When working with our partners on their service plans we frequently get into the discussion of why discounted rates and bundled hours should be NOT be a part of the service plan. Examples of this might include:
The “Discount” Plan: Pay $75/month and receive a 20% discount on service + some other benefits.
The “Free Hours” Plan: Pay $150/month and receive two hours included each month + some other benefits.
In this post we’re going to compare and contrast the two plans above with the two plans below, which focus on subjective concepts that don’t eat into your margin.
The “Priority Response” Plan: Pay $75/month and receive priority service.
The “Priority Response + Monitoring” Plan: Pay $150/month and receive priority service + monitoring.
Integrators have told us that they feel more comfortable with the “Discount” plan or “Free Hours” plan because they believe it boosts the value of their service plans and helps them sell the service. They feel they can sell these plans with less pushback and also potentially make more money with them. But our experience and research by marketing consultants shows otherwise.
One preliminary problem when you bundle hours into your service plan is that you are simply getting prepaid for hours you are likely to work anyway. Tech will break, service will be needed, and regardless of whether the client is on the service plan or not, they will call you and ask you to fix it. In both scenarios you are able to bill for your work. By including the hours in your service plan you are helping with your cash flow (you’re receiving cash up front), but it’s not helping your profitability because you would have gotten paid for those hours anyway. If you want to fix your cash flow then do that with your AR procedures (collect deposits, make clients pay by credit cards, send invoices on time, etc).
Some integrators think that they are going to make money when the client doesn’t use those hours, but the client knows how to do math and will usually realize that they are paying for hours they are not using. So they will argue against the need for a service plan and instead use your hours a la carte when they need them. The other problem with this thought process is that tech is only getting more complex and integrated in the home – support needs will only rise over time driving your service plan margins down if you are providing discounted rates or bundled hours as part of your plan.
But the two major reasons why you should not include these concepts in your service plans are because they eat into your margin and limit your ability to value-price the service plan (i.e. limit your revenue). There’s one exception to this – read further below to learn if you are part of this exception.
You’re Eating Into Your Margin
The “bundled hours” and “discounted rates” plans only help you with cash flow because it’s money you would have earned otherwise (the client would have called you for support and paid you hourly for it and the client also would have likely paid you for a preventative maintenance check if you simply emailed them offering to do it). In most cases it’s eating into your service plan margin.
If you bundle hours in any form then you should assume at least some, if not all, of those hours will be used and count the lost hourly revenue against the service plan revenue in order to calculate the new revenue you’re bringing in from your service plans.
For example, looking at the “bundled hours” plan, if you charge $150/month for your service plan but include two hours/month (valued at $100/hour), you should make a determination as to how many hours are used for that client. Let’s assume the client uses on average one hour/month for billable service. This adds up to $100/month of revenue you otherwise would have gotten, so subtract it from the $150/month your service plan brings in. Your service plan really ends up being worth only $50/month in new revenue.
The same can be said of the “discounted rates” plan. Every hour of labor you bill to the client you end up eating away at the revenue you earned from your service plan because of the lost revenue on the discount. In other words, the more a client uses you the less profitable the service plan becomes (and in some cases, if they use you enough, the plan starts to lose you money).
Many integrators are convinced that if they bundle hours or give discounted rates they will end up on top because the family will never consume that many support hours, but consider this: tech is only getting more complex and families are only becoming more dependent on it. This means support will take up more hours and your service margins will continue to come down.
If you are convinced that discounted and bundled hours are helping you then you can verify this by tracking your team’s time diligently as you expend these hours on the client. After six months you’ll know exactly how much revenue you gave up in exchange for the service plan.
This table demonstrates the new revenue that each service plan would generate given a client who requires at least one hour of service/month on average.
Subjective Value vs. Objective Value
Let’s consider the value of an hour. What is it for your company? We’ve heard some people charging as little as $75/hour and as much as $200/hour. And usually hourly rates are determined by the markets we serve and the hourly rates of our fellow home service providers (electricians, etc). Hourly rates are in a sense objectively valued – they can be benchmarked and there is a glass ceiling – charging more than $200/hour is virtually unheard of without getting a response like “I don’t pay my lawyer that much why would I pay you that much?” Regardless of the value we believe you bring to the table, clients have a relatively objective manner of determining the value of your hour.
Correspondingly, the values of a “discounted rates” and “bundled hours” are objective. A 20% discount on a $100/hour rate is equal to $20 of value for every hour used. Or including one hour/month in your service plan is equal to $100 of value if the client expects to use you for one hour of service.
Subjective value is different – it’s hard to quantify and it’s usually very personal. For example, the value of art is hard to objectively determine and usually reaches absurdly high prices. In the consumer services world, concepts like “priority service” and “monitoring” are subjectively valued and can therefore be value priced. Our data shows that families are willing to pay $75+ for priority support and $150+ for monitoring – both of which are risk free (no risk of lots of service hours eating into service plan revenue) and easy to sell.
A service plan should be based on items of subjective value, not objective value. That’s how maximum price points are reached delivering maximum margin.
Our team at OneVision will put together this simple service plan on your behalf and then help you sell it to your clients. We’ll handle your service and support as well making recurring revenue generation easy as pie.
An Exception to Every Rule
One exception to all of this is if you have excellent data that allows you to understand the cost of each client. This means you have to become excellent at time tracking (read our 3-part series on this here) so that you know how much time you’re putting into every client (and thus how much that client costs).
With that data, you can now provide the ultimate subjective benefit: “unlimited, prioritized service for a fixed monthly fee.” We learned that our clients appreciated the benefit of writing one check every month and knowing that everything would be taken care of. And that benefit was completely subjective.
The benefit of “unlimited” is significant enough that we are able to charge a premium for our services. It effectively became insurance – we guaranteed that we would respond instantly to every request 24/7 and meet their sense of urgency and we guaranteed to do whatever it took to solve the problem. Because we were so diligent at time tracking we knew how much each client used on an annual basis and charged appropriately, reaching an average of $3,000/month/client (many of whom paid upwards of $10,000/month). This all averaged out to a rate of $300/hour for our service team.
We think the best integrators can get to this state by implementing simple service plans now and focus on making RMR a significant driver of the business. Then it can be optimized for maximal revenue generation.
We can help make this happen – fill out the form below and we’ll get back in touch right away.