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Residential Service Agreements, Part 1

Originally published: 09.01.07 by Ron Smith


How To Build A Dynamic & Highly Profitable HVAC Retail Business With Residential Service Agreements

After a combined career in the hvac industry of over 90 years, we can say one thing with absolute certainty: We fully recognize and understand the importance of residential service agreements in growing a highly successful retail (i.e., repairing, maintaining, adding, and replacing equipment and IAQ accessories in existing owner-occupied homes) hvac business! We were each fortunate enough to successfully develop and operate large, highly profitable retail hvac businesses, one in Fort Myers, Fla., and the other in Atlanta. These two markets have significant differences in their climates and demographics; however, we utilized the same basic principals and philosophies in growing our businesses.

Beginning with this issue and continuing with the October and November issues, we will share with you many of the things we have learned about the use of residential service agreements in building a residential retail contracting business.

Residential service agreements are known by many names, such as maintenance agreements, service agreements, service contracts, energy-savings agreements, money-saving agreements, maximum-comfort agreements, etc. Residential service agreements include periodic (typically two or three times annually) maintenance, inspection, cleaning, and testing of hvac equipment and accessories and also

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include certain additional customer benefits such as discounts for repairs, overtime work at regular rates, priority customer status, etc. A complete list of customer benefits will follow. Residential service agreements are not “full-coverage” service agreements that typically include costs associated with repairs (parts and labor), nor are they extended warranties.

We have learned through communicating with thousands of hvac contractors throughout North America that there are three primary obstacles to building a highly successful hvac residential retail company.

1. The inability to attract and retain good people (technical, support, management, and sales).
2. Difficulty in driving revenues during mild weather periods.
3. Overcoming low-price competitors in the marketplace.

The only consistent long-term solution we have found to these problems is the development of a large, loyal service agreement customer base. This, combined with the establishment of an appropriate company culture, ongoing training, and the use of effective systems and procedures will overcome these three primary barriers to growth, profitability, and sustainability. Easier said than done!

We have also learned that in order to succeed in building a successful hvac and IAQ retail contracting company, it is mandatory to complete the necessary up front preparations, have proper implementation, and then continue the disciplines required to assure service-agreement customers continue to renew their agreements each year. Our advice to those unwilling to make the firm commitment to take these steps is: DON’T sell residential service agreements! Selling residential service agreements without the systems and processes in place to assure renewals, referrals, and ongoing retail revenues from these customers will actually cost your company money.

We have both observed false starts by contractors, most often caused by their early enthusiasm and haste in getting their residential service-agreement program up and running. Typically, this is caused by the contractor’s lack of understanding or his unwillingness to put the basics in place. First, the owner of the company must be absolutely committed to the success of the service-agreement program and must fully understand how it operates. The owner must totally support the effort. He must demonstrate the same degree of excitement for a $150 residential service-agreement sale as he does for a $15,000 equipment-replacement sale. The owner must understand that a residential service-agreement customer, properly cared for and marketed to, can provide an annual average of over $700 in revenues with little if any price sensitivity and with a minimum of marketing cost, as well as an ongoing source of new customer referrals. A residential service-agreement customer represents a future replacement and IAQ accessories sale.

It is important that not only the owner, but all leaders and other co-workers fully understand and appreciate the residential service-agreement program and the many benefits it affords. A “service-agreement culture” is the objective. In fact, with the right explanation, combined with initial and on-going training and co worker participation, a culture can be achieved whereby the co-workers, including service and maintenance technicians, will actually feel sorry for anyone in their service area who does not own one of the company’s residential service agreements.

Here are the benefits enjoyed by all three parties — the customer, the co-worker, and the company:

Customer Benefits

• Lower monthly utility bills
• Fewer inconvenient and expensive service calls
• Longer equipment life
• No overtime charges
• Discount on any required service calls (parts and labor)
• Priority customer status
• Regular information on available products and services
• Compliance with extended warranties conditions
• Peace of mind
• Improved safety
• Improved comfort
• Improved IAQ
• Improved cooling and heating equipment capacity
• Protection against rising energy costs
• Being a good citizen through helping conserve our nation’s energy supply 

Co-worker Benefits

• More work available year round
• Happier customers to interact with
• Cleaner equipment to work on
• Additional compensation earned from spiffs and commissions
• More, and better-qualified sales leads for equipment and accessories year round
• Benefits of working for a more stable and growing company
• Improved career-path opportunities
• More predictable working hours
• Increased job satisfaction 

Company Benefits

• Increased and sustainable revenue growth and profitability
• Improved cash flow
• More, and better-qualified equipment, accessory, and IAQ sales leads year round
• Reduced advertising and marketing cost
• Increased company value
• More predictable workload and revenue growth
• Reduced co-worker turnover
• Increased customer retention
• More referrals from happy customers
• Easier to attract new co-workers
• Improved sales closure rates
• More sales of higher priced high efficiency and variable speed equipment, accessories, and IAQ products and services 

This series of articles will include information on:

• Procedures for converting demand service calls to service agreements
• Procedures for converting precision tune-ups to service agreements
• Quality precision tune-up procedures by the technicians
• Procedures by the technician in selling service agreements
• The renewal of service agreements
• On-going structured training
• Forms and documents
• Support co-worker (dispatchers and customer-service representatives) training
• A co-worker spiff program to reward sales and renewals of service agreements
• Operating software
• The necessary performance-tracking information
• Pricing strategy
• How to market precision tune-ups
• Procedures by the technicians in developing equipment-replacement sales leads
• Profiling natural behavior characteristics of technicians and support staff
• Realistic and practical benchmarks
• Establishing a maintenance department
• Maintenance technicians vs. service technicians
• Your company’s identity
• Debriefing of service calls and precision tune-ups

In the October issue we will discuss in detail the specific steps necessary to prepare your company to build your residential service-agreement customer base and leverage it for increased growth and profits. Again, we invite your questions and comments at www.hvacrbusiness.com/forums

Also in this series
Converting Theory Into Practice (November Issue)
Avoiding False Starts (October Issue)


Articles by Ron Smith

Light Commercial Service and Service Agreement Business, part 2

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Light Commercial Service and Service Agreements Business, part 1

HVACR residential retail contractors who wish to grow their revenues and profits have a natural and synergistic diversification opportunity. With proper guidance, planning and execution, it’s not difficult to expand into the light commercial service and service agreement business.
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What’s Your Post- Recession Strategy?

What initiatives did you take to combat the recession, and — just as important — how will those initiatives affect your ongoing management decisions as the economy improves?
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