What Do You REALLY Need To Know To Run A Profitable Business?
This is the third of a three part series on what you really need to know to run a profitable company. Part one dealt with how companies get started and the normal pitfalls more fall into that are seeds for later failure. Last month we began talking about what it really does take to run a profitable company. We talked about labor pricing, flat rate pricing and the need for developing a month-by-month, department-by-department, cash flow budget. This month we're going to look at the last to basic areas that must be an integral part of any really profitable company. This month we're going to talk about service agreements and marketing.
Now I'm going to make a statement I believe to be 100 percent correct: "Service agreement are literally the foundation stone for profitable growth in the 21st century." Let me say it again, "Service Agreements are literally the foundation stone for profitable growth in the 21st century." Why? Because service agreements are the feeder system for everything else the company does. Let's think for a moment about why your company would want to have a service agreement program, or in other words, what's in it for me?"
The first benefit is consistent cash flow. You will remember the second reason most companies go out of business is because of cash flow problems. A well-run service agreement program will provide consistent monthly income since the company is both selling and renewing service agreements every month during the year. The next benefit deals with scheduling. One huge advantage of selling a service agreement is that you get to schedule the work. That means if your tech is only scheduled for 4 hours' worth of service calls for the day you can send him or her on a couple service agreement calls to fill the schedule. Utilizing those hours reduces the company's non-billable time, which results in increased profit, and the tech gets a full day's pay instead of being sent home early on slow days. One of the provisions of most service agreements is that the customer gets a 5-, 10-, 15- or 20 percent discount on labor and/or materials if they need additional service work done during the year. So guess what happens when your service agreement customer needs additional service work done during the year? Right-they're going to call you!
The biggest long-term benefit of having a service agreement program is the eventual replacement and/or upgrade of equipment. This includes any remodeling work as well. Spending 2 or 3 hours in the customer's home once a year performing the annual service agreement provides lots of time to talk about new products, upgrades, more efficient water heaters, etc. By now most of those who have read my articles know that customers buy from you not because of the type of equipment you carry, but because they have a relationship with you and they trust you. After you've been in the service agreement customers' homes once or twice a year, for years, and it comes time to replace or upgrade their equipment who do suppose they are going to call? Right again, they'll call you. The neat part is that most of the time they won't even get competing bids and they always purchase at a higher profit margin than new customers. Are you convinced of the need for a service agreement program yet? If not, lets look at few more benefits.
The next benefit is that you have happier customers. How? Because you're going to their homes to maintain equipment when everything is running fine. That's a lot better than the tech having to go to the home when there's no hot water or perhaps a major leak. In times like these the customer is usually less than totally happy. Again, well-maintained equipment will break down less frequently, therefore you have happier customers.
Are your techs somewhat fearful of selling in general? Well another benefit of selling service agreements is that it builds the techs confidence, especially if you're on flat rate pricing. Flat rate pricing is the ideal, yes the ideal, system for selling service agreements. When the diagnostic survey has been completed the tech shows the customer the repair price in the manual. Right next to the repair price, however, is the reduced price service agreement customers pay, which usually reflects a 10- to 20 percent discount. The tech then simply says to the customer "Mr. or Mrs. Jones you'll notice this repair will be $238, however if you had an annual service agreement with our company you will notice in the book your cost would only be $190. Now Mr. and Mrs. Jones if you would like to sign up for an annual service agreement today I can go ahead and charge you the lower price and you would save $48.00--would you like to do that?" The answer is usually yes. As you can see service agreements are easy to sell when you're on flat rate pricing. The neat part is that once the tech gets comfortable selling service agreements his or her confidence grows to the point where they can begin to talk to the customer about other add-ons sales as well. Another plus for a service agreement program!
Are increased cash flow, guaranteed repairs during the year, the eventual replacement of equipment at higher profits, happier customers and encouraging your techs to sell enough justification for having a service agreement program? If not, lets look at two more.
We all want to increase our customer base. When is the best time to do that? The best time is during extremes of weather. When extremes of weather take place, are your phones ringing? Sure they are. Are the phones ringing at your competitors as well? Right again. Now if you walk into the office and you have 10 messages, and 8 are from current customers, who will
you take care of first? Of course you'll take care of your current customers. Now think for a moment, if you had the majority of your customers on an annual service agreement program the probability of their equipment failing during extremes temperature is pretty low. Now you walk
into the office and again you have 10 calls but only one or two are from your current customers. Now you have the opportunity to add new customers--again because you have a service agreement program.
The final benefit of a service agreement program comes when its time to sell the company. When it comes time to sell your company--and that time will come someday--normal profit is valued at two to three times its value. Service agreement profit, however, is valued at six to seven times it value when its time to sell the company. Would you rather have $100,000 in
profit from retrofit, new construction or remodeling or would you rather have the same $100,000 profit come from your service agreement program. You guessed it, the service agreement income is a LOT more valuable when it's time to sell the company.
Now I know I've spent some extra time on service agreements but they really are the feeder system for all other areas of your company. If you want to be profitable you need to develop an effective service agreement program.
The last area we need to touch on is marketing. In a nutshell, marketing keeps your name in front of the customer. Consistent marketing is necessary because your customer doesn't need you every month, or perhaps not even every year. When they do need service, or equipment
replaced, however, it's who they remember that counts. You may have marketed well for two years but the customer didn't have a need so they didn't call you. Six months after you stopped marketing, someone else is marketing to your customer and guess who your customer will call when their equipment does break down. You're right; they'll call the one who is
currently marketing to them.
I heard an interesting statistic a few months ago. It said that 60 percent of your past customers who would have used you again, but didn't, didn't call because they couldn't remember who made the last repair. Remember, it isn't just marketing that's needed, it's consistent marketing. When your customer does need work done, which may be years down the road, it's who they remember that counts. In America we are geared for instant success, instant results, instant gratification. Think about a farmer for a moment. He plants the seeds, fertilizes the ground, plows up the weeds and waits for the rain to come. It's a while before he sees the fruit of his labor. Most things of value don't have instant success. A well-run marketing program will take some time to show consistent fruit but the fruit will come.
Now let's summarize a bit. Remember, most companies gradually go out of business over a 1- to 4-year period of time and most don't even realize what's happening until it is to late. The two main killers of contracting companies today are improper labor pricing and cash flow. To be really profitable, however, the company needs to set proper hourly rates based on all of their real costs of doing business and they need to be on flat rate pricing in service when their service rates exceed $75 or $80 per hour. To maintain profitability the same company needs to develop month-by-month, department-by-department cash flow budgets and they need to track them each month. The same profitable company also needs to develop an outstanding service agreement program since service agreements are literally the feeder system for all other work. And lastly, a consistent marketing program is needed to keep your name in front of your customers.
Now you know what it really takes to run a profitable business. If you need some help in some of the areas mentioned you may want to consider attending one of Grandy & Associates three-day "Basic Business Boot Camps." All of the items we just talked about are covered over the three days, plus a whole lot more. The response to the boot camps has been tremendous, with contractors from more than 40 states having attended the program thus far. The best comment we have had to date was in last week's boot camp when the contractor said, and I quote "You saved my company!" If you would like some information on the boot camp give us a call on our toll free line at (800) 432-7963.
You work hard, very hard, so why not build a profitable business that will reward you for all the time, energy and money you have invested? Remember the definition of insanity? Insanity is doing the same thing over and over while expecting different results. Do something different next week and begin to enjoy the fruits of your labor.