Service Agreements Part 2

April 15, 2004

Service Agreement Pricing

By: Matt Michel


This is part of a continuing series of New Year’s Resolutions aimed at helping your company become “fiscally” fit. In this series, we will walk through the marketing mix of product, price, promotion, and placement. This Comanche Marketing tip focuses on Service Agreement pricing.

CHOICES
More service companies are offering choices in service agreements today. They offer a low end, low cost inspection only agreement (i.e., a “kick and check”). They offer the traditional tune-up and cleaning type of service agreement, and now, some are offering a full coverage or partial full coverage agreement.

With a full coverage agreement, you are basically covering anything that could go wrong with the listed equipment. Yes, it’s an extended warranty. Some companies cover themselves by taking out extended warranties with Equigard or other companies that offer extended warranties. The beauty of the full coverage agreement is that it generates work now, when it’s sold. In order for the system to be covered, it must be brought up to your standard. This is a time honored approach of the commercial market that is slowly filtering down to residential. Just like most homeowners prefer the certainty of flat rate, many prefer the certainty of knowing all repairs are covered.

A partial full coverage agreement is similar, but with exceptions. You might except the compressor for an air conditioner, labor to replace the heat section of a furnace, or the tank of a water heater. You might cover labor only and place the burden of materials on the homeowner.

If you choose to offer a partial full coverage or full coverage plan, you are choosing to engage in risk management. You must estimate the number of repairs you will need to cover and spread that cost over the number of coverage agreements you think you might sell. Then, be sure to set the money aside in a reserve account.

NAMES
It’s a mistake in this day and age to call a service agreement a “service agreement.” The big box consumer electronics companies have taken over the term. It no longer means the same thing. Today it’s synonymous with “extended warranty.” You’re not offering an extended warranty because you are going to service the equipment, saving energy, preventing breakdowns, enhancing safety, and so on. Call it something else.

You can come up with all kinds of exotic names for your service agreement. It’s pre-planned service. It’s scheduled maintenance. It’s comfort protection or plumbing protection or electrical protection or what have you. HVAC consultant, Jackie Rainwater (jackie.rainwater@worldnet.att.net), the most recent inductee into Contracting Business’ HVAC Hall of Fame, says to simply call it a maintenance agreement. Few people have built a program as strong as Jackie did with Peachtree in Atlanta. If all else fails, follow his lead.

PRESENTATION
Presentation of multiple service agreements is the same as presentation of multiple pieces of equipment. Use the column approach and spell out the differences and the cost. You might want to break the cost down to a daily basis, to emphasize how little it is.

The Service Roundtable (http://www.serviceroundtable.com) has a terrific form for selling service agreements on a service call. The form has two columns, one for service agreement customers and one for non-service agreement customers. In the column for non-service agreement customers show the cost of a repair at the standard rate, the cost of the diagnostic or show up charge, and the cost of the tune-up(s) you would perform under the service agreement.

In the second column for service agreement customers, show the cost of the repair at the discounted rate for service agreement customers, the cost of the diagnostic (it’s included), the cost of the tune-up(s) (also included), and the cost of the service agreement. It will always be less expensive for the homeowner to buy the service agreement. If the technician presents it half way right, people will buy.

MULTIPLE YEAR AGREEMENTS
You may want to sell multiple year agreements. Give the homeowner a discount when they purchase more than one year at a time. How much? Give them 5% to 10% per year. Remember, you’re locking them in. This is gold!

Juan Cardona of JC Heating & Cooling in West Virginia put together a form for new system sales where the customer agrees to purchase a service agreement for every year the new system is under warranty. Juan’s form is legally non-binding, but when the customer signs it, he is committing. Because Juan presents it at the time of the final inspection for a new system, he is hitting the customer up at exactly the point where he is happiest and most apt to make the commitment. It’s good psychology. As a result, Juan has a high service agreement conversion rate. He pushes the system with the ten year warranty and at the end of ten years, persuades people that it’s time to buy a new one because the warranty coverage has expired. Brilliant!

NEW EQUIPMENT BUNDLE
Whenever you sell new equipment, bundle a service agreement into the sale. Price it in. Do not include one with your Bubba system, but include one with everything else. Consider stepping up coverage as you step from good to better to best. People are starting to expect this. When you purchase a new BMW, for example, three years of full maintenance are included.

RESERVE ACCOUNT
Make sure that you place the revenue from a service agreement into a reserve account and draw from it as you fulfill the agreements. Otherwise, you could artificially inflate your cash position and run out of cash when it’s time to pay the technicians for doing the work.

PAYMENTS
Ron Smith’s latest advance in the art of service agreement sales is to charge the customer for a service agreement monthly through a credit card or bank draft. This drops the price to an inconsequential monthly amount. It is the perpetual service agreement.

If you’re not ready to tackle a perpetual agreement, time your service agreement billing to periods of greater demand. For an air conditioning company, this means sending out the renewal invoice when it’s hot, not when it’s mild and people are not thinking about air conditioning.

SCHEDULING SMART
Okay, I’m getting off the subject of pricing. This is profitability. Want me to stop? Didn’t think so.

The real trick to making service agreements profitable in their own right is to schedule smart. Cluster agreements as tight as possible. Too often service companies send techs 30 miles between calls. You do not make money on windshield time. You make money when the tech is working for the customer. With service agreements you have scheduling flexibility. Schedule them to minimize windshield time.

Ideally, you will sell a cluster of homes in a neighborhood, so your technician can go from house to house to house, accumulating a grand total of five miles or less on the truck between calls. I know, it’s wishful thinking. It took me a long time before I stopped believing in the tooth fairy too.

You can train your dispatcher to look at the call board and try to wrap up the day with a service agreement near the final call for a technician. Work them in. Some homeowners need a lot of advance notice. Others will be able to accommodate you with little notice. Learn your customer’s habits and preferences and note them in their file.

FULFILLING THE PROMISE
Once you sell the service agreement, the burden falls to your technicians to deliver. They have got to do more than some of the technicians on the sting TV shows. They have got to do a good, thorough job. They have got to go to the extra step of waxing equipment, cleaning fixtures, and so on. It’s often these little steps that convinces the homeowner the value is present.

In addition, it’s always a good idea to give the homeowner a written report. Check off the work performed, record operating parameters, and so on. Steven Howard at the ACT Group (http://www.theactgroupinc.com/) has a good service agreement starter kit with such forms for HVAC. Maurice Maio (http://www.maiomarketing.com/) has a kit for plumbing.

Whenever a technician services equipment, he is not merely a technician. He’s in show business. It’s time to demonstrate his abilities, to show off, to dazzle the customer. Given the effort most technicians make, your technician will shine brighter than the newly waxed furnace.

RESOLUTIONS
This year resolve to…

Review service agreement overhead to ensure you are not artificially raising the cost of your service agreement beyond acceptable market prices.

Set a service agreement price that is high enough for homeowners to believe your service agreement holds value, but not so high it prevents sales.

Review your multiple system pricing to ensure it is correctly discounted.

Review your service agreement and maintenance pricing to ensure that maintenance costs the customer less when a service agreement is purchased.

Consider adding an automatic renewal clause, perpetual service agreement, or multi-year offering.

Offer a choice of service agreements.

Develop an apples to apples comparison form for evaluating a service agreement purchase on a service call.

Bundle service agreements with new equipment sales.

Schedule service agreements so drive time is minimized.


Wishing You the Best in the New Year!

Source: Comanche Marketing. Reprinted by permission.
Free subscriptions are available at:
www.serviceroundtable.com
-- click on the Comanche Marketing tab

Copyright © 2003 Matt Michel

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