Managing Your Service Department: Maintenance Agreements Must be Priced for Profit
Tuesday, June 23, 2015
Many view maintenance agreements simply as a way to tie the customer to the company, and perhaps generate a little extra profit if the tech performs a repair while on the job. Those are valid points, and the KPI (key performance indicator) for repairs while performing a maintenance is $40 per hour. However, maintenance agreements on their own must be priced for a profit or at least break even. Why? Have you noticed a trend over the past few years? More and more manufacturers are offering 10-year parts and labor warranties. They didn't just pick this number out of the air; it is based on solid numbers through accelerated wear testing. The manufacturers "know" there will be very few repairs within the initial 10 years of a piece of equipment’s life.
What does that mean to you as an owner or technician? It means the service department, as we know it today, is going to be phased out over the coming years. As the profitable service department work is phased out, what will take its place? Maintenance agreement work will remain.
What do you suppose will happen to the service/maintenance agreement department’s overall profitability when it is left with mostly maintenance agreement income? Well, if your maintenance agreements are priced for profit, there will not be a problem. However, if you are selling your maintenance agreements at a loss (which is very common), the service/maintenance agreement department’s overall profitability will be in big trouble!
Many owners are concerned that if they price their maintenance agreements for profit, their pricing will be significantly higher than their competition … and they would be right. However, ask yourself this question: When and where are most maintenance agreements sold? They are normally sold while the technician is face-to-face with the customer during a service call. Now ask yourself this: At that moment, who is the most trusted individual in the eyes of the customer when it comes to their equipment? Right again, it's the technician.
You may not believe it, but if the technician properly presents the benefits of a maintenance agreement to the customer, they will buy it, with little consideration about how much it costs! Ask your techs how many of their customers, after being been told about the benefits of having a maintenance agreement, respond like this: "That sounds great. However, I think I will call several other companies in town to see what their pricing is." That almost never happens.
Again, be aware of the shift that is going on within your service/maintenance agreement department and be sure to price your maintenance agreements for a profit! Ten or 15 years from now you will be glad you did.