I am amazed at how often I see service contractors spending extraordinary effort to measure the gross margin of each service call, job, or project to two decimal places while simultaneously making zero effort whatsoever to measure and understand the value of their business in total. Service call gross margin is a very poor proxy measurement for the overall value of the business to its shareholders.
Any financial calculation of investment value is always about the current value of a future stream of income. The more certain and less volatile that future stream of income, the higher the premium that can be paid today to own that future income – i.e. to become a shareholder. For a service contractor, optimizing this value is all about having a large set of somewhat diverse customers that spend predictable amounts of money each year for the maintenance, monitoring, repair, and upfit of their important equipment. It is also about having a sales approach that regularly adds new customers to the portfolio while simultaneously having high customer satisfaction levels so that few customers ever terminate the relationship.
So what questions should you be asking as a shareholder to determine the value of a commercial service contracting business (or any other high value, maintenance or subscription-oriented business)? Here are a few ideas to get you started. Let’s see how you do in answering these:
How many customers do you have under an annual or longer maintenance contract?
What is the monthly recurring revenue (MRR) or annual recurring revenue (ARR) for the set of customers that have a maintenance contract?
What is the total contract value (TCV) of future committed revenue for all customers under contract?
What is the annual contract value (ACV) expected to become revenue in the next twelve months?
What is the amount of deferred revenue on the balance sheet that reflects payments collected in advance for services to be delivered in the future? What is the ratio of this number to the ACV number above? To the TCV number above? The higher these ratios, the more committed the customers are to your contracts.
What is the ratio of planned work revenue (maintenance, inspections, quoted repairs) to unplanned work revenue (emergency or priority service calls where something broke)? The higher this ratio the better the customer service being delivered. Customers do not like unplanned expenses nor the disruptions they represent.
How much does it cost in sales and marketing expense to land a new customer (the cost to acquire a customer or CAC)? What is the ratio of that cost to the first year average revenue from a new customer?
What is the net revenue churn in the customer base? How much revenue did you get this year from customers that have been with you for over a year relative to the revenue from those customers for the prior year? Minimal churn means your digital wrap is sticky.
What is your contract renewal rate? What percentage of customers do not renew their maintenance plan when it comes due? How much annual contract revenue on average do these non-renewing customers represent? These numbers represent your gross churn.
All of these questions are directly correlated with the value of a service contracting business (or any subscription-oriented business for that matter), and not one of them deals directly with the question of gross margin for a service call. Service call gross margin is important, but gross margin on contract maintenance, inspections, and planned repairs is actually much more important. No investor will complain about an occasional expense hiccup for unplanned services in the context of a highly predictable stream of high margin, contract service fees. The very nature of unplanned work (it is unplanned!) makes it volatile and not particularly valuable to an investor.
So what is the formula for managing the business toward the highest return for the owners of the business? If service call gross margin is the wrong metric, what are the right metrics? And how can they be measured regularly to assure the business strategy is generating high shareholder returns?
As I indicated above, the basic finance formula for determining the value of an investment is to assess the amount and the risk of future income streams. Of course, predicting the future is tricky business, so it is best to rely on historical trends as a proxy for future performance, along with a healthy dose of common sense. With that in mind, I have developed a simple, easy to remember mantra for service contractors to keep in mind as they consider strategic initiatives to increase the value of the business:
How Many? How Much? How Long?
These three questions underpin the basic value-building fundamentals for almost any business.
A continuation of this chapter with tactical examples of how to measure “How many? How much? How long?” is included in our How Valuable Is Your Brand? Part 2.
As I indicated in my previous post, the basic finance formula for determining the value of an investment is to assess the amount and the risk of future income streams. Of course, predicting the future is tricky business, so it is best to rely on historical trends as a proxy for future performance, along with a healthy dose of common sense. With that in mind, I have developed a simple, easy to remember mantra for service contractors to keep in mind as they consider strategic initiatives to increase the value of the business:
How many? How much? How long?
These three questions underpin the basic value-building fundamentals for almost any business.
How many?
