In essence, the more service calls you have on one specific Service Agreement throughout the course of a year, the lower your profitability is for that Agreement. Performing a basic calculation can help you to understand what your company's actual loss is on a specific Service Agreement. Start by taking your average cost per service call and then subtract it from the total price that you sold the Service Agreement for to your customer. Depending on the Service Agreement selling price, more than three service calls per year may render a Service Agreement unprofitable. If your company is supplying service to a high number of Service Agreements annually, the losses from each contract with over three service calls could add up quickly.
To keep track of the number of service calls, start by performing an analysis of any Service Agreements coming up for renewal within the next two to three months. Chances are good that you will find a small percentage of customers that knowingly or unknowingly may be taking full advantage of their Service Agreement. So how do you handle "bad" customers that fall into this category? In some cases, the first inclination is to cancel the contract. However, if you are in the process of trying to build your business, canceling one contract or a number of contracts because of too many service calls may be taking your business in the wrong direction. Therefore, canceling one or more Service Contracts should ONLY be used as a LAST RESORT. That said, let's take a look at some ways of mitigating against service contracts that may be unprofitable.
In most cases, you will always want your customers to renew for another year of contract coverage. Aside from the fact that renewals help to generate more revenue for your company, they also help your business to address any abuse of service calls that may have occurred during the previous year's contract coverage. The first course of action is to determine whether or not all service calls on a specific Service Contract were for repair on a single item or if they were repairs for multiple items. If you find that, for example, you had a customer with three service calls on a single item such as their dish washer, you may want to raise the premium for coverage on that specific item during the renewal process. This will help to cover any additional expenses your company may incur on any subsequent service calls for the next coverage year.
Although raising the premium on a specific item should be used as your first line of defense to mitigate your losses on a specific Service Contract, it is also a good idea to offer your customer any possible alternatives. Using the example above, try contacting the contract holder to see if they may be interested in updating their ailing dish washer. Helping your customer to recognize and justify the benefits of purchasing a new dishwasher vs. spending more money on a higher coverage premium will go a long way in helping you to build a trusting relationship between you and your customers. By persuading them to purchase a new dishwasher, you also help to create a win win situation for you and your customer. You and your business no longer have to service a failing dish washer. And, assuming that your business is setup to sell them the specific replacement item, you could potentially see some extra sales and service revenue at the end of the sales transaction. Your customer wins because they get a new appliance that is more energy efficient and less costly to maintain. They also get to reduce their coverage costs on that item when it is time to renew their existing Service Contract with you.
In a different scenario, if you find that each of your customer's service calls were each for repairs on different items, you will want to dig a little deeper in to each call and item serviced. If you find that each of the items serviced were relatively new, you will want to do nothing more than raise the price of the entire Service Agreement using a standard cost of doing business percentage increase. Giving your customer a small increase in their contract renewal price makes it easier for your customer to want to renew because they understand that there are usually increases in premiums for products providing coverage. For your business, newer items help to lessen the chance for subsequent service calls during the next contract year. In essence, you are looking to sell more Service Contracts that cover newer items. That is because newer items covered under your Service Agreements usually require fewer service calls and help to create close to 100% profitability for the next contract year.
However, if you find that all of the items serviced are older, you may want to re-evaluate the cost of maintaining those items as you should expect to have many more service calls during the next contract year. Re-evaluating Service Contract renewals should take into consideration the age of each item covered, the parts that you may have to replace and the time that will be required during the entire service call process. Once you come up with your total costs to service these items, you will want to pass them on to your customer during the renewal process. It is important to note here that the higher contract renewal price may scare your customer away after your evaluation. But, the money saved by not having to send a technician out to the same property over and over again should justify the loss should your customer decide not to renew their service contract with you. The object here, is to present your customer with an alternative to having no coverage at all. Ultimately, your customer will make the decision that is best for them. If they choose to renew at the higher contract price, you and your customer are both covered for any unforeseen problems that may be experienced during the next contract year. If they choose not to renew, you have done nothing more than reduced your overall expenses for the next year.
So, there you have it. Service Agreements should always be an important part of your business. But any service/repair company can expect to have "bad" customers. Luckily, you have the power of the renewal process to compensate for any losses experienced during the previous contract year. Use it to your advantage, but be sure you take the time to investigate the details of each "bad" contract. As an alternative, you can suggest that your customer update/upgrade their heavily serviced item. Finally, you don't want to lose a customer if you can help it. But, if the loss helps to keep your company in the black then you can rely upon the fact that you will no longer lose money on that specific Service Agreement moving forward.
How do you handle "bad" Service Contract in your business today? Give us your feedback below.
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