Why Recurring Revenue Service Contracts Don't Work for My Company

Nov 12

Written by: John Sciacca
11/12/2013 12:53 PM  RssIcon

 
 
The Holy Grail of our industry seems to be developing some form of a recurring revenue stream. Far better than the one-and-done-and-on-to-the-next-one install, recurring revenue is like that mythical golden goose that just poops out stacks of money on a regular basis, while you just sit back at your desk, feet up, sipping some Macallan 30, watching all those hundos rolling in and thinking of all the ways to spend it.

In reality, getting a boat ride on that revenue stream is far easier said than done, and many integrators wonder just how to set sail aboard the SS Easy Money. As much as we like the idea of the checks flowing in every month, at the other side of that money pipeline is a customer writing a regular check and they are going to be expecting some value in return. (Unless you are just so good that you have customers writing you regular checks solely to keep your awesomeness on retainer in which case, I salute you, sir or madam! And I beg you…please instruct me in your ways, oh Jedi Master!)

The security industry is the business model that most of us look to, as they have nailed down the concept of “pay a monthly/quarterly/annual fee for the monitoring of your system.” For the most part, once you have installed an alarm system, there is very little regular on-going maintenance required and a third-party company handles the 24/7 monitoring and dispatch, meaning it really is a case of just sitting back and getting your share of the monthly pie. A small pie, to be sure, but I believe it was Confucius that said, “One who takes many little bites from a lot of different pies will end up having a most large and satisfying meal.”

From the customer’s standpoint, they are generally happy to pay for the added piece of mind of knowing night-or-day, someone has a finger poised to summon the authorities if things go sideways, so monitoring is a win-win.

Several install companies have tried to kickstart the recurring revenue stream by offering maintenance contracts for the work that they do. On the surface, it sounds like the perfect integrator counterpart to the alarm monitoring model: you pay me a set fee monthly/quarterly/annually, and I’ll make sure that your system is up-and-running. And, I’ll be honest, this is something that we have kicked around at our company a few times over the years, but ultimately, we continue to abandon the idea and stick with per-call charges because we think that it makes the most sense and is the fairest for both us and the client.

Now, I’m going to tell you why I think that per-call charges work better for my company, and then I’d love for those of you that have maintenance contracts in place to tell me in the comments all of the reasons why they work for you and your clients and how you’ve overcome my objections.

Fine Print
In trying to find an equitable billing rate for a maintenance contract, we tried to determine how often we would need to go out to a job, how far away it might be, how long we would need to spend there, what was likely to go wrong, and what exactly we would be covering. We came up with verbiage of how many visits and what would be done on each visit, but it always ended up feeling like we were going to hand the client a bunch of fine print, mumbo-jumbo laying all of the things that we wouldn’t be doing for them, instead of just a blank check of, “Whenever your system has a problem, we will fix it for this flat rate. Period.”

Equipment Repair
We also struggled with how we would handle gear that breaks, both in and out of warranty. Would the client expect that a “maintenance contract” would cover all of their gear regardless of the warranty state if it broke during the maintenance agreement period? And would the contract cover shipping costs of getting the gear repaired? And what if it couldn’t be repaired? The client is paying a regular fee to have their system in working order, so this doesn’t seem like an unrealistic expectation on their end, but could potentially leave you on the hook for a big charge. Of course, you could roll an extended warranty into your service agreement, but then you’ll likely get into pricing that would make the agreement unpalatable to clients. And if something is broken, even if you are going to cover the repair costs and the shipping, what is an acceptable period of time for the system to be down? And your definition of what is “acceptable” might not be the same as the client’s…

Meeting Expectations
Someone calling up and saying, “I’m coming to town next week; could you send a tech over to make sure my system is working before I get in to town?” is a pretty routine request. But there are times when things are so busy that you just can’t drop everything and get someone out on those calls on short notice. But, if you have a contract with someone, then you are going to be bound to go out there and look at the system, schedule conflicts be damned. Of course, you could require so many days of advance notice as part of your fine print, but, again, when someone is cutting you a regular check to take care of their system, what they are going to remember is that they’re paying you to make sure their system is in working order and not the exceptions and exclusions you printed for them.

Buy Just What You Need
What we keep coming back to is, even though we’d certainly love to have all of our clients filling our mailbox with those sweet-sweet monthly checks, on-demand service calls where we bill time-and-materials for each request makes the most sense for both us and our clients. This way, we know exactly what our costs are going to be on each truck roll and the client never pays for something that they don’t need.

We can also meet their expectation that their system will work right up until it doesn’t, at which point they will call us and we’ll set up a billed service call within a reasonable period of time to come out and fix it. And if they want that pre-emptive, “I’m coming in to town” call, they can call or e-mail and pay for that singleton service.

So, am I leaving money on the table? Does your company have a maintenance contract system in place? How have you made maintenance contracts work for you?John Sciacca
 
 
 
John Sciacca is principal of Custom Theater and Audio in Myrtle Beach, SC.
 
 

5 comment(s) so far...


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Re: Why Recurring Revenue Service Contracts Don't Work for My Company

John, I agree that service contracts have never seemed to be a good choice for our company as well. I don't like fine print in contracts that I sign and I know our clients would not as well. Also each of our projects are so custom that I would be very difficult to have a contract that would fit our needs. We also bill on a time and materials basis for service calls. This method also keeps some of our more budget minded clients from having us come out for simple "plug it back in or reset service calls". You know...the ones where you feel guilty for charging.

By Mark Profitt on   11/12/2013 3:41 PM
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Re: Why Recurring Revenue Service Contracts Don't Work for My Company

My girlfriend is a CPA and she feels there should be a way charge clients for all the telephone assistance we provide.She is around on weekends and evenings when I grab a call and start troubleshooting with a client. As most in our industry know this can be a 24/7 job.Many problems are resolved over the phone,so no further revenue is added from these interactions. I know that we get a ton of referrals from existing clients, so I(mentally) write off the phone time as good advertising.

By Dallas Dingle on   11/12/2013 9:50 PM
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Re: Why Recurring Revenue Service Contracts Don't Work for My Company

You seem to be looking at service contracts in the wrong way. There's no such thing as money for nothing. You need to schedule regular maintenance calls as a part of your contracted systems therefore placing the onus on the client to schedule them in advance. With regular maintenance calls there will be fewer problems. Regular maintenance calls can bring in additional revenues as the customers needs change. Additional customer training means fewer nuisance calls and fewer emergency service calls, and regular maintenance calls keeps the company in mind frequently and the client will then feel more satisfied that the checks they are writing are actually doing something for them. A happy customer is a recurring customer, and there is no better advertising than word of mouth!

By Jeff Magnell on   11/12/2013 10:58 PM
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Re: Why Recurring Revenue Service Contracts Don't Work for My Company

Jeff,

Great points, adding regular preventative maintenance is a big part of any service plan. It is also a great way to monetize remote reboots and those phone calls that Dallas brings up. Combine this with remote monitoring and support and you have a Client Care Plan that provides value to you and your client.

Now, since this is relevant to the topic... Did you know that the team at ihiji has spent more than 5 years discussing this topic with dealers around the world? Using that time and knowledge we even put together a turnkey kit on selling Service Contracts. You can learn more on our website or one of our regular webinars.

Mr.ihiji

By Mr.ihiji on   11/14/2013 2:00 PM
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Re: Why Recurring Revenue Service Contracts Don't Work for My Company

If you can add some type of monitoring like the Ahiji or a product like that that monitors the state of the system then you can set up the exact model that the alarm companies use.

By Jonathan Herbster on   11/16/2013 9:55 PM

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