Over the last 60 years, the term “Service Agreements” has meant conducting maintenance with your existing customers by performing regularly scheduled tune-ups on the HVAC or Plumbing mechanical system(s) in the dwelling.
Today, I would offer we now have an added thought process that, while the basic maintenance is crucial (residential and commercial), what an agreement program is really about is the client experience or relationship it allows us to enjoy, effectively tethering our brand to a home.
Interestingly, 80% of the profits created in our industry are made by 20% of the contractors. After many years of study and evaluation, one of the common themes is the 20% making the profit—you guessed it!—they maintain a thriving, growing and healthy service agreement approach in their residential businesses. It isn’t a coincidence. They simply have a strong enough culture in service agreements that it allows the following benefits to occur inside the company:
1. Improved cash flow – most agreements are pre-paid
2. An ability to schedule shoulder season labor and maintain technicians during off-peak periods
3. A great opportunity to leverage accessory options and sales in non-crisis calls
4. Lead turnovers from equipment that is becoming demographically of age for possible replacement
5. A “sticky” customer base for growth to occur – especially with digital marketing strategies today
6. Ability to pay technicians more for various sales opportunities besides the agreement
7. A great training ground for up-and-coming or inexperienced technicians who need technical knowledge
8. An increase in company value, by offering repeat profitability evidence, from client relationships that do not require the owner to be part of the company to sell.
There are of course other benefits as well, for the company, the employees, and the customer.
So, with all these benefits, why are contractors not more committed to engaging in agreement growth?
There are a couple of reasons:
1. We don’t know how to do it well.
2. We don’t want to do service agreements because it takes a lot of work – and it does!
3. We don’t believe in service agreements.
4. We never had time to do service agreements – just trying to make payroll.
There are no doubt some other reasons, but if you are reading this far, you have to be at least semi-interested in developing or enhancing a service agreement approach in your business.
Let’s take a look at some recommendations for what it takes to create or simply improve a service agreement program!
Many companies have been successful marketing service agreements.
They all share a basic high-level theme. They have a philosophy of what their company does with residential service agreements and they stick to it. It is cultural.
Once they decide they like what they are doing and it works for the company, they maintain their approach and do not change their philosophy of how they go to market.
Example metrics are 1000 agreements per 1 million in annual revenue comprised of replacement, demand service, and the maintenance dollars. A better milestone still is 1500 per 1 million in revenues. Why? Well, when one analyzes the lead turnovers, the add-on sales, the accessory sales, and the replacement of the accessory part such as UV light bulbs, filters and other aspects, the maintenance department begins to create a revenue stream that is formidable and very profitable.
And while we are on the subject of KPI’s (and there are many in the service agreement model), be sure that the maintenance department is absolutely broken away from the service department in terms of financials. We price, operate, market and staff entirely differently than demand service even though a truck or man may be doing both styles of work, it is not the man or truck that keeps our metrics orderly for decisions. It is how we operate, so keep the department independent and focus on the KPI’s for analysis and adjustments.
Types of Residential Agreements
After you decide which of the philosophies you think you want to implement, the next consideration is what kind of products or services will you offer?
1. Precision tune-ups – an inspection & cleaning only - defined by the product
2. 1-year service agreement platform – may consist of several (2 or 3) PTU’s a year
3. 1-year labor only – covers the equipment for labor on repairs for 1 year
4. 1-year parts and labor – full coverage on all parts and labor for 1 year
5. Extended years labor – labor coverage for a specified amount of years
6. Extended years parts and labor – full coverage for specified number of years
The products and services we offer are based on what operational comfort levels we have as a company, and more importantly what we want to accomplish for our marketing plan.
Aligning the service agreement products with your philosophy is a key point. This also applies to how you will price these products/services in the next section.
Pricing Agreements
The pricing of service agreements is not very complicated. In fact, in the EGIA website under the template support section there are a number of Excel pricing template tools for you to use so you can price the service agreement products and determine what the correct pricing structure needs to be.
The pricing of service agreements is also somewhat dependent upon what kind of product selection you choose to offer. The various products will have different components in them such as:
· Direct labor estimated on the agreement
· Travel time
· The wage we pay for this type of work or technician
· Direct labor benefits – the costs associated with burden or benefits for field labor
· Materials – if any are used in the agreement
· Extended warranty coverage costs – if purchased through outside vendor or done in-house
This article is to briefly cover pricing in detail, but there are two basic ideas to consider:
1. Price for profitability – identifying a gross profit target and ensuring you reach this with pricing based on how much time it takes to perform the agreement you are selling – use the price tools
2. Price for maximum uptake or consumption – meaning a lower price makes it easier to sell, especially with a discount from the demand service calls.
Please refer to the service agreement pricing templates at EGIA.org, as you need to be certain your prices are set correctly.
