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The $99 Maintenance Agreement Too Good to be True

Originally published: 07.01.18 by Ruth King

A competitor of a former client offers potential customers a maintenance agreement for $99, which includes four visits to the customer’s home.

The contractor asked, “How do I combat this?”

Interestingly, the answer came from his technicians. When I asked them about this contractor, their comment was that the reason they work for the company they do rather than his competitor was because “here, they can really take care of the customers and do the job right.”

They don’t have to “high pressure” sell the customer. One techician who had worked for this competitor said that they had sales meetings every week. Their job was to sell, period. They were NOT to walk out the door without selling something.

Customers aren’t stupid. One or two may jump initially to experience the $99. If they used a company who did the proper maintenance and spent the time to do the proper maintenance, they will be surprised at how short the “$99 maintenance visits” really are.

Those who have been at the $99 rate will eventually get the picture and realize every time there is a maintenance check, something is wrong and they have to pay for it. The contractor’s competitor has to generate revenue somehow to make this work. High pressure sales, perhaps? You bet.

You can’t do a good job and stay in business at that price if you don’t sell something during the maintenance visits.

Let’s do the math: $99 per year for four visits is roughly $25 per visit revenue. Even if you pay your technician $15 per hour, you still have his FICA, workman’s comp and other benefit expenses, which brings the technician cost to $20 per hour. Then, you have his truck expense. Most trucks cost more than $10 per hour to operate. In places like New York City and Chicago, it’s even higher.

So, $25 per hour is not even covering your direct costs.

But, “I make it up in service sales or replacement sales,” you say. Well, let’s debunk this one too.

If that company’s overhead cost per hour is average, it’s $30 to $35 per hour. If the company pays $10 SPIFF for each agreement, then the SPIFF cost needs to be added for the first year.

I believe in at least breaking even on maintenance agreement revenue, including overhead cost.

So, let’s look at how much service revenue the company has to generate just to make up for this loss. Let’s assume:

  • The total maintenance agreement time, including travel, is four hours
  • A $10 SPIFF is paid
  • The technician is paid $20 per hour, which includes all FICA, Medicare, worker’s comp, vacation and holiday expenses
  • Overhead cost per hour is $35

The total cost would be $230 ($10 + $80 + $140), with a total revenue of $99. That’s a loss of $131 per agreement!

Now, the company has to make up the $131 loss in profit with customer sales.

  • If the company’s net profit averaged 10 percent, the revenue from that customer would have to be $1,310 per year.
  • If the company’s net profit averaged five percent, the revenue from that customer would have to be $2,620 per year.

Not likely in either case, unless you sell a new system. If you did sell a new system, then you’d have to sell a system, on average, at one out of four homes who have maintenance performed — depending on your average replacement price. This means the technician has to turn in at least one legitimate lead per day. Again, high pressure sales.

The more agreements this competitor sells, the faster he could go out of business.

Educate Your Customers

So, how do you explain the difference? Actually in this case, the differences are so dramatic it’s easy. First, about 20 percent of the population will always look for the cheapest price, no matter what the benefits.

These are not your customers. They are the customers of the contractor who is doing the $99 and four visits.

For the remaining 80 percent, education works. They want to know the difference. Explain that your company takes the time to do what the manufacturer recommends — which is one heating check and one cooling check once per year — and that four times per year is overkill.

Your technicians do the maintenance recommended by the manufacturers, do the proper measurements on the system, cleaning, etc. This takes time. You provide a written condition report so the customer can see what you did (she may not understand it but can ask questions).

Then explain to the customer that the competition has to find something wrong every visit because they cannot survive a loss each time a technician visits their home. Your company charges an honest price to perform proper maintenance and won’t recommend any repairs that are not really needed.

Do the maintenance correctly and charge accordingly so you at least break even.

 


About Ruth King

Ruth King

Ruth King has over 25 years of experience in the hvacr industry and has worked with contractors, distributors, and manufacturers to help grow their companies and become more profitable. She is president of HVAC Channel TV and holds a Class II (unrestricted) contractors license in Georgia. Ruth has written two books: The Ugly Truth About Small Business and The Ugly Truth About Managing People. Contact Ruth at ruthking@hvacchannel.tv or 770.729.0258.


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