The Silent Service-Plan Profit Killer
This Post Originally Appeared on CE Pro on August 24, 2017
Thinking of adding extra features or offerings to your service plans? Don’t! Selling over-complicated service plans pits you against a silent profitability killer: operational overhead.
As anyone who’s been through the process can attest, figuring out how to effectively craft a service plan is a real challenge. With no effective roadmap to follow, integrators I speak with all over the country have a tendency to over-complicate the process. I know how easy it is to fall into this trap; I’ve been there myself.
A service plan packed full of features might appear on paper like an attractive offering for your clients. But from a business perspective, selling such plans pits you against a silent profitability assassin — operational overhead.
Prior to launching OneVision in its current form, we used to operate as an integrator servicing families in the Boston area. Even back then, we didn’t perform integration in the traditional sense. Instead, our unique business model focused exclusively on monetizing our services through recurring monthly revenue contracts.
In 2013, we had just finalized another in a series of service plan overhauls. We were now on version 4. And despite all signs to the contrary, we had opted not to simply our feature set, but rather to expand it. Amongst a bevy of other offerings, our plans had now grown to include such features as discounted labor rates, prepaid labor and bundled hours.
In isolation, I could make a reasonable argument for all three of these inclusions.
Discounted labor rates were, of course, designed to serve as a carrot, enticing prospective clients who might otherwise sit on the fence. Bundled hours were to act as a secondary incentive for such indecisive prospects. And prepaid labor appeared to me at the time as a convenient way for clients to cut down on the number of invoices they had to deal with, with the added benefit of OneVision getting paid up front (never a bad thing, although cash flow isn’t the same as profits).
At the time, all of these inclusions had an added benefit in that they eased the process of learning how to pitch the high-dollar service plans we were offering. After all, once we’d worked through the process of what to include in our plans, the biggest challenge remaining was to find the confidence needed to sell them. Without question, being able to point to things like discounted labor and the included bundled hours made this process easier. And, as you might have predicted, the plans sold well.
It was only once an appreciable number of clients had signed up for these plans that the problems became apparent.
Over-Complicated Service Plans: The Breakdown
Much to the dismay of our accounting team, we had failed to appreciate the complexities that came with the inclusion of bundled hours. The tracking systems necessary to keep invoices accurate got completely out of hand. We made countless mistakes, and invoices often required up to two weeks of internal reviews before we felt confident enough to send them out.
The option for clients to purchase prepaid labor added another layer of complication with very little benefit. While prepaid labor did help with cash flow, it did nothing to boost our profitability. Prepaid labor simply became one more thing to keep track of.
Then, there were the discounted labor rates. Beyond being one more piece of critical client data to keep track of, this feature served as little more than a drag on our profitability. Incidentally, it wasn’t until we overhauled our plans for a fifth time that I learned an important lesson; not only was this offering unprofitable, it wasn’t necessary. In other words, our close rates were not impacted whatsoever by the removal of this plan benefit.
In short, the overhead costs associated with these inclusions were killing any chance we had at profitability. It didn’t matter how many of these plans we sold. Even though we developed systems on the fly to deal with the complexity, the efficiencies we gained were never going to be enough to blot out the fact that we had made a fatal flaw in our pricing model: we had over-complicated it.
The team was pulling their collective hair out trying to track the hideously complex maze of features our plans had become. This killed our chance at profitability, not to mention what it did to team morale.
Whether you’re just getting started or well down the road to offering your clients premium service contracts, you must think critically about every inclusion. Offering features designed to drive value for the client is the ultimate goal, but this can’t be done at the expense of your profitability.
So before you go adding features simply for the sake of sweetening the deal, be sure to weigh each one against that anticipated overhead it will create. Only high-margin features should be included. The rest should be left on the cutting room floor.
Are you a business owner or service manager? Did you find this article helpful? If so, check out this post as well – How to Simplify Your Hourly Billing
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