“How many?” refers to how many customers the business services under a contract. It can also be how many locations or customer assets are under contract. Likely all three need to be measured. Any business that is overly reliant on a small number of customers, even if they are large customers, has higher risks associated with their future income streams. A single screw up or a change in management at the customer can put the entire company at risk. It is better to have many customers with many locations so that the risk and volatility of the revenue portfolio are lower.
At the end of every quarter and every year, you should measure how many customers or locations were serviced that quarter compared to the same period in the prior year. Do you have more customers and locations under contract now? How many customers that were serviced last year declined service or canceled their contract this year? How many new customers were added under contract and serviced this year? As a percentage, what type of growth does this represent? How much did you spend on sales and marketing to add those new customers (sometimes this is difficult to measure precisely because marketing spending tends to come well ahead of actual customer wins, sometimes by several quarters or even years)?
Here is my favorite chart for plotting the progress of the business in maximizing the how many? metric.
It shows the number of customers/locations serviced in the quarter, the number that declined service or canceled, and the number of new customers added. The customer locations lost and the newly added locations are plotted on the second axis because these may be small in a large, mature business with lots of customer locations under contract from years of servicing the market. Ideally, everything but locations lost is going up and to the right. The number of new customers/locations added should also exceed by a good margin the number that canceled. Otherwise, the “churn” in the customer base will eventually decimate your business if it continues over too many quarters.
How much?
“How much?” refers to the amount of revenue you can collect from a given customer or location. The higher the number the better, of course. There are generally two ways to drive this metric higher: 1) raise prices to charge more for what you do, and 2) do more for the customer. Investors love companies with pricing power in their markets. Companies that can raise prices without losing customers to the competition are valuable to shareholders. Customers love companies that can do more for them because their overhead associated with vendor administration is lower. It is also more difficult to replace a vendor that is doing many things, so your services are likely to be more durable in the face of a hiccup or challenging customer service situation.
Every quarter, you should measure the amount of revenue you earned from each customer and each group of customers relative to the amount of revenue you earned in the prior year period. Were you able to raise prices? Did customers respond to your solicitations for larger amounts of their business? Did they buy new innovations or suggested upgrades that you recommended?
I suggest that you break your customers up into groups or “cohorts” indicating what year they initiated the service relationship with your company. You can plot a view of how much money you are getting each year from customers that have been with your company for one year, two years, three years, four years, and so forth and so on. Ideally, you are growing within each cohort group for the first few years and then holding onto most of that business during subsequent years. Some churn after a number of years is understandable as companies go out of business, merge and change strategies, or experience other corporate disruptions that ultimately affect their relationship with you. However, if you can show strong growth from sales to existing customers along with staying power within accounts as a business pattern, a new investor will pay you a premium for that trend.
Here is a chart that shows how revenue breaks down by customer cohorts grouped into the year you landed the service contract with the customer.
Notice how the recent cohorts start smaller, grow over time, and then hit a steady state before a slow decline.
You should also measure how much? as a function of the type of revenue you are recognizing. I would suggest three different categories – contract maintenance or program subscription fees, planned repairs and upfits associated with quoted work, and unplanned repairs such as emergency service calls. You want to demonstrate a pattern over time of an ever increasing portion of your revenue coming from contract fees and planned work as compared with emergency service calls, which are typically associated with customer equipment malfunctions.
Planned work is more efficient and more scalable because the logistics can be meticulously coordinated. Customers benefit and your business benefits when you can plan the work to avoid excess travel time, expedited parts shipping, overtime expenses, and the general administrative stress associated with delivering service “right now.” Ideally, you can get the customers assets “under control” and minimize the service calls by quoting planned repairs to replace the risky equipment assets with more robust ones that are less prone to failure.
Here are a couple of graphic illustrations that demonstrate why you want to pursue a strategy that ultimately transitions your revenue mix from unplanned, service call work to programmatic contract work and quoted work.
The oscillating, sine-wave-shaped pattern represents demand associated with random equipment breakdowns when no programmatic approach is in effect across the customer base. If you scale up your technician workforce to deliver great service in the face of random peaks in demand, you will be losing lots of money as you keep that workforce in place during the random slack periods.
