What’s the most valuable asset of field service businesses? Simple: Long-term maintenance agreements that lock in base revenue and profit, and which largely determine the company’s value. HVAC finance expert Tom Grandy, in fact, calls the agreements “the foundation stone for profitable growth in the 21st century,” because they “tie the customer into your company for life and nearly guarantee you will be called when additional repairs are needed during the year.” Also, they’re great at adding value to an HVAC company when and if it’s time to sell. Grandy assumes that most people reading his recent post on the ACCA’s Contractors Excellence blog know how great maintenance agreements are; the reason he wrote the piece was to highlight the ways companies can sell more maintenance agreements, give the customer value and sometimes even increase profits all at the same time.
To start off, Grandy recommends that firms charge flat rates for services. If you do that, and charge a diagnostic fee, the first step is to set “accurate hourly rates” by following these instructions:
- Determine our 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: = (Cost of doing business – Gross profit on sale of parts and equipment – diagnostic income) / 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
The next instruction is to ignore the diagnostic income, which means the hourly rate would increase to keep profits the same. This way of pricing also holds these key benefits, according to Grandy:
- 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.
- 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!
So even though you’ve let the customer feel like they’ve received added value on the agreement, profits don’t decrease. The customer will be more likely to purchase a maintenance agreement, and another financial building block is added to the company’s foundation. While many HVAC business owners are tempted to spend money on advertising, Grandy’s advice shows that a little creative math can be even more effective in terms of connecting with customers.