Question: How would I price my multiyear service agreements?

Gary Elekes: Well, it depends on how many years and how many systems, but there’s a nice little tool out there on the EGIA Best Practices site that will allow you to do that. And it really is going to ask you a series of ten questions, each step – ten steps – each step is a definitive cost question. What am I paying my technician on an hourly wage, for example, and how many minutes will it take to do a tune-up? And so you go through that process and you really have to cost out, what does it cost you, in terms of direct costs, to run a service agreement? How many events are you going to run? One event, two events, three events? Each event being a tune-up or some form of a work-required event. And travel time, you know, those types of things; materials. It’s just going to walk you through the costing structure. And then the next question becomes, well, do you want to give a discount for multiyear agreements or multi-systems?

So there’s spaces inside of that tool to essentially create a discount structure, so you can play with that and manipulate that. So for our purposes, on a multi-system deal, for example, we’ll give a discount because we’re not traveling twice, we’re walking three feet next door to the next mechanical system in the house. So if there are five systems on the house, obviously we can give a discount that’s broader than if there are two systems.

And then the multiyear agreement – we tend to give a discount on that only if it’s a pre-pay. If it’s a perpetual agreement where we’re collecting on a monthly debit, or you’re using a credit card purchase, you don’t have the benefit of being able to have the cash up front and put that into your accrued liability. In fact here [refers to tools shown on screen] if you just click on the center tab on the worksheet there that says “agreement pricing,” cause right now what you’re seeing is the supervisor’s compensation plan, which is tied to that. So this is an example of the steps, so if you scroll down a little bit you’ll see that this is actually a spreadsheet down there. And so these are the steps, these are the instructions, and then the spreadsheet itself allows you to enter the data. If you don’t know EGIA’s tools, basically anything that’s pastel yellow or some form of a yellow, is an empty field for data.

So at some point you just have to go through the process and say, “What are my cost structures as a direct cost?” And then for me, we always calculate the overhead as well, so that we understand what it costs us to move a vehicle from Point A to Point B – from portal to portal. And that’s something that we would discuss in a class; it’s beyond the scope of the timeframe for this conference call.

But we want the service department to have a separated area as a separate department that would be called “maintenance agreements” or “service agreements.” So while we’re using the service truck and probably a service tech in a lot of cases — as you grow your company you might specialize with maintenance techs – there are specific costs for overhead that are attached directly to the service agreement platform that are not actually service-related. So to keep demand service clean and to keep service agreements clean, and to understand the overhead, we separate those out into departments. And that’s a relatively sophisticated concept for many contractors. But even if you didn’t, you could estimate the overhead. So that gives us an idea of what it would actually cost us to run one event. So the discount for the ability to price for profit is derived by knowing your costs.

So for me – if you click on the ten-year worksheet there on the left [referring to worksheet on screen] – this is the example. So you can set your compensation plan. The agreement in this example is 179 and you begin to see, by systems or by years, that discounts apply. And those are all random. So the ten-year discount in Cell B11 shows 80%, which means it’s a 20% discount, well that’s just fake data in there. The reality is you get to choose that.

What I do is set up an accrued liability account on my balance sheet. That’s basic accounting. The money you get paid up front has to be earmarked for use. You can’t just take that and spend it. So for us we take that money and we invest that into a bond fund. And it’s part of a company, so it’s not going to be taken out of the company. But the bond fund is going to accrue earnings and interest that are going to be coming back to my company, and that allows me to accept 10 years’ worth of payments. So if you have five systems and we use this example right here, you gave me $6,086, I’m going to put that money away and I have essentially nine years of investment after the first year, and then the second year I have eight years, and so forth. Over a period of time, with the bond fund, I’m more than offsetting the discounts I’m giving in that situation.

So, again, the customer had to prepay me for that benefit and the price was established based on a cost structure that said I’m going to at least break even, maybe better, make some profit on that. And so this is an example of a tool that you could use, and the main thing is that you understand your costs and, as a business, are marketing and selling based on the principles that your costs are recovered first and any discounts you give don’t harm your business. There’s an entire class on this, we’ve probably got a one-hour video on this as well, and there’s a whole series of other videos that are on the site as well.

Listen to the whole Ask the Experts call: Every week, EGIA offers two Ask the Experts conference calls to allow contractors to ask questions and get answers about the issues affecting their business right now.

This is the weekly Ask the Experts free excerpt. To listen to all of this week’s calls, or to see the schedule and register for future calls, click here.

In part one of a three-part series, host Mark Matteson relates his book, “Sparking Your Success,” to the home services industry, illustrating various motivational techniques, self-improvement strategies and more that can maximize individual and company performance. Additionally, Mark responds to a Snapshot Survey question on whether training new hires who already have experience is necessary, and he fields a listener question on boosting morale.

Question: How can we compete with the large contractors that sell every brand of equipment and have huge advertising budgets?