If you scale back your technician workforce to avoid the plunge in profits when demand tapers, you are at risk of delivering poor customer service during the peak periods.
The ideal situation is to get the customer demand curve “under control” on a customer by customer basis by putting them into a contract that incents both you and them to programmatically eliminate the risks that ultimately drive equipment failure.
In this case, customers pay more for your maintenance program and monitoring fees, and in return, they have less risk of failure and fewer unplanned expenses. If you do a good job demonstrating to them the story of their equipment via video and photo evidence, they will not have a problem with the program fees, and they will generally accept your advice regarding repairs, retrofits, and upgrades that further eliminate risks, disruptions, and unplanned expenses. The ideal situation, as always, is that you are getting “money for nothing” while the customer sees daily evidence through your digital wrap that they are indeed paying for “something” very valuable.
How long?
In addition to measuring how many? and how much? on a periodic basis, you also need to measure how long? which refers to the duration of your relationship with a customer. If you can create a really sticky digital wrap that reinforces the story of your brand throughout the service cycle, you should, in theory, be able to hold onto those customers forever. Ideally, you are actively working your pricing model to manage your portfolio of customers by raising prices on those customers that do not fit with your model and in other cases perhaps trimming prices or offering other value-added services at a discount with those customers that are your prized possessions. In fact, once you become comfortable in your marketing and sales strategy and the cost of attracting new customers that fit the model, you will probably begin actively firing customers that do not fit by not renewing their contracts or simply directing them to your competitors when they call for service.
Investors love sticky brands with repeat customers that pay up year after year on a subscription basis to continue receiving the terrific results from the relationship. However, investors are just like customers in that they generally do not want to pay for nothing. In this case, nothing refers to sales pitch platitudes that ultimately add up to “Trust me! It’s gonna be great! Just sign the check so I can cash it!” You have to provide the evidence that your “money for nothing” program really yields higher returns in the form of a predictable income stream. Show them the charts that you use to measure the business value you are generating. I bet they are impressed, and you might be surprised at just how much “money for nothing” you get if you ever decide to sell shares in your company.
The bar graphs in this post were created from data in ServiceTrade with Amazon QuickSight. Learn more about how you can use this Business Analytics tool to uncover insights in your own service data.
How to Make Billions Selling Nothing – The Story of Red Hat
The following story is a preview from an upcoming book about how commercial service contractors can earn “money for nothing” by rethinking the way that they present and deliver the services that they provide their customers.
I left IBM to join Red Hat in late November of 1998. Red Hat would record five million in revenue in 1998 selling a software collection on compact discs (CDs) to computer science enthusiasts in retail outlets like Fry’s, CompUSA, Egghead, and Best Buy. All of the software on the CDs was also available for free online, but in those days the Internet was still a bit slow for most people, so the CDs were more convenient because installing the software from CDs was faster and easier. The collection also included useful user manuals to help with installation and setup. Fast forward twenty years to today and almost all of the software that Red Hat provides to its customers is still available for free on the Internet, but somehow Red Hat is a worldwide enterprise worth more than twenty billion dollars with annual sales of about three billion dollars. How is that possible? How can Red Hat make so much money for something that is available for free? Because Red Hat is a “money for nothing” premium brand.
One of my first tasks, after I joined Red Hat, was to determine why all of these computer geeks liked Red Hat so much, and what, if anything, the company might sell to them or their employers that was worth more than the fifty to sixty bucks they were spending on a CD collection at Best Buy. Shelley Bainter, who works with me here at ServiceTrade, alongside Hilary Stokes and Marty Wesley began setting up “customer Friday” events every week to quiz Red Hat customers and users on their experience with the technology and the company. Our goal was to understand what was important to them, and how Red Hat might use that information to make a more valuable product. The company had an initial public offering of stock on the NASDAQ exchange in August of 1999, and the shares jumped from about $20 per share to about $150 per share in a few short weeks. With huge expectations and a monster market capitalization of about twenty billion dollars, it was critical that we figure out a premium product strategy. The company still had no clue what to sell potential customers, and we certainly did not want the shareholders to figure out that we didn’t know what we were doing.
