There are no hard-and-fast rules to pricing service agreements

June 1, 2000
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One reason contractors are hesitant to offer service agreements is that they believe they are a risky proposition. That’s true, says Steve Howard, president of A.C.T., Phoenix, AZ, if you don’t know how to price them.

There are no hard-and-fast rules to pricing service agreements, but Howard believes that the agreement should at least cover costs. “The correct answer on how to price a service agreement is; there isn’t really a correct answer. It goes back to what are the goals and motives of the company.”

Howard suggests pricing a service agreement knowing that the work will be done in the slowest time of the year. It’s also necessary to do an excellent job managing the program, so you’re not caught trying to do service agreements at a busy time of year.

Jackie Rainwater, president of Peachtree Service Experts, Duluth, GA, says his company doesn’t even look at the sales of service agreements as a profit center. Of course, he notes, there are reasonable profits to be realized exclusively from the sale of service agreements.

However, the real profits come as a result of training technicians to generate sales leads and sales for replacements, accessories, and IAQ products when they know the customer can truly benefit from the products and services their company offers.

“Service agreements are the very lifeblood of our business,” says Rainwater. “Over 65% of our add-on, replacement, accessory, and IAQ leads, and over 75% of our sales come from our customers who own our service agreements. Our large service agreement customer base also provides us with sales leads, even during periods of mild weather.”

If you’re still unsure how to price an agreement, help is available. An Electric Power Research Institute (EPRI) study shows that approximately 59% of the factory-installed compressors in approximately 18,000 heat pumps were still in operation 10 years after installation in Alabama, and 69% of compressors in northern climates (Chicago and northern Illinois) were still in operation after 10 years.

By knowing that the average compressor has a better than 50-50 chance of lasting longer than 10 years, an understanding of the risk involved in a total maintenance agreement starts taking shape. Assume that $500 is your cost for parts and labor:

$500 replacement cost ÷ 10-year failure = $50 risk of compressor failure per year

Howard notes that other factors must be included in the risk formula, such as age of the equipment, condition, prior maintenance, climate, operating hours, brand, model, etc.

Using your own experience and judgment is also a very good way to assess risk. You already know that you wouldn’t want to offer a service agreement on a unit that’s on its last legs.

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