Mike Treas: Well, the thing about the large contractors: A lot of people see them as being more expensive as well. Not that a smaller contractor wouldn’t be charging the same amounts, and I really hope and believe they absolutely should be, but I think sometimes people look at the smaller guy and think they might get a better deal. As far as selling every brand of equipment, I truly believe that you don’t want to sell on brand. I want somebody to come out there because I trust them and I don’t care what they sell. We all know in the industry that every system now has a Copeland scroll compressor and a Honeywell gas valve and a GE motor. They’re really the same thing in a different box. It’s what we do with it.

So what we have to get our customers to understand is that we are, being a smaller company with the training we’ve had and the amount of time we can actually put into a system because we’re not running all over town like the big guys are, we’re actually going to do a better job. So in sharing with our customers, they need to understand that the most important thing is doing the job right, not being the big guy out there. And by doing the job right, it doesn’t even matter what you pay. If you got a great deal on it and it didn’t last as long, or you got a great deal on it and it breaks again in six months or a year or a couple years, was there really any value in that to begin with?

So whether it’s installing a part or tuning something or installing an entire system, if we convince our customers that we do it right and we do things that nobody else will do because we believe those things we include in our system are going to be beneficial to the customer, it’s going to be healthy to the customer, it’s going to help their system last longer, then they’ll start to see us as the heating and air conditioning choice in town.

If I can add one more thing, guys: Social media is huge. If we get – we’re talking about “How can I compete with large contractors?” – I truly believe that when you setup a really great Facebook page, and you get your customers to honestly say “Yeah, I’d love to go to your Facebook page and like you,” and then all of their friends have an opportunity share your company as well with other friends, we start to build a social media following. And people today want a recommendation, and they will follow that recommendation on that social media – whether it’s Twitter or Facebook or whatever it may be. Nextdoor! Nextdoor is a great place to start adding a presence for your community.

Listen to the whole Ask the Experts call: Every week, EGIA offers two Ask the Experts conference calls to allow contractors to ask questions and get answers about the issues affecting their business right now.

This is the weekly Ask the Experts free excerpt. To listen to all of this week’s calls, or to see the schedule and register for future calls, click here.

In last month’s Snapshot Survey, we asked contractors all about service management operations to get an idea of what’s working in the industry and what’s not. Here’s one survey question and its results from the summary report.

Question: At what rate does your company convert demand service customers into service agreement customers?

The warmest service agreement leads are demand service customers – they’re already inviting your company into the home, agreeing to a conversation, and encouraging a relationship with your company. When we asked at what rate respondents’ companies converted demand service customers into service agreement customers, we found the leading result to be 31-40 percent of the time (22% of respondents). That was followed closely by 21-30 percent of the time (18%) and 11-20 percent and 0-10 percent (both 14%).

According to Gary Elekes, an EGIA Contractor University faculty member and a service department efficiency expert, service agreements need to be offered at 100% of all demand service calls. A minimum of 25 percent of those demand service calls should actually be converted into service agreements, with a target goal of 50 percent.

Login to access the full research report on Service Management Operations at EGIA.org/Login.

Question: What percentage of my total revenue should be spent on marketing?

Gary Elekes:There’s no one right answer to that. The percentage of marketing expenses is going to rely, and be linked heavily, to the goals and the growth patterns that the company desires. So, we always like starting off with an operating plan. What am I trying to accomplish, for example, in the year 2018? What do I want that to look like in the year 2021? And even in our own discussions, we project 10 years out. We use Jim Collins’s metaphor – he trademarked it – it’s called “B-HAG”: big, hairy, audacious goal. It’s a 10-year goal. So if you say, “Well, I want to be a $1 million company in 10 years, or I want to be a $100 million company in 10 years.” It’s that big goal.

And what that does is it frames the conversation about: Where am I now, and where do I want to be in one year, three years, ten years? And that’s a discussion that you can have by yourself, as a small company, as a company owner. Or if you have a larger company, and you have a management team, that’s the conversation that everybody should have. The beginning process of what marketing costs are link back to that conversation. So there’s a gap that’s created. I’ll just use an arbitrary example. If I’m a million-dollar company today and in 2018 I’d like to grow to $1.5 million, that’s basically a 50% growth pattern; $500,000 of growth. So I need to figure out how am I going to get that? The next layer underneath of that become the financial plan. The financial plan is always first, the marketing and sales plan is second, and it’s subservient to the financial plan. Because if we spend money and we don’t make money, we will not survive in business. So the financial plan comes first. So we have to set up the idea of saying well, if we’re going to grow this business $500,000, how do I access that ability?

So, many different ways. I can go to the marketplace and use media, such as digital media, or I can use traditional media – radio, TV, direct mail – those would be the traditionals. Digital would be things like websites, pay-per-click, AdWords, social media, reputation management, Angie’s List, Home Advisor, Google Home Services, etc. And there’s tons of videos on the website [EGIA.org] – there’s probably 14 or 15 videos on the digital side, and there’s at least 30 videos on the marketing side – probably 10 of them are on the media, just talking about each individual medium at this point. So that conversation is just determining, Well, how much do I want to spend there?

There’s three different kinds of marketing that we have to identify inside of that discussion. The first one then is external – advertising, you know, the media. Being able to go out and scream to the marketplace, “I’m here, these are my products and services, buy something from me!” That’s effective, but it’s usually the most expensive version of our marketing expense. It’s the one everyone knows about and everyone thinks about, because we get inundated with the ads on TV and the media that we tend to get exposed to in our daily lives.

