Profits From Service Agreements
Last month, I wrote about operating your business as if it were for sale. I encouraged you to plan for the future and maximize the value of your business — whether you actually want to sell it or not. Though there are many different ways to build value and make your business worth more, few can produce the combination of benefits that service agreements can. I never hesitate to mention flat rate as a way to increase the value of your business, as well as your annual profits, but selling service agreements produces that same value-now and value-later opportunity. What’s better, selling service agreements can make your transition to flat rate easier for your technicians and can boost your profits after you have switched. I’ll show you how.
It’s The BookI have often said there is much more to flat rate than a pricing manual, but that is where you have to start. And that is where you have to start selling service agreements, too.
All flat rate manuals have prices. However, I find it easier to show two columns of prices. List one column as the Standard Price, usually the price customers pay for the service listed in the pricing manual. In a column next to that price, list a column of prices that stand out and label it Value Price. Since the value price is noticeably 15 percent to 20 percent lower, customers almost always ask, “How can I get the value price?”
The answer is easy. Train your technicians to respond quickly and clearly that the value pricing is for service agreement customers. Naturally, the customer then wants to know how he can get a service agreement. What do I get? How much does it cost? Can I immediately take advantage of the value-pricing discount on this service call? When the technician answers his questions, telling him that he will save as much or more on this call as the service agreement costs, he will jump at the chance to buy a service agreement. The pricing manual did much of the selling.
It’s The Technique, TooTraditionally, technicians may have been taught to check the price in the price manual and then tell the customers. Before pricing manuals, they may have been used to running out to the truck and figuring out the materials and labor costs. Either way, they kept the source of the pricing information to themselves.
I suggest a different approach. Train your technicians to be open about the source of the price. Have them show the pricing manual to the customer. Better yet, I suggest that the technician encourage the customer to follow along as he looks up the price. This openness will give the customer more confidence that the technician is actually looking up the right job and quoting them the right price.
Many customers are suspicious that the price may be arbitrary or made up, or worse, vary with the level of affluence of the neighborhood. They want to be sure they pay no more than their neighbor who had the same work done. The only way to build the customer’s confidence is to let him see where the price comes from. If he helps look it up, he will be comfortable that it is a legitimate price and that he is not being taken advantage of.
The FundamentalsI assume by now you are familiar with the arrangement you set up with the customer for a service agreement. He pays a nominal fee, say $49, for a service contract where your company will send out a technician at least once during the term of the agreement to inspect the customer’s home at no charge. That doesn’t mean your technician will fix any problems or replace fixtures and equipment for free while on the call. But the service call itself is free, plus the customer gets the value-pricing rate for all jobs that need to be completed.
These service calls often result in technicians finding work that needs to be done, and sometimes technicians can prevent hazardous situations like leaking gas, electrical shorts or pending failures and flooded houses. Since the technician is already there, the customer gets a break, especially for multiple jobs.
A good technician will, generally, find service and repair work that should be done on about three out of four service agreement calls. We are talking about honest assessments of the customer’s home and systems in it. It is important not to tolerate technicians who recommend unnecessary jobs or attempt to scare customers into fixing systems, valves and switches that do not present a current hazard. Since there is such a high percentage chance of finding work on the service agreement call, it doesn’t make sense to complete the service agreement inspection on a regular service call, or on the service call where the customer bought the service agreement. More chances to inspect the customer’s home months later will produce more business.
A perfect time to conduct service agreement inspections is when business is slow, such as between seasons, or any time the telephone is not ringing and your technicians are sitting around waiting. Sending them out at that time is a benefit for them, keeping them busy and earning money. It’s also a benefit for your business, since you won’t have to pull them off other jobs to complete service agreement calls.
Just have your call takers contact service agreement customers and set service appointments.
Keep ’Em Coming BackWhen we first started selling service agreements, we used a one-year term. Next, we made the terms multiple years — eventually, five-year terms. That seemed like a long time. Then we discovered that there was no reason why the service agreements couldn’t be automatically renewed every year — a lifetime service agreement. Finally, a way to keep customers for life! Who are they going to call for service and repair work if they have a service agreement with your company — one that gives them a discounted price on all work? They will call your company.
It’s a constant challenge to get customers to call back time and time again. Service agreements are one of the ways I see to reduce expensive advertising costs. They help keep the customers loyal and keep them out of the Yellow Pages, where they might call a competitor. That loyalty lets us gradually reduce our advertising.
You not only increase revenue from selling service agreements, you cut costs, too. The combination of more business and lower costs gives the margins you have been hoping to get. Service agreements are not the only customer service techniques to keep customers loyal and happy, but they can make a major contribution to customer satisfaction. Plus, they build business at the same time.
Maximize ValueIf you are looking at selling your business, now or in the future, you will soon discover that buyers, particularly consolidators, are looking for a business with consistent (and growing) sales volume over the years. They also want profits, good margins and a good cash position. Selling service agreements can help you improve all three of these in your business. They help margins by boosting sales and reducing ad costs. They help your business grow with increased sales revenue from both the sale of the service agreements and the business they generate from home inspections. Your books will look more attractive with hundreds or maybe even thousands of $49 payments annually. And the service agreements continue for years.
Continuing business is one aspect that can be very important to a buyer. His risk when purchasing your business is simple: How many of these customers are going to call next time they need service and repair work? Any service business needs to have a system to be certain customers will keep calling. Service agreements allow you to demonstrate to any buyer that you have a specific number of loyal customers whose homes you will be inspecting, and who pay about $49 annually for their service agreement. That’s a competitive edge over competitive businesses, one that produces both certainty of future business and current revenue.
As you will quickly discover if you discuss selling your business, every dollar of sales and profits computes to a multiple of those figures when you attempt to calculate a sales price. So your decision to sell service agreements could produce several dollars for every dollar generated from the sale of the agreements and the corresponding business they produce.