Considering the potential for growing profits in the service and maintenance area of many businesses, it is surprising how little time some business owners invest in thinking about the growth of this side of their business. Most time and energy is invested in designing, quoting, project managing, installing and getting paid for the installed system. Yet, most of the profit is made in the service area. This article looks at how to establish a service business mindset, and highlights the many benefits that come from growing your service sales...
We work with a significant number of installers and it is surprising how little time some business owners invest in growing the maintenance and support service side of their business.
Most time and energy is invested in designing, quoting, project managing, installing and getting paid for the installed system. Yet most of the profit is made in the service area.
It is vital to develop a service business mindset when the installation activity can be so time consuming. This mindset is easier to develop when you call to mind the many benefits of growing your service sales…
1. Increases the value of your company
If you’re considering selling your business at some time in the future, the value of the contract base can be the key element in valuing the business for a buyer, with a multiple being applied to the monthly or annual contract value.
2. Provides recurring income stream
Wouldn’t it be great to know at the beginning of the year that your overheads are at least covered by your annual service contract income?
As an installer, your annual service contract income can be anything from 50% and above to less than 10% of annual sales. If you are in the latter category then you are constantly dependent on cash flow in winning, completing and getting paid for new installation work.
3. Delivers higher margins
Service gross margins can be in excess of 50%. This will depend on your target market, your service pricing, your geographical coverage and your engineer efficiency, but these margins are considerably different to installation projects, especially when the work is tendered or you are working through contractors.
4. Provides follow-on sales
The service contract gives you the opportunity for repeat contact with your customers. There is the reactive call-out income stream and, more importantly, there are the service works that follow from having the service contract: system extensions; systems upgrades; new disciplines/ services.
5. Gives you repeat contact with your customers
The repeat contact through preventative maintenance visits and reactive call-outs by the engineer provides the opportunity to build a relationship with your customer over the long term.
6. Improves your cash flow
With the higher service margins and the annual service contracts that are usually paid annually or at worst quarterly in advance, this is a tremendous boost to your cash flow.
But does it really make that much of a difference?
I had the privilege of running a £200m business in the field of automatic doors through the market downturn and severe economic crisis of 2008/9. The business continued to make net profits in excess of 20% because 45% of the revenue related to contracted maintenance income that had been secured systematically following each installation. This was a real cash cow business. So, yes. It does make that much of a difference.
