The most successful, profitable, longest-standing, customer-oriented, best-reviewed, and highest-rated residential HVAC companies have a bunch of service agreement customers. This committed captive audience yields guaranteed maintenance (and repair) visits along with the potential of ancillary product and service purchases and future replacement equipment sales.

The key performance indicator (KPI) for a healthy company is 1000 agreements per million dollars of residential revenue. A vibrant and thriving company has 1500 agreements per million dollars of revenue. Another KPI is for the company to have 50% or more of their customers secured on service agreements. These KPIs are great, but also limiting in their scope and potential opportunity.

The problem I see with most companies is that their service agreement program offers a singular agreement. A choice of one is a choice of none. We need to offer customers options, not ultimatums (by definition a final proposition, especially one whose rejection will end negotiations and cause a resort to force or other direct action, often in the opposite desired direction).

Think about this way: If you were a car dealer and you ask people who are in the market for a car, “Would you like to buy car from us?,” many people would say no. But what if you ask, “Of the various cars we offer, which model is most appealing to you: the sports coupe, the sedan or the hatchback?” Now the customer has choices or options and a couple things to say no to. Some customers will still say no to buying a car at all from me now (they may come back later), but many more will select one of the choices offered. In the second scenario, the customer must state they don’t want anything that was offered (a 75% chance of earning the customer’s business – 3 choices vs. no), whereas in the first scenario the customer can say ‘yes’ or ‘no’ – a 50% chance based on math, but less than a 25% chance based on buyer psychology and statistics when the only choices offered are yes and no, and in order to have options the customer has to consider other dealers.

We all know the more active customers (someone who has paid for a product or service in the last 36 months) you have, the greater the revenue and profit generation potential. Service agreement customers meet this criteria since they pay for their agreement each year. However, if you only offer one level of agreement to lock in customers, the odds of you locking in the maximum amount of people are less than if you were to offer people a series of choices to become an agreement customer.

This is why we recommend that our clients offer multiple options when it comes to service agreements. Offering multiple levels of service allows customers to choose the level of access, service and engagement that makes sense to them, and some things to which they can say no.

People pay for access, service, and value-added benefits on a spectrum of DIY to “done cheap” to “best value” to “done for me,” “done right” and “one less thing I have to worry about.” People will pay a premium for pain- and problems-avoided or solved, life impacts, and extraordinary and exclusive experiences.

Vary the level of access, service, and benefits from “service at our leisure, not at your convenience” to “service at your convenience, not our leisure.” All customers get a world-class service and customer care experience, company newsletter, money and energy saving tips, exclusive offers, and access to special events.

Example of a tiered benefit and access agreement program (dollar amounts and percentages are for demonstration purposes only):

Pals:

FREE to join for people providing contact information (and who like us on Facebook)

• Dedicated live-person 24/7 customer care line
• Standard trip and diagnostic fee
• 5% off twice annual precision tune-ups (optional)
• 5% off repairs
• 3% off equipment
• Standard repair warranty
• Priority 2 service access
• No accumulative spend accrual account with point banking from year to year
• 1 point per $2 spent Accumulative spend accrual account with point banking from year to year

Peeps:

$5/mo.

• Inspect all home mechanicals
• Dedicated elite live person 24/7 customer care line
• $20 discount off trip and diagnostic fee
• 10% off twice annual precision tune-ups
• 10% off repairs
• 5% off equipment
• Tier 2 Extended repair warranty
• Priority 1 service access
• 1 point per $1 spent Accumulative spend accrual account with point banking from year to year

Patrons:

$16.50/mo.

• Inspect all home mechanicals
• HVAC tune-ups with NCI protocols and iManifold testing
• Dedicated elite live person 24/7 customer care line
• Chat with an eExpert for FREE on minor concerns or D.I.Y.
• $40 discount off trip and diagnostic fee
• 15% off twice annual precision tune-ups
• 15% off repairs
• No-breakdown guarantee
• Tier 1 Extended repair warranty
• 7% off equipment
• Priority 1 service access
• 2 points per $1 spent Accumulative spend accrual account with point banking from year to year

Partners:

$24.50/mo.

