Increasing Maintenance Agreement Sales

Industry average: $400 per agreement, in value of company

Hopefully by now you are fully aware that maintenance agreements are the foundation stone for profitable growth in the 21st century. Maintenance agreements tie the customer to your company for life and nearly guarantee you will be called when repairs are needed during the year. Maintenance agreements also mean that customers will almost always call your company when it's time to replace or upgrade their equipment. Last but not least, maintenance agreements are the basis for the sale of your company. A good industry average is that each maintenance agreement is worth $400 when it comes time to sell your company. That means if you have 1,000 active maintenance agreement customers, those agreements are worth $400,000 when it comes time to sell the company.

With all that said, our attention needs to shift to new and unique ways to sell additional maintenance agreements. We want to add as much value as possible to our agreements. The more value, the more likely the customer is to purchase an agreement. The standard offerings are annual or semi-annual maintenance of the equipment, 10% to 20% discount on labor and/or materials if additional repairs are needed during the year and, finally, priority service. If the maintenance agreement customer calls for service, they are moved to the top of the repair schedule with any other maintenance agreement customer. These are the basic offerings most companies provide.

Now it’s time to provide more value! What I am about to share will only work if you are on flat-rate pricing (if you are not…you should be) and if you currently charge a diagnostic, or "show up" fee. If these two things are true, what I am going to suggest really will increase your maintenance agreement sales. Before I share, though, we need to go back to the foundation of proper labor pricing.

The process of setting accurate hourly rates, in a nutshell, is this:

(Cost of doing business – Gross profit on sale of parts and equipment – diagnostic income) divided by billable hours

Add profit. Take the break-even rate and divide it by .85 if you want a 15% profit and that will tell you what rate needs to be charged to cover all your costs of doing business while generating a 15% net profit

  • Determine your real cost of doing business, from a cash flow perspective.
  • Determine how many “billable” hours you expect to charge the customer over the next 12 months.
  • Determine how much gross profit you will earn on the sale of parts and equipment.
  • Estimate your annual diagnostic income for the year.
  • Determine your break even rate.

You just covered a full day labor pricing seminar/workshop in less than 2 minutes! There is obviously more to setting totally accurate rates than what I just shared, but you now know all you need to know for me to make the point.

The above process “included” the diagnostic income that you expect to generate during the year. Now what I want you to do is to go through the same process, but ignore the diagnostic income. Your hourly rate will obviously increase when the diagnostic income is no longer part of the equation. If you are on flat-rate pricing that is not a problem. You will simply have your books reprinted at the higher rate. When the new books arrive, they will go out the door with the techs the next day and the customer will see no difference.

That is one of the joys of flat-rate pricing. You can change the internal rate and the customer will be totally unaware that any change has been made. Now for the good part! Since the diagnostic income was not part of the pricing process, what did it just become? Right -- total profit! Your new (slightly higher) service rate will cover all your costs of doing business, while generating a reasonable profit. That makes any/all diagnostic income total fluff…..more profit on top of the normal service profit. The company will continue to charge the diagnostic fee just like it did before.

You may ask, "What’s the benefit when it comes to maintenance agreements?” Since the diagnostic income is not part of your new service rate that allows the company to do two things:
1. Waive the Diagnostic Fee – The company now has the ability to waive the diagnostic fee, if needed, at any time. It won’t cost the company anything since the hourly rate covers all costs and generates the needed profit margin.
2. Maintenance Agreement Benefit – Since the diagnostic fee is not part of your hourly rate the new “benefit” to the maintenance agreement customer is that their diagnostic fee will be totally waived (or partially if you wish) on any service call needed during the year. That is a real benefit!

Now the potential maintenance agreement customer is told the benefits of having the plan. They will get annual maintenance, which will save them money and increase safety. Routine maintenance will also reduce unexpected break downs and save the customer money. Secondly, they will receive a 10% to 20% discount on labor and materials if additional repairs are needed during the year. They also get priority service. Lastly, the customer’s diagnostic fee will totally (or partially) be waived if repairs are needed during the year. Now picture the tech doing a routine service call. The normal diagnostic fee is $79. The repair/s in the flat rate book total perhaps $150. Now the technnician tells the customer about the benefits of becoming a maintenance agreement customer.
“Mrs. Jones, if you want to become one of our valued maintenance agreement customers today, you will save 20% on today’s repair which is $30. By the way Mrs. Jones, I can also waive the $79 diagnostic fee. That means your total saving on today’s call will be $109.”

Do you think Mrs. Jones will purchase a maintenance agreement on the spot? I do. Give this idea some serious thought. Remember, the greater the value the more likely the customer is to purchase your maintenance agreement. You might also remember the statement that was shared a couple months ago. When the customer calls your company the first words out of your mouth should be “By the way Mrs. Jones, do you pay full price or are you one of our discount customers?”

When the customer is properly informed about the benefit of begin a maintenance agreement customer they will nearly always say yes.

Tom Grandy is president of Grandy & Associates, consultants to the HVAC industry. He provides online and in-person Boot Camp training and a variety of sales and business management tools. A new, "Labor Pricing for a Profit"software package is available at: http://bit.ly/laborpricing

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