Each form of agreement has a template that allows you to correctly price your agreements.
Marketing Agreements
The marketing of service agreements is a key element in developing a service agreement culture and success in your company.
You need internal marketing and you need external consumer marketing.
It all starts internally with these areas:
1. Convincing your employees this is a good thing – have them build a service agreement
2. Have the technicians then value what each repair is worth – if charged
3. Creating buy-in among your employees – commitment to go forward
4. Appointing a “champion of service agreements” in your company (focus)
5. Training and education of ALL employees – convincing is not education
6. Consider daily training to drive ideas, values and culture, and reinforce performance
7. Developing bonuses and spiffs around the service agreement process
8. Creating operations practices that work to create service agreement sales
9. Developing a process to take advantage of service agreements – leveraging the service agreement and maintenance business we now have.
10. Tracking and measurements for service agreements – goal boards, reports, service technician debriefing and all manner of work with the service team.
The fundamentals are listed above, and they MUST be dealt with! You should craft your company solutions to these fundamental areas and present the approach to the employees.
Here are some additional marketing thoughts for service agreements.
1. Technician Sales Support Materials
What source of presentation materials do you arm your service technicians with to allow them to speak less and sell more? Use materials prepared and packaged for the service technicians to give to homeowners while they are conducting demand service calls with new customers, or those that do not currently own a service agreement. Videos, collateral materials, your website and all manner of possibilities exist to help the technicians explain the value of such an agreement.
2. Technician Friendly Flat Rate System
What system of service pricing do you use? Are you allowing your demand service processes to compliment and work for your company and the technician to sell more service agreements? A properly organized flat rate system will offer the discount for the customer in a manner that makes the service agreement sign-up a no-brainer. See the math in the following pages that details this concept further.
3. Technician Made Easy Marketing Approach
The technician needs to be properly organized with service agreements that are easy to use and with service invoices that work WITH FLAT RATE, or WITH THE TECHNICIAN to allow the sale of service agreements to happen as a natural part of any demand service call.
By creating training, marketing and support materials, a pricing system, and a set of invoices and forms that allow the technician to be 100% comfortable, you have created a powerful platform for the technician to do the work required of him or her!
4. Technician Training Manuals
The technician needs to practice the system. That means a training manual that supports the ideas in #1, #2, and #3 above. We need to practice the sales process with our technicians daily/weekly to keep their customer communication skills sharp!
Technician Role Play (REAL PLAY) is the best way to conduct your training.
These very role-plays are the basis for how a technician is going to learn to offer the following options to homeowners on demand service and/or a maintenance agreement call:
a. Thermostats that are new and sexy
b. Humidifiers/air cleaners
c. IAQ solutions (See the IAQ Model in the EGIA.org resources library) – example- duct cleaning, insulation, whole house remediation
d. IAQ diagnostic tools like Air Advice
e. Air duct modifications
f. New replacement lead opportunity
g. Plumbing or electrical inspections
Thus far we have been focused on the internal marketing of service agreements. By far the best way to create service agreement sales and growth is inside the company. However, there are plenty of potential PTU’s and service agreements that can be obtained through marketing externally to the community who currently may not understand what a value this is for them!
External Marketing
Direct Mail – Direct mail is an excellent method of targeting certain areas and zip codes, and narrowing down your target audience of customers who may be potential prospects for PTU’s and service agreements.
Flyers – Using flyers through services or through the newspaper as free standing inserts is also an excellent method, and is tied to the all-important TIMING of when the weather is breaking.
PTU Door Hangers – It’s always a nice touch to drop letters or postcards inside door hangers with a premium gift like a magnet promoting tune-ups or service agreements.
Coupons for Precision Tune-ups on Your Invoice – These are part of the invoice. The technician tears the perforated letter off after the service call, and the letter contains coupons for service, service agreements, and PTU’s.
Free PTU’s for Friends and Family – Granting a free PTU creates trial, not necessarily repetition.
A FREE service agreement on each sale you make in residential replacement market
Operationally here are some ideas for you to consider in this model:
1. The technician creates a price for the demand service call. A discounted version of this price appears. This savings amount is calculated. Depending on the actual service performed that day, it could be any amount. The strategy is to promote to the homeowner that this amount can be saved if they invest in a basic service agreement. See the math below in the chart. The diagnostic fee is NOT waived, as it is how we pay for our travel time to get there, and the actual time it takes to perform a quality diagnostic on the system. These costs are now part of our demand service call. However, we will discount the demand service total costs by some discount percentage (20% in this example) from $400 to $340 to make the homeowner economically interested in a service agreement today. If they do sign-up, we will go right back to the equipment and perform on-site. This will be their 1st of the three PTU’s will perform.