• Inspect all home mechanicals
• HVAC tune-ups with NCI protocols and iManifold testing
• Water heater tune-up
• Smart home - remote thermostat, access and control
• Dedicated elite live person 24/7 customer care line
• Chat with an expert for FREE on minor concerns or D.I.Y.
• $0 trip and diagnostic fee
• 15% off twice annual precision tune-ups
• 15% off repairs
• No-breakdown guarantee
• Tier 1 Extended repair warranty
• 10% off equipment
• Priority 1 service access
• 2 points per $1 spent Accumulative spend accrual account with point banking from year to year

Power Players:

$36.50/mo.

• Inspect all home mechanicals
• HVAC tune-ups with NCI protocols and iManifold system performance testing
• Water heater tune-up
• Smart home technology - remote thermostat, keyless door lock, doorbell camera, access and control
• Dedicated elite live person 24/7 customer care line
• Chat with an expert for FREE on minor concern or D.I.Y.
• $0 trip and diagnostic fee
• 20% off twice annual precision tune-ups
• 20% off repairs
• No-breakdown guarantee
• Tier 1 Extended repair warranty
• 10% off equipment
• Priority 1 service access
• 3 points per $1 spent Accumulative spend accrual account with point banking from year to year

Creating more opportunities for connection to your company is more sustainable with less of a marketing expense to create future marketing and purchase opportunities for other services. This model will make you more sticky to more customers and help your build your ecosystem.

Service agreements are the lifeblood of a residential or commercial contracting company. They do far more than simply fill in the slow times with tune-ups. Service agreements dramatically increase the value of your business. Service agreements create recurring revenue which is what most potential buyers are interested in. If you want millions of dollars for your company, you need to find someone who has millions of dollars lying around. Sophisticated buyers do not want your vehicles or equipment. They are millionaires. They can go buy those things without your help. What they are seeking to do is acquire companies that have assets that they cannot easily just go out and buy themselves. What they want is recurring revenue. That’s what service agreements offer you.

Recurring revenue is the portion of your company's revenue that is expected to continue in the future. Unlike one-off sales like service calls and replacements, these revenues are more predictable, relatively stable and can be counted on to occur at regular intervals going forward with a relatively high degree of certainty.

Service agreements are sold with the promise of a certain level of service for a certain price. Today, service agreements are typically sold with a monthly fee that goes on in perpetuity or until canceled by the buyer. Annual fees and annual renewal notices are becoming a thing of the past. Today, buyers are used to pulling out a credit card, signing up for a monthly service, and forgetting about it.

Service agreements increase your recurring revenue. Buyers will pay more for recurring revenue than they will for one-off revenue.

Marketing and Selling the Service Agreement (SA)

You should advertise a “clean and check” using whatever method has worked for you in the past. Give this service a more appropriate name such as “high-performance tune-up” or “precision tune-up.” Establish a “loss leader” price such as $98.50. After performing the tune-up, the technician will work to convert a single tune-up sale to a service agreement sale that includes three visits. Here is how the service tech might explain it:

“Today’s high-performance tune-up will cost ninety-eight dollars and fifty cents. If you were to invest just two seventy in a service agreement, you would receive three high-performance tune-ups, 15% off future repairs, a life-time warranty on repairs, and top priority dispatching. Best of all, I can make today’s high-performance tune-up the first one under your agreement. That will keep you from having to pay the ninety-eight dollars and fifty cents for today’s work.”

Today’s visit will be considered the first visit with two more visits roughly six months apart. The idea is to get your technician back in their home - as close to the expiration date as possible and renew the SA to the standard two-visit type. You should be able to convert 60% of your tune-ups into an SA sale.

