Service agreements (SAs) are critical to increasing the value of your company, increasing cash-flow, improving profitability, and decreasing employee turnover. SAs increase the value of your business because potential buyers usually value them over anything else. SAs improve cash-flow because you get paid for services you have not yet provided. SAs improve profitability by increasing service revenue, increasing accessory sales, and by creating high quality replacement sales opportunities. SAs decrease employee turnover because they allow managers to keep their employees busy during slower times of the year.
Service agreements can also cause your company serious problems when not properly implemented. Here are the top three ways companies lose money with service agreements:
1. They send a “parts changer”
A parts changer replaces parts only when there is a complete failure. This is bad for the company and bad for the customer. The person you need to send thinks more like an aircraft mechanic. They look for abnormal wear and address issues before they result in a complete failure. This person will sell legitimate repair work when the parts changer won’t.
2. They offer discounts they cannot afford
If your service department generates a net profit of say 10% and you offer your SA clients a 15% discount, you are losing 5% of every transaction. Before you implement a SA program, be sure you have calculated your true net profit for service work. You accomplish this by printing out a departmentalized income statement for the service department. Most accounting software will not breakout your overhead by department. If that is the case, you will need to do it manually. You must know what your net profit is so that you do not create losses by offering discounts you cannot afford.
3. They price their labor too low
It is vital that you know how much it costs to provide labor. Your service agreements mostly consist of labor and they should generate more billable repair work. It is vital that you price your labor correctly before you begin selling SAs.