Well, we weren’t fast enough. The share price plummeted from one hundred fifty dollars to about three dollars over the course of the next few months. But in the midst of incredible employee anxiety and shareholder lawsuits, we discovered something that proved to be very, very valuable. We discovered from our research that the more experience a customer had with Linux (the name of the software collection that Red Hat distributed), the more they valued easy and quick access to the maintenance package downloads provided by Red Hat. These highly experienced Linux users were keen to keep their server systems in top working condition. They did not want their critical servers to be susceptible to security flaws or operating errors that might disrupt their business. They readily indicated that they were willing to pay Red Hat a premium to be certain that nothing ever happened to their systems.
With validated information about why Red Hat was valuable to its most knowledgeable and experienced customers, my product marketing team set about defining a premium program that would allow customers to pay for a subscription to the maintenance packages delivered by Red Hat engineering. Coincident with our efforts to formulate a scalable product plan, the press became involved in describing Red Hat’s business model (we couldn’t yet describe it, so someone was going to fill the gap). Red Hat was a high flying stock (before the crash), and journalist and technology pundits were keen to weigh in with their opinions of whether or not any business model would actually emerge to sustain the shareholder value.
The press told the world that Red Hat sold “support” for free software. Unfortunately, our customer prospects took this to mean that if your free software “broke” you could call Red Hat to fix it. Nothing was further from the truth. Our most valuable users told us that AVOIDING system failures was most important, not fixing problems after they happen! But the “break/fix” story was a simple message that was widely promoted in the technology press. A “break/fix” business model is a miserable model. You engage with your customers when they are under extreme stress and every revenue opportunity is an emergency. By definition, the relationship will be stressful and challenging. But it was easy for the salespeople to talk about it, so that’s what they began trying to sell.
No matter the musings of the popular press, my product marketing team knew what Red Hat needed to deliver to be valuable to customers. We released two products in 2001 that, taken together, represented a premium subscription program. Red Hat Network was a management console that helped customers update and patch systems, and Red Hat Enterprise Linux was a well-defined set of free software packages for which Red Hat promised to deliver prompt and quality maintenance. We priced these based on the number of computer systems under maintenance and the type of application workload these systems supported for the customer. This pricing scheme aligned the value of the systems and their consistent operating performance with the amount the customer paid. Perfect alignment, right? Not exactly, because the press has poisoned the market with their “break/fix” news story, which resulted in a lot of uncomfortable conversations with large potential customers.
I got to lead most of those conversations because I was promoted to run sales for the company after I negotiated the first seven-figure deal the company had ever signed. The sales team was not yet comfortable with all of this new messaging around maintenance instead of “break/fix.” So I nominated myself to go show them how it was done, and I got my first opportunity when Cisco Systems of San Jose, California reached out to Red Hat for suggestions on how they might simplify and streamline their Linux technology systems and applications. The biggest deal the sales team had closed to that point was in the low six figures. When Cisco signed a multi-year seven-figure deal, the formula that I had used to sell them became extremely interesting to the rest of the company, especially the sales team. I happily accepted my promotion to run sales, and off I went to have a bunch of uncomfortable conversations with high profile customer prospects.
One of the first calls that I fielded was from someone that worked directly for the Chief Information Officer for BankOne in Ohio. BankOne was one of the ten largest banks in the country, and it was run by the visionary executive Jamie Dimon. They would later merge with JPMorgan Chase in a deal orchestrated by Dimon, and today the combined JPMorgan Chase, headed by Jamie, is one of the largest and most admired banking and financial services conglomerates in the world. Clearly, this was an important prospect for Red Hat, and they had approached us about helping them with their Linux strategy. The person responsible for Linux made it very clear to me that they were not interested in our maintenance product strategy, but they would sign an agreement to call us when they needed technical support. He wanted me to come to Ohio for a meeting. I told him there was no point in me coming to Ohio because we did not offer what he was looking to buy. I referred him to our competition and told him to call me back if he ever had a change of heart. The CEO of Red Hat was beginning to wonder if promoting me to run sales was such a great idea. BankOne was gone.