After performing a demand service call, the technician will offer the client an opportunity to invest in a SA and still get the 15% discount. Here is what the tech might say:

“Your total investment for today’s repair is four eighty-nine sixty-two. Do you own one of our High-Performance Service Agreements? You don’t! Okay. I just wanted to see if you qualified for the seventy-three dollars and forty-four cent discount. If you would like to invest just one seventy-eight in a service agreement, I can go ahead and give you the seventy-three dollars and forty-four cent discount as if you already owned one. You will also receive two high-performance tune-ups, a 15% discount on any future repairs, a life-time warranty on repairs, and top priority dispatching. Would you like to invest in our High-Performance Service Agreement today?”

Your Choice of Words is Important

When you want to emphasize a dollar amount, spell out the dollar amounts with words and not numbers. Always say “dollars” and include the words “hundred” or “thousand.” Use this strategy when speaking about discounts. If you want to downplay a dollar amount, say the numbers and avoid the words dollars, hundred, or thousand. Also notice when and how I use the word “pay” versus “investment”.

Service Agreements are Great for Everyone

1. Service agreements are good for your customers. They can provide energy savings, reduce breakdowns, and offer peace of mind.
2. Service agreements are excellent for your employees. They provide a work routine for service departments when business seasonality slows the labor demand.
3. Service agreements provide a proven training ground for new or prospective service technicians.
4. Service agreements help you to lock in your existing customer base.
5. Service agreements allow technicians an opportunity to sell accessories and create equipment replacement leads.
6. Service agreements build recurring revenue, making your company more valuable.

SA Sales Goals

As a rule, techs should be able to convert 25% to 50% of their demand service calls into an SA sale. If your company does not have dedicated maintenance technicians, you want to have as many service agreements as it takes to fill in your slow time and keep your service technicians busy. You should have approximately 250 SAs per one million of service sales or about 250 SAs per billable service employee. Once you grow beyond those numbers, you can build a dedicated maintenance staff.

If your company does have dedicated maintenance technicians, your goal is 1000 SAs per one million of residential sales (service/maintenance/accessories) with a best-in-class target of 1500.

Suggestions for Implementation

1. Owners and managers must be committed to this process.
2. Someone must own this project. Assign a champion to oversee every aspect of it.
3. Be sure you price everything properly. You need departmentalized income statements and you need to know your breakeven on labor. Don’t use multipliers or rules of thumb. You must get this part right.
4. Set goals for SA sales and post the progress on a scoreboard for everyone to see.
5. Create an SA culture. Train technicians on selling SAs. Be sure they believe in your SA program.
6. Pay spiffs to technicians for selling them and pay your office staff a bonus when monthly SA sales goals are met. I recommend paying techs $15 for each complete system and $5 to be split with the office staff.

One day, your company will either close or transfer ownership. Whether you are selling to an outsider or handing your business over to a family member, a well-designed service agreement program is the best way to assure that you create the most value for you and the next owner of your company.

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:

1. Thermostats that are new and sexy
2. Humidifiers/air cleaners
3. IAQ solutions (See the IAQ Model in the egia.org resources library) – example- duct cleaning, insulation, whole house remediation
4. IAQ diagnostic tools like Air Advice
5. Air duct modifications
6. New replacement lead opportunity
7. 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.
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.

Blood… A healthy living body cannot operate without blood. If you look carefully at the business of contracting, the service agreement acts as the "blood" in our customer retention and marketing strategy by forming deep, lasting customer relationships.

Let's define the "service agreement" as a paid in advance (yearly/monthly) agreement to provide future work. This can be a precision tune-up (PTU), or possibly some form of extra insurance, such as parts and labor full coverage. We will define the various products and options a bit later as there are many variables and paths to success. The agreement, the connection, the brand promise, allows us to stay in touch with our clients, build fences around them, and get paid while doing so. The agreement also connects us to the future replacement opportunity.

The “service agreement” represents the single greatest marketing opportunity in contracting, and yet, some contractors have not bought-in or fully adopted the strategy, failing to see the connections between service agreements and profitability and maintaining positive cash flow during shoulder seasons.

To quote the great Ron Smith in his book, HVAC Spells Wealth, “The road to prosperity is paved with Service Agreements.” Why does Ron state this? Simple, it’s accurate, as service agreements create options for us as contractors. The puzzling aspect is that service agreements have been around since the 1950's, yet new generations of leaders still have not adopted them as a strategy for sustained success for fear of labor usage.

