The benefits of maintenance agreements to contractors and their customers are many and are, for the most part, universally understood. For contractors, maintenance agreements provide an excellent hedge against the peaks and valleys of the revenue cycle that result from the seasonality that is inherent in the HVACR industry and give contractors a better chance to keep employees busy year-round so they can attract and keep top talent. They also result in predictable cash flow and contribute greatly to the valuation of a business when it comes time to sell. For customers, the benefits vary depending on what their plans include, but most plans nowadays provide for a discount on any repair work, add-ons/accessories, or replacement installations that become necessary. Customers who hold maintenance agreements also typically enjoy a preferred status with their contractors, which offers them benefits, including front-of-the-line service. Perhaps most importantly, customers are able to build relationships with their contractors over time that result in trust, which is something that can be hard to come by and even harder to maintain in the trades, thanks to the unscrupulous contractors that seem to pop up in our industry every day.
While the benefits of maintenance agreements are nearly universally understood today, I’ve found that the benefits of perpetual maintenance agreements are not nearly as universally understood, and I believe they are something every contractor should seriously consider.
PERPETUAL MAINTENANCE AGREEMENTS
A perpetual maintenance agreement is a maintenance agreement that does not have a defined end date and is billed monthly. The majority of maintenance agreements sold today are valid for fixed periods of time, usually one year but sometimes multiple years. There are several pitfalls inherent to traditional maintenance agreements that are addressed by the perpetual maintenance agreement:
1) Customers are asked to invest a considerable amount of money on the front end, usually a couple of hundred dollars, or more, for a traditional maintenance agreement;
2) Traditional maintenance agreements all have expiration dates. At some point before the expiration date, it is incumbent on contractors to track down and notify customers that their expiration dates are coming in an effort to try and convince them to renew. This leads to an incredible amount of work, even when contractors have software capable of managing this process to a certain extent. Letters need to be sent out, and phone calls need to be made, both of which result in the burden of data entry, which would otherwise be unnecessary. If and when contractors are successfully able to make contact with customers and have a discussion about the benefits of renewal, contractors still must ask customers for additional investments, hundreds of dollars or more, and customers must be willing and able to pay.
3) Renewal rates are relatively low compared to perpetual maintenance agreements. Customers are much less likely to cancel perpetual maintenance agreements than they are traditional agreements, namely because of the nominal monthly fees they are being asked to pay compared to large lump-sum fees.
Of the reasons listed above, No. 3 stands out as far more consequential than the others. Consider the following example, as the math will tell the story:
Assume Contractor A has 1,000 traditional maintenance agreements on the books. The average renewal rate has been 60 percent because customers have either been hard to track down or unwilling to renew. Assume Contractor A charges $200 for a maintenance agreement, and the average life cycle for a piece of equipment in Contractor A’s market is 15 years.
Assume Contractor B has 1,000 perpetual maintenance agreements on the books. Only 10 percent of Contractor B’s customers drop off every year because of the low monthly fee. For the same $200 plan that Contractor A offers, Contractor B charges $17.99 per month. If you do the math on this, you’ll notice that Contractor B is earning nearly an 8 percent premium by collecting $215.88 over the course of the year instead of $200.
Let’s look at what the numbers look like in year two, after customers opt to cancel in each group:
Contractor A: Year-two revenue from maintenance agreements equals $120,000 with an average of 40 replacement opportunities. A 60 percent renewal on 1,000 customers = 600 customers. Six-hundred customers divided by one replacement every 15 years equals 40 replacement opportunities.
Contractor B: Year-two revenue from maintenance agreements equals $194,292 with an average of 60 replacement opportunities. Ninety percent renewal on 1,000 customers equals 900 customers. Nine-hundred customers divided by one replacement every 15 years equals 60 replacement opportunities.
While the math in the above example is over-simplified and makes a few assumptions, it should still be clear to see how one simple change in the way you charge for your maintenance agreements can have an enormous bottom-line impact on your company.
Publication date: 3/6/2017