How to Sell Proactive Service Agreements

Can you imagine a day when A/V gear is given to clients for free, and the only way you make money is on your labor or on recurring revenue services? No more high-margin products generating profits?

It could happen, according many integrators who have decided to shift their business models away from highly profitable mega-installations to smaller, repeatable installations that provide ongoing revenues.

As the market changes, dealers are seeking ways to more effectively sell ongoing services to new and existing customers.

Among the process strategies that appear to be working are reducing the warranty term on your installation labor and extending commissions to your salespeople for not only the initial contract sale but also for the annual renewal.

Whatever the methodology, integrators are recognizing that they can build "clients for life" with service agreements rather than continuing to look at customers as one-time sales opportunities.

The biggest payoff: Service contracts carry a 70 percent margin for the dealer.

Facing a Changing Industry, New Customer Types

The sea change occurring in the industry is being caused by numerous influences.

First, there's the influx of security companies in the industry. These companies come from a world in which the installation labor itself is de-valued, often even subsidized, in order to receive a long-term, highly profitable monitoring contract.

Second, there's the trend of IT value-added resellers moving into the custom installation business. These companies come from an industry in which the products are inexpensive (with no mark up), but the installation labor has a high value.

They also covet recurring contracts to maintain computer systems against viruses, to provide backup storage and to offer software upgrades. Some integrators have stolen a page from these companies by charging for system design services.

Third, the economy is slowing and operational costs are increasing -- duh! Integrators need to create ongoing agreements to stabilize cash flow. This can go a long way in offsetting spiraling gasoline costs.

Fourth, profit margins are dropping on products. This is not news to most integrators.

Fifth, the client demographics are changing. Of course, dealers know that the days of selling to an audiophile, two-channel listener are long-gone.

While the high-end of the market appears to be somewhat stable, middle-class customers have less expendable income for high-end A/V gear. However, that same gen-X/gen-Y client is devoted to his X-Box or PS3, his AppleTV and his PC home network.

Moreover, this client base is impatient; they don't want to physically rent movies or buy CDs. They are digital.

They also feel empowered -- they've grown up being catered to with designer coffee and cable TV. While these customers have less money to spend on an initial installation, they tend to spend more money on ongoing services (while saving less money overall, unfortunately).

Lastly, these clients tend to be more educated than older customers -- "just enough to be dangerous," says Gary Kayye, chief visionary at Kayye Consulting Inc. in Chapel Hill, N.C.

Kayye made a compelling presentation during the CEDIA Management Conference in San Diego back in February. His focus was the different ways integrators can sell service agreements.

"Selling proactive service agreements requires a proactive philosophical change in your organization," he says. "You need to shift into a service-sales type of organization."

One way to look at it is to compare the custom installation market to other trade contractors who work in the home.

For example, a painter or tile contractor charges much more for his labor than he does for the cost of the goods. But integrators do not tend to place a premium on their labor.

Kayye says that today's gen-X/gen-Y buyer expects to be charged at a high rate for labor while expecting to get the product for a lower cost. He cites AppleTV and gaming systems as perfect examples.

Customers will pay only $299 for an AppleTV, PS3 or Xbox, but expect to be charged (say, $150) if they contract with an integrator to hook it up for them. The homeowner then pays for his or her individual downloads.

"So what?" you might ask. Where is the value for the integrator in that transaction?

First, you are satisfying the customer.

Second, you are helping to establish a "recurring revenue" mindset with the homeowner to pay for ongoing services.

"This transition is good for the industry," says Phil Joseph of AVT in San Ramon, Calif.

"We transitioned our plasma installation price-point to a higher level. So, we made $2,000 more on a base television installation than we did before."

Analyzing Your Contract

Before integrators can successfully sell service agreements, Kayye recommends they conduct an analysis of their existing installation service warranty.

He advises that dealers limit their standard labor warranty to no more than 90 days. A quick show-of-hands poll of integrators in attendance at the CEDIA Management Conference showed that most companies offer one-year warranties on their labor.

Kayye argues that a 90-day policy immediately increases the possibility of selling an extended warranty.

(Editor's Note: Some states, like California, require a one-year "operational warranty" for installed systems. Check with your local jurisdiction before altering your own labor warranty policy.)

A 2007 study by CE Pro shows that less than half the industry even tries to sell service agreements, either for labor or for products.

Also, dealers need to have specific language in their installation contracts that specify the start of the warranty period. For many, that date is when "system operation" is turned over to the homeowner.

Moreover, dealers need to have a solid replacement policy, such as a clause that guarantees the integrator will supply a replacement unit if a component is down for more than three days.

Lastly, if a customer opts not to purchase a service agreement, dealers should get the refusal in writing.

"The challenge to selling service agreements is that many customers look at electronics as 'disposable,'" says Randy Stearns, president of Engineered Environments in Alameda, Calif.

"People don't want to pay for a five-year service contract if you will likely replace that component in two years."

As many dealers know, selling service agreements can get murky. Matt Carter of Encore Technology + Design in Columbia, S.C. recalls a job in which the customer installed an AppleTV and DVR years after the original installation.

The addition of the two new pieces of equipment overheated the cabinet and caused two existing components to fail. The customer called wanting the components replaced at no charge.

Carter's solution was to sell the client a fan-cooling system for the cabinet and install it for free, but not replace the overheated components.

How and Why to Sell Service Agreements

Plain and simply, selling a service agreement keeps you in consistent contact with your customers, allowing you to sell them upgrades and maintain their satisfaction.

"It makes them clients for life and helps drive referrals," remarks Kayye. It's much more expensive to generate new customers than it is to keep the old ones.

Also, service agreements are very profitable. According to Kayye, the contracts typically yield 70 percent annual profit.

When in the sales process should service agreements be sold? "Early," advises Kayye. "Don't make it a line item at the end of the proposal and don't try to sell it after the job is done."

He recommends that service be included as a major section in the initial proposal, on par with design and integration. Another way to sell it is to have a separate line item amount for "service" included with every piece of gear.

One key to selling service agreements successfully is incentivizing your sales staff properly.

Kayye recommends offering the same sales commission on a service as you do for the gear, and continue paying that sales commission in perpetuity each year if the customer renews the contract. In the meantime, dealers should think about switching their billing cycle to monthly instead of annually for the contracts.

Richard Millson of Millson MultiMedia Inc. in Vancouver, B.C. is one integrator who has taken his service agreement program a step further.

His staff periodically logs in to clients' systems remotely to perform routine upgrades and monitor system operation.

The clients are subsequently sent a report listing exactly what the technicians discovered and what was done.