  Stress the benefits of the program, not just a checklist of tasks the consumer doesn’t understand.

Involve Everyone
Make sure the entire company understands the importance of service agreements, owns one if they own a home, and can collect a spiff for selling one.  Each employee should feel no qualms about offering their family and friends such a beneficial product.

© 2016 Matt Michel