The most important premise is service agreements are not just a technical product, but instead the main bridge in our marketing strategy to BUILD relationships with the clients. Existing clients spend 67% more money on products and services due to the trust created in that existing relationship. The service agreement provides a company the opportunity to build client experiences that are positive in a non-crisis situation instead of a volatile demand service call where the emotional wellbeing of the client is under serious stress.

We were fortunate in the 1990’s to be able to study the top 45 companies in the consolidation model to determine why they were producing over 20% pretax operating profitability (after paying a general manager wage). And the single key performance indicator that emerged? All 45 companies had over 1000 service agreements per one-million in sales (demand service + maintenance + replacement), and the top 20 of those 45, with closer to 25% earnings, were at 1500 agreements per million residentially.

Clearly, this high-performing group had learned to sell agreements, but more to the point, they had learned to communicate with their clients -- discussing accessories, replacement equipment seeds were planted, while general service recommendations of a suggested repair were all trusted at a higher level due to the relationship built over time by the service agreement. Trust is the intersection of credibility and likeability, and the engine driving that trust is the service agreement.

This is the cornerstone of what makes the service agreement so impactful, since we provide a great value to the client, and at the same time have a chance to communicate with them about our company store.

Philosophies:

Many companies have been successful marketing service agreements. They all share a basic common high-level theme: They have a philosophy, a true culture, to market and sell service agreements, and they measure and incent for performance. It’s a part of their DNA.

It becomes part of the daily metrics, the ritual, the reporting and is never far away from a value structure of customer experience.

Various Types of Service Agreements:

The next consideration is what kind of products or services will you offer?

In the residential markets, examples are:

1. Safety Check – the most basic: a safety inspection, typically limited to a few checks
2. Precision Tune-Ups – a specified cleaning only: defined by tasks in the tune-up
3. 1-Year Service Agreement Platform – may consist of multiple tune-ups in a year/warranty
4. A Multi-Year Agreement – 5, 7, 10 years: some states have laws on prepayment
5. 1-Year Labor Only – covers the equipment for labor on repairs for 1 year, plus the tune-ups
6. 1-Year Parts and Labor – full coverage on all parts and labor for 1 year, plus the tune-ups
7. Extended Years Labor – labor coverage for a specified amount of years: 3, 5, 7, 10?
8. Extended Years Parts and Labor – full coverage full specified number of years: 3, 5, 7, 10?

In the commercial markets, examples are:

1. Basic Maintenance Agreement to Cover a Fixed Client Budget – do what they can afford
2. A Recommended Maintenance Schedule – priced to do what is recommended by you as a vendor; also clean up recommended repairs up-front
3. Full Guaranteed Coverage – a full parts and labor coverage agreement on all equipment, once the recommended repairs are completed and paid, usually for 1 year then renewed. All repairs completed and inspection when unit replacement schedule is issued. Full coverage then granted.

All these products can be adapted, and these are simply some of the many options of what the industry has offered. Aligning the pricing, selling strategy, and marketing comes next and needs to be communicated to your company teams.

Strategies in Selling/Marketing Service Agreements:

The marketing and pricing of service agreements is a key element in developing a service agreement culture and success in your company.

You need internal marketing to train your team and staff. It starts internally with these areas as examples:

1. Defining benefits of your service agreement club
2. Creating buy-in among your employees – commitment to go forward
3. Appointing a “Champion of Service Agreements” in your company (Focus)
4. Training and education of ALL employees – convincing is not education
5. Developing bonuses and spiffs around the service agreement process
6. Creating operating practices that work to create service agreement sales
7. Developing a process to take advantage of service agreements – leveraging the service agreement and maintenance business we now have.
8. Tracking and measurements for service agreements – goal boards, reports, service technician debriefing and all manner of work with the service team.
9. Set up a pricing strategy that supports your company goals for club memberships; that could be a lower price and higher volume of agreements, or a higher price to limit consumption.