The Math for Service Agreement Sales Strategy
Standard – No Process Process
$500 Invoice $500 Invoice – Discount 20% $400.
$89 Diagnostic $49 Diagnostic $49.
$589 Total $449
No PSA/NO PTU Service Agreement $169
Total $618
For an additional $29, the homeowner gets 2-3 PTU’s 1st year
Plus in our case a lifetime repair guarantee and no overtime
2. The 1st year use 3 precision tune-ups instead of two – it costs more, but it places the PTU specialist or service technician (who is now trained to educate and discuss options with customers) in the home one additional time the 1st year. Only on a slow-season call.
3. The second year and beyond, we go back to 2 PTU’s each year.
4. Have your technicians design the proper time and tasks for the PTU. This creates a quality product and the buy-in necessary for the answer to the question – is it a good value? – for the technician’s response to be a believable YES IT IS!
5. Create a class of PTU specialists once your company has enough service agreements. This becomes a feeder position for future service technicians.
6. Operationally, sell your service agreements through your demand service as opposed to marketing through spring and fall. Some direct marketing we discussed earlier will follow the spring and the fall weather patterns in your market area, but the vast majority of service agreements can and will be sold during the period of WHEN THE TECHNICIAN IS IN THE HOME! Consider this opportunity. It creates the need for you to plan operational labor hours around the newfound need to satisfy your new service agreement customers. That is why a PTU specialist is a good operational tactic.
7. Renewal procedures are simple. The PTU specialist or technician on the call for the last PTU check-up renews the agreement for the next year. No letters, no postcards, just a simple process. A spiff is paid for the renewal. In addition, it is much harder for a customer to attach value to a direct mail letter or postcard than it is to a real life technician who has done a great job for the customer!
8. These agreements should be collected up front, or what we call “full pay,” so you have the money up front prior to completing the work. Monthly debit is fine but beware of the administrative work it creates later. We offer this but do not promote actively the option, it is available if requested by homeowners to ease the sale.
Financial Metrics:
Financially, service agreements are one of the most dynamic and healthy ways to improve your profitability.
A few financial key performance measures to keep in mind:
1. Each service agreement should produce approximately $650 in recurring replacement revenues for each agreement from now on as an average, excluding agreement price.
2. The minimum target for service agreements is 1000 per 1 million in replacement, service, maintenance and IAQ revenues. The best target is 1500 agreements per million. These are full pay (up front pay) agreements.
3. 85% or better renewal rate
4. $80,000 revenue per maintenance truck minimum – pure maintenance
5. Maintain labor as a percent to maintenance sales at 34% or less (non-burdened)
6. Overall gross margin percentage between 48-50% including ALL parts/labor sales
7. Service & maintenance together as a percentage of total company sales should be between 25-30%
8. A replacement sales or accessory lead on 1 of every 8 maintenance calls
9. Lead closure rate of 80% or greater on the maintenance generated leads with a gross margin of between 42-45% on those sales closed from the maintenance leads
10. Materials and parts at 3-6% of maintenance sales
Final Thoughts:
1. Reaching a target of 1000 or 1500 maintenance agreements per million in residential revenues allows your company to more effectively train the next generation service staff through the maintenance PTU specialists. This becomes the feeder for your service organization. This also has the effect of increasing your productivity, which directly relates to your profits at the end of the year!
2. Is it possible, if we have a trained force of service personnel, that we may actually generate a high-margin replacement sale that does not have a competing bid? 80% closure rates on these leads from maintenance is only rivaled by referrals in terms of lead tracking results, and further these margins are among the highest due to customers who WANT us to talk to them about their needs and listen to our technicians more favorably than a typical salesperson.
3. As you develop your service agreement products, remember to price them appropriately against your costs, and any liabilities you decide to incur. When you decide to extend your services to labor coverage, and/or parts and labor (full coverage) coverage, you begin to incur more risk. That is okay, as a business you simply need to identify the risk and properly price the coverage for that risk you assume. Many customers like the idea of extended coverage for their equipment. You just need to be sure your price reflects whatever risk you assume. Your ultimate goal in any agreement, is to get the future replacement sale, and maintain a client relationship.
There is much we didn’t have an opportunity to cover here about service agreements, which are truly your best marketing strategy to improve company health and profitability. To learn more, download a free package of training resources on the subject – including an online course, sample documents and how-tos, and an industry research report – at EGIA.org/CBS-Serviceagreements.
Gary Elekes is the president of EPC Training, co-founder of iMarket Solutions, an HVAC and plumbing contractor, and a recognized expert in lead generation and contracting with more than 30 years of experience in the trades. He is also a founding faculty member of EGIA Contractor University, which provides contractors with the training, tools and resources to build the businesses and lives of their dreams. For additional information, visit egia.org/university.