Why Selling Service Pacts Makes Sense
Offering service and maintenance agreements to your clientele not only provides new streams of recurring revenue but can also go a long way in helping stem attrition. Find out what the proper cost structure components are and how to convince customers to sign on the dotted line.
Business stability has been at the forefront in the minds of many installing security contractors as of late. Accordingly, many companies are focused on creating new services that generate recurring and more predictable revenue.
One of the most attractive options is extending the customer relationship and financial commitment by selling service and maintenance contracts. In SSI‘s Operations & Opportunities Report survey (August 2010), installing security company managers identified service/maintenance contracts as their top choice by a significant percentage among other recurring revenue-generating services (see chart).
Many successful installing security companies share in common this one particular business component. They are aggressive in offering and retaining service and maintenance agreements for a majority of their clients.
In speaking with various dealers about this topic you will hear a wide variety of feedback — and not all of it positive. For instance, some dealers lament about the exorbitant costs of providing service and how it has reduced the overall profitability of their company.
If this is the case with your operation, it is high time to undertake a review of your business strategy and adopt a brand new approach to service. Many factors and diligent efforts lead to running a strong and profitable service department. This includes providing work on systems covered by warrantees; however, you can still expect to operate a lucrative service department with the proper cost structure.
Setting Quality Installation Goals
In a perfect world a security dealer would sell each customer a service and maintenance contract and then install systems that never require any overhaul. Realizing this to be a difficult feat, it could still be a goal to strive for philosophically.
The first step is to make sure that all products and systems are installed for longevity, and the systems you acquire are brought up to a service level that will not create a logistical or financial burden on the company. Although this may seem all too obvious, it’s probably the most important element in driving a well run service company.
Determining the fees for the variety of service and maintenance agreements is simply a calculation of what it will cost you to fulfill the terms along with the profitability you expect. Some of the industry standards for calculating competitive service fee structures will be explained later in the article.
Maintenance agreements are a little easier to figure since you already have an idea of how often inspections are needed and what the work will entail. Some maintenance agreements are for inspection and labor; others offer inspection, labor and materials. In any case, this should be a profitable element for an alarm company, and one that should be clearly communicated to clients as a great value proposition.
Incidentally, with fire systems it’s a given that they require periodic inspections. This provides a good first foot in the door, allowing dealers the perfect opportunity to sell service agreements along with their maintenance contracts.
Understanding the Art of the Pitch
Security dealers should never lose sight of the very basic fundamentals that go into operating a profitable business. The heavy lifting entails building a client base that is committed to your company. Working to keep them satisfied and engaged while increasing the revenue they produce should be the fun part. This latter point is not to suggest any of this is easy; rather it is fun because the more a dealer can grow the subscriber base, the more a dealer has an open opportunity to work the ratios.
For example, whether a company has 100 accounts or 1,000, the approach remains the same. Let’s say the average recurring monthly revenue (RMR) is $30 per client. Selling valued-added services along with service and maintenance contracts will allow a company to raise the average across the board.
As long as the basics of pricing these additional services are properly followed, a company can increase its average RMR — and most importantly increase its profit margins.
Let’s look at a structure most consumers are very familiar with, the retail transaction. When purchasing any major appliance, television, computer, automobile and the like, all retailers seem to take a similar approach to offering service, maintenance and/or warranties. Upon making the purchase, consumers are faced with the same question: “Would you like to add an extended warranty or service or maintenance to your purchase?”
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About the Author
Peter Giacalone
Peter Giacalone is President of Giacalone Associates, an independent security consulting firm.
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