by Matt Michel, guest editorial

"What sold me on service agreements,” said Tempo Air’s Steve Saunders, “was another contractor’s complaint about them.”

“Why did a contractor complaining about service agreements persuade you to start a service agreement program?” I asked.

Saunders smiled, “He told me that they were a lot of trouble and he lost money on them. Then, he said the only reason he kept offering them at all was that one out of every seven or eight resulted in a furnace change-out. That got my attention.”

Ah, Saunders has it figured out. Service agreements lead to sales.

As service agreement pioneer Ron Smith says, “Every service agreement is a future change-out.”

According to HVAC legend Jackie Rainwater, “Service technicians who have the proper training and the proper incentives generate quality replacement and/or IAQ leads on 12 to 15% of all maintenance calls. A large percentage of these leads will come in mild weather, just when the company needs them the most.”

Rainwater continues, “Tech-generated replacement leads will result in many proactive replacement sales, which are made without the customer getting a ‘bid from Bubba.’”

Smith notes that contractors convert more than eight or nine out of 10 leads from service agreement customers, into replacement sales, compared to only three to four out of 10 leads coming over the transom.

Let’s see . . . Steve Saunders’ company is Contracting Business’ 2003 Residential Contractor of the Year. Ron Smith and Jackie Rainwater are both members of Contracting Business’ Hall of Fame. These are three highly successful current or former contractors. They’re all huge proponents of service agreements. Hmmm . . . Do you think there’s a connection?

Service agreements are a no-brainer. Aside from sales, they generate work during slow times, so you can employ technicians year-round.

Service agreements retain customers who might otherwise forget about you. Don’t laugh. According to Decision Analyst, Inc., one homeowner in five forgets your name within a year of buying a new system from you. That’s the customer’s memory of a contractor from whom he has purchased a new system, costing thousands of dollars. What are the odds a customer will remember your name after a service call?

It costs more than $200 to attract a customer in this business. At that price, only a fool would discard one casually. Yet, without a service agreement program that’s exactly what you’re doing.

You spend to recruit the customer once. Unless he or she becomes a service agreement customer, you have to spend to recruit him or her all over again. That’s called customer churn. Listen, if you won’t invest in a service agreement program, buy a few shares of stock in an antacid company. That way, you can feel better about buying so much stomach medication once you realize how much customer churn is costing you.

As Rainwater points out, service agreements do not need to be a profit center. They are a customer retention program. Yet, I would argue that service agreements are profitable. They are profitable on a marginal cost/marginal revenue basis. They don’t add much to the overhead of a service department and help cover the nut. Future sales aside, you drop more to the bottom line with a service agreement program than without one.

Moreover, service agreements aren’t just good for you, they’re good for the customer. Empirical research shows that annual service saves energy, restores capacity, extends operating life, and untimely prevents breakdowns. The service agreement is the most affordable way for a homeowner to buy annual service.

Why offer service agreements? There are lots of reasons. Service agreements are:

  1. Good for the customer
  2. Profitable on a marginal cost basis
  3. A customer retention program
  4. The means to offering year-round employment for your techs
  5. A way to improve your sales efficiency
  6. A path to reduce your marketing costs over time.

Those are all good reasons and each is reason enough to start a program. However, the most compelling reason was, is, and always will be sales. Why offer service agreements?

It’s the sales, stupid!

Matt Michel, a member of Contracting Business’ Editorial Advisory Board, is CEO & president of the Service Roundtable (www.serviceroundtable.com), an Internet based contractor group offering contractors a bundle of sales, marketing, and business support tools at an affordable price. Matt can be reached by email at matt.michel@serviceroundtable.com.