The second type of marketing though, that’s probably more important to the actual small contractor, is the internal marketing problem. Those are the battles for the employees’ minds and willingness to execute the actual strategy that the company has – like selling a service agreement to a client who might need a service agreement. Or if we have technician opportunities and we don’t transact – the technician had the opportunity, we created that opportunity as a business, but we didn’t execute, we didn’t take advantage – oftentimes that’s a mindset issues. So I would encourage you to go through Wally’s mindset training and mindset discussion. Because having people aligned and understanding the company’s purpose and the company’s marketing philosophy about what’s necessary is absolutely crucial to reducing the amount of money the company is spending in media. So if we’re spending over here in media that’s great, but we’d rather grow without having to do that, because we get to keep the cash flow.

And then the third component is operational marketing, which is the business processes that are inside of a company affect how well or poorly customers refer us and interface with our company – and that’s called brand experience. And there are a litany of examples of how poorly companies set up their business practices, to the point where it’s aggravating or it’s negative in the experience to a consumer. And so I’m not going to give you a referral or go on Facebook and say “You should buy from ABC Heating, Cooling & Plumbing because they’re the most fantastic business ever; I love these guys.” And then maybe put a review out there through RecommendMe or one of the review agencies.

So those are low-cost process that you should look at and say “Well, how do I build operating practices, brand experience practices, that make great experiences for my customers?” You know, one bad experience, people tell 24 people, one good experience they tend to tell between 8 and 11. So it’s a numbers game that’s working against you if your practices are bad.

So those are the three fundamental core areas that I would take the goal-setting process through first. How do I want to grow my business? Do I have internal opportunities, do I have operating brand practice opportunities? Let’s fix those first. A business owner should spend at least 50% of their energy and time on those two areas – that’s tech training, that’s customer service training, that’s grabbing a guy like Brigham Dickinson at Power Selling Pros and getting him in to your customer service dispatch function and help your conversions become better. I don’t want to quote Brigham, but I think he says they can guarantee at least 70% conversation rates. So if you’re at 60 and you need to get to 70, you don’t need to spend external media money, you need to get to 70%, 75% or 80% — book more calls that you’re already getting. And then I think you want referrals, you want service agreements, you want your existing customer base being raving advocates – lunatics! – about recommending you as a reputation-based company for the type of business that you are.

When you have those two things working in your favor first, and you spent 50% of your leadership time pressing on those issues to get them right, what you’ve done is created a backbone of a company that can then grow through the media side. So most of my consulting work is done generally in the first two areas that I describe. And before I want to spend any marketing money, externally on the media side, I always have the goals and we solve those first two layer so marketing. And once we have those seamlessly working and we’re basically printing money in the company at that point, then it’s worthwhile to spend money to grow.

So the answer is, if I want to grow somewhere in the area of 12% to 15% a year, a marketing budget to replace my customers – they’re going to move, die and/or decide they don’t want to patronize me – is somewhere around 3 to 5% of your total gross revenues. That’s a legitimate number to start a budgeting conversation.

If I want to grow 20%, I’m probably going to have to spend more money to seek customers who aren’t currently doing business with me. Typically we’ll see a 6% to 8% marketing expense involved in that type of budgeting process. And if you want to grow more than 20% — maybe you want to double your revenue, or maybe you want to grow 50%, like we said earlier, you want to go from $1 million to $1.5 million – once I know out of that $500,000 growth, how much of that is coming from my existing customer base (my service agreements, my opportunities that I already have), then I may have to spend as much as 9% or more. I’ve seen companies spending 18% of their revenues on marketing expense, but I’d also like to suggest that very few of those companies were profitable. They were growing very quickly, but they weren’t making any profit. So I’m not sure what you’re interest is, but if I’m a company that’s growing at 50% but I’m not making any money, that’s not necessarily attractive to me and my goal-setting process; that might be attractive to you. So the goals begin to frame that conversation.

So I always like to start with the first two: operating processes/operation marketing, brand experience, internal marketing (how the employees and team members are aligned and functioning and we’re able to print money and our pricing is correct and all is good), and 3 % to 5% is the first conversation. If you want to grow more and your goals and your business plan set up for that, sure you can spend more money, but you have to know that if you spend that money, it needs to return cash flow and capital back to the business. IF it’s not returning cash flow and capital back to the business, it doesn’t seem logical to me that you would risk that. It would be better served putting that towards the first two areas.

This is the weekly Ask the Experts free excerpt. To listen to all of this week’s calls, or to see the schedule and register for future calls, click here.

The founder and president of Power Selling Pros, Brigham Dickinson is a renowned name in the home services industry. Brigham, an EGIA Contractor University faculty member, is a leading authority on customer service and call-handling, and how they can drive sales within an organization.

In the latest episode of the Contractor Coffee Club podcast, Brigham joins host Mark Matteson as the longtime friends chat about some industry insights and strategies that can impact businesses immediately.