Making Sense of Service Agreements

For over 30 years in the HVAC and plumbing industries, we have all been raised with the mind-set that maintenance agreements are a requirement of having a successful, profitable business. And generally, with varying degrees of success, companies have dutifully, if not always enthusiastically embraced maintenance agreements.  

This in-spite of knowing that every time a service technician or plumber runs a maintenance call, the cost is a minimum of $100. That cost comes from putting that tech or plumber, with his knowledge, her truck full of expensive parts with a full tank of gas, insurance and expensive wrap in front of the customer. And depending on how the accounting is done or whether the technician tries to offer an accessory, less than 10% of the time is additional revenue generated from the maintenance call.

Certainly, maintenance agreements can make sense for a profitable contracting business with a caveat: maintenance agreements are only performed in the shoulder-seasons when demand calls are not coming in, allowing techs to be on jobs. (In other words, the maintenance agreements are covering the salary of the tech and some of the overhead in the slow seasons.)  But I often hear owners complain about maintenance calls being pushed into the busy times, meaning the company is missing the opportunity to bring in new customers who may need new equipment.

Consider maintenance agreements from the perspective of the homeowner. Recently, someone used the analogy for Mrs. Homeowner that maintenance agreements are like having your teeth cleaned every 6 months. It is a great analogy. But who really likes to have her teeth cleaned? It can be painful; it is inconvenient; it costs money; and I am not convinced my teeth really need it. These are often the same thoughts many homeowners have about maintenance agreements on their HVAC equipment and water heaters.

So now, back to the issue of business model development and business growth. It’s a business fact that revenue growth comes from doing installations, not service and maintenance. Nearly 80% of the revenue a company enjoys from a new customer comes in the first 12 months.  
Do not think that I am saying that service and even maintenance agreements aren’t important. Service and maintenance agreements assist in building brand, customer relationships, referrals and trust. But service also consumes a lot of labor. And there is the business growth issue. Is it time to look at service labor management and, therefore, maintenance agreements differently?

There has always been the discussion of what is the “correct” ratio of installation revenue to service revenue. And the age-old proven, profitable ratio has been that 75 percent to 80 percent of a company’s revenue should come from installation. Couple that with the difficulty of finding  knowledgeable, skilled, motivated technicians capable of doing service, and it should cause us all to do some out-of-the-box thinking about service and maintenance agreements.

Looking into the future, perhaps it’s time to evaluate how maintenance agreement programs are used in your business mix. Is one maintenance call a year sufficient?  Could a new system operate efficiently and properly for the first three years after installation without a maintenance check?  (Seems to happen all the time. Just ask five homeowners in your neighborhood who do not know you or what you do.)

Could you stay in touch with the customer by mailing him a new filter once a month or every two months?  Could you send a reminder text or e-mail to the customer about changing the filter? Can you mail a company newsletter every quarter?  Should you pursue monitoring technology that notifies your company and the customer that the system needs to be checked? Could the company make happy calls to the customer to remind her to wash off the outdoor condensing unit and change the filter? Maybe we could have the customer pay us a $100 fee per year for 24-hour service and 10% discount on future repairs. Or, perhaps we could have them pay us $100 a year that would be held in an accrual account to be applied to a new system when the time is right.

The question really isn’t should you offer maintenance agreements. Instead, you should ask, Is there a new way to offer maintenance agreements that makes more sense for my company and my customer?