The fundamentals are listed above, and they MUST be executed well. You should craft your company service agreement club solutions in 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 sales presentation materials do you arm your service technicians with to allow them to speak less and sell more?
2. Technician-Friendly Flat Rate System Tied to A Club Strategy
   What system of service pricing do you use? Are you allowing your demand service processes to complement and work for your company and the technician to sell more service agreements?
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.
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. Humidifiers/Air Cleaners
1. IAQ Solutions (See: the IAQ Model on egia.org) – example- duct cleaning
2. IAQ Diagnostic Tools and Questions
3. Air Duct Modifications
4. New Replacement Lead Opportunity and Questions

External Marketing Ideas

• Website Pages – descriptions and live chat function
• Website Video – a brand promise as to why Service Agreements make good financial sense
• U-Tube Videos – Do it Yourself Guide with you as a Back up
• Social Media – Facebook and Instagram
• Twitter – Live and regular tweets tied to Social Media Outlets on Maintenance
• Consumer Demo Video – on an iPad
• Direct Mail Postcards, Flyers
• PTU Door Hangers
• Coupons for Precision Tune-ups on your invoice
• Free PTU’s for Friends and Family
• Call Center- Outbound PTU Marketing – Set Tune-Ups
• A FREE Service Agreement Tune-up at your Discretion
• And let’s not forget our own lifetime repair guarantee if you maintain a club membership on that individual repair, a definite marketing opportunity internally and externally.

Financial Success:

Financially, service agreements are one of the most dynamic and healthy ways to improve your profitability and cash flow in the shoulder seasons. We can, for example, sell units and accessories to our club members in targeted, over-10-years-old agreements with promotions.

A few financial key performance measures to keep in mind:

1. Each service agreement should produce no less than $650 in recurring revenues from now on as an average – excludes agreement price. Just new sales.
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 pay (up front) agreements.
3. 85% or better renewal rate
4. $80,000 revenue per maintenance truck minimum – pure maintenance. Far more when sales are included.
5. Maintain labor as a percent of maintenance sales at 34% or less (non-burdened)
6. Overall gross margin percentage between 45-50% including ALL parts/labor sales
7. Service & maintenance together as a % of total company sales should be between 25-30%
8. A replacement sales or accessory lead on 1 of every 5 maintenance calls
9. Lead closure rate of 75% 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 & parts at 6-8% of maintenance sales

In a brief summary such as this, the financial metrics can be hard to detail, but certainly these are high level KPI’s that we know are very attainable and yield the best results for replacements, accessory sales, and IAQ opportunities including cross-marketing other verticals.

In the end, the Service Agreement is our best approach to marketing, creating better retention, more replacement leads, and an opportunity to sell and make money in shoulder seasons. Adopt them into your DNA, make it cultural, and begin focusing on the club agreement process. Your company will be more valuable to you – and to a buyer, if you ever decide to sell.

Don't let the title fool you. Service agreements are one of the most important things your business can get involved in. In fact, I would go so far as to say that your company should create a culture that is built around service agreements and make selling them your main purpose. Why? Because selling service agreements leads to everything else you want from your business.

Service agreements (SAs) are critical to increasing the value of your company, increasing cash-flow, improving profitability and decreasing employee turnover. SAs increase the value of your business because potential buyers usually value them over anything else. SAs improve cash-flow because you get paid for services you have not yet provided. SAs improve profitability by increasing service revenue, increasing accessory sales, and by creating high quality replacement sales opportunities. SAs decrease employee turnover because they allow managers to keep their employees busy during slower times of the year.

Service agreements can also cause your company serious problems when not properly implemented.

Here are top three ways a company loses money with service agreements:

1. They send a "parts changer:" A parts changer replaces parts only when there is a complete failure. This is bad for the company and bad for the customer. The person you need to send thinks more like an aircraft mechanic. They look for abnormal wear and address issues before they result in a complete failure. This person will sell legitimate repair work when the parts changer won't.
2. They offer discounts they cannot afford: If your service department generates a net profit of say 10 percent and you offer your SA clients a 15 percent discount, you are losing 5 percent of every transaction. Before you implement a SA program, be sure you have calculated your true net profit for service work. You accomplish this by printing out a departmentalized income statement for the service department. Most accounting software will not breakout your overhead by department. If that is the case, you will need to do it manually. You must know what your net profit is, so that you do not create losses by offering discounts you cannot afford.
3. They price their labor too low: It is vital that you know how much it costs to provide labor. Your service agreements mostly consist of labor and they should generate more billable repair work. It is vital that you price your labor correctly before you begin selling SAs.

Loss Leaders and Pricing

A "loss leader" is a product that retailers sell at or below cost for marketing purposes. An example might be a case of pop. Retailers are willing to sell pop below cost to get you in the store in hopes of selling you additional products. Service agreement sales are a marketing strategy. Therefore, they can be thought of as loss leaders. You are looking for a price that is low enough to make investing in a SA an absolute "no brainer," but high enough that you don't dig yourself a financial hole too deep to get out of. This might mean that your service agreements are priced close to your break-even — that's fine. The price of your SA should be slightly lower than what you charge separately for the services it includes. Let's say you charge $98 for a tune-up. A two visit SA should sell for about $186 while a three visit might be priced at $274.

Marketing and Selling the Service Agreement

You should advertise a "clean and check" using whatever method has worked for you in the past. Give this service a more appropriate name such as "high performance tune-up" or "precision tune-up." Establish a "loss leader" price such as $99. After performing the tune-up, the technician will work to convert a single tune-up sale to a service agreement sale that includes three visits.

Here is how the service tech might explain it: "Today's high performance tune-up will cost $90. If you were to invest two fifty-seven ($257) in a service agreement, you would receive three high performance tune-ups, a 15 percent discount on any approved repairs and priority dispatching. Best of all, I can make today's high performance tune-up the first one under your agreement."

Today's visit will be considered the first visit with two more visits roughly six months apart. The idea is to get your technician back in their home — as close to the expiration date as possible and renew the SA to the standard two-visit type. You should be able to convert 60 percent of your tune-ups into a SA sale.

After performing a demand service call, the technician will offer the client an opportunity to invest in a SA and still get the 15 percent discount.

Here is what the tech might say: "Your total investment for today's repair is four eighty-nine sixty-two is four eighty-nine sixty-two ($489.62). Do you own one of our High Performance Service Agreements? You don't! Okay. I just wanted to see if you qualified for the seventy-three dollars and forty-four cent ($37.44) discount. If you would like to invest just one seventy-eight ($178) in a service agreement, I can go ahead and give you the seventy-three dollars and forty-four cent ($73.44) discount as if you already owned one. In addition, you will receive two high performance tune-ups, a 15 percent discount on any future repairs, and priority dispatching. Would you like to invest in our High Performance Service Agreement today?"

Be sure that your technicians call out each number when saying the discount. As a rule, techs should be able to convert 25 percent to 50 percent of their demand service calls into a SA sale.

SA Sales Goals

If your company does not have dedicated maintenance technicians, you want to have as many service agreements as it takes to fill in your slow time and keep your service technicians busy. You should have approximately 250 SAs per $1 million of service sales or about 250 SAs per billable service employee. Once you grow beyond those numbers, you can build a dedicated maintenance staff.

If your company does have dedicated maintenance technicians, your goal is 1,000 SAs per $1 million of residential sales (service/maintenance/accessories) with a best in class target of 1,500.

Suggestions for Implementation

1. Owners and managers have to be committed to this process.
2. Someone has to own this project. Assign a champion to oversee every aspect of it.
3. Be sure you price everything properly. You need departmentalized income statements and you need to know your breakeven on labor. Don't use multipliers or rules of thumb. You have to get this part right.
4. Set goals for SA sales and post the progress on a score board for everyone to see.
5. Create a SA culture. Train technicians on selling SAs. Be sure they believe in your SA program.
6. Pay spiffs to technicians for selling them and pay your office staff a bonus when monthly SA sales goals are met.

While there is a lot more that can and should be covered here, you now have the basics for implementing a successful and profitable SA program.