Fortunately for both me and Red Hat, I was having other conversations that were going quite well. One of them was with Rich Breunich, then the global head of technology for Citigroup, which was actually the largest financial institution in the world at the time. In a meeting with Rich and his team, I explained our maintenance business model to them. “A break/fix model means we are incentivized to provide customers with technology that breaks all the time in order for us to grow our revenue. This model delivers the highest revenue when things break. But we don’t want to collaborate on technology with you only when things are broken. We want to have a more thoughtful relationship where we collaborate continuously to give you great technology that never breaks and exceeds your expectations.”
Rich’s staff was having none of it. They pounded the table and puked on my grand vision. They explained to me that every major technology publication asserted in article after article that Red Hat sells support for Linux, and by God that is what they intended to buy from us. Rich, however, was in my corner, and he settled the matter quickly by siding with me. Citigroup did not want to incentivize their vendors to deliver shoddy products in order to increase revenue from break/fix support, he explained to his staff. They would happily pay a premium for great technology that performs without aggravation. Certainly, Red Hat was available when things go wrong, but that should not be the basis of the relationship. It should be the exception, not the rule. Like Cisco, Citigroup signed a multi-year, seven-figure deal with Red Hat. Now my sales team was off to the races. They had a premium formula, and they had a leader that would back them up as they engaged in uncomfortable conversations with high profile market prospects, even if that meant walking away when a large prospect like BankOne did not agree.
Does any of the Red Hat story feel familiar? Do you find yourself selling service features that are defined by your customer and by low-end competition? Break/Fix? Price? Labor Rate? Parts? Do the sales people race to the lowest common denominator to declare a win? And then dump it into the lap of the service department and move on? All of these things were true for Red Hat as well, and yet they managed to break out of this mold of break/fix misery and create a multi-billion dollar brand by collecting “money for nothing.”
When Red Hat turned the corner financially with a scalable model, I was often dispatched to investor and press meetings to explain how we were making so much money selling free software. My message was simple. Red Hat offered customers “a predictable outcome for a predictable price.” Sure, they could download a bunch of free technology off the Internet and cobble it together, and in some cases that might work out OK. In the most important cases, however, not having a reliable vendor for critical systems was not acceptable. Putting the hardware vendor in charge was also generally a bad idea because all they want to do is sell more hardware, not optimize outcomes. Hardware vendors get paid more when systems have marginal performance and the customer requires more hardware to support the load. Red Hat was perfectly positioned to help them get the most from their hardware and systems through a managed technology maintenance program.
There are several important lessons in the Red Hat “money for nothing” story for the commercial service contractor:
Break/fix support is a terrible business model. Your brand becomes associated with stress and chaos at the customer. Earning more revenue means the customer is experiencing more trouble. This model does not end well for the vendor.
Selling what the market is buying is often not a good idea. All of Red Hat’s competitors simply said “yes” to the customer’s break/fix support request because that was easy. They got exactly what they deserved. Almost all of them went out of business after the Linux frenzy subsided. Be willing to have the hard conversation with the customer to get a better outcome for both you and them.
Know who you are and the value of your service model. It is not enough to say “no” to something that is obviously bad. You have to offer the customer an alternative plan. You need to sell a premium program.
Say “no” to the customers that do not buy into your vision. Better still, offer them the contact information for your competitor. Let the competition sully their brand with miserable customer experiences while you strengthen yours with long lasting and scalable relationships.
A subscription revenue model for a technology maintenance program is an extremely lucrative business model. Service contracting is not incredibly different than Red Hat’s model. Red Hat found a position of authority relative to the system vendors (Dell, HP, IBM, etc.) by offering a branded, third-party system maintenance capability. Customers could turn to Red Hat for advice on which technology subsystems were most scalable and reliable. As the manufacturers in your segment seek to exert more control on the customer maintenance program, you need a strategy to push back and become the technology expert that the customer trusts to deliver optimum system performance.
Don’t let the manufacturers of the hardware take your seat at the table with the customer. System vendors are generally terrible at customer service, and they are incentivized to sell more systems. Be certain you build skills and collect data across a broad swath of hardware brands to offer the customer the insights and outcomes that they are seeking.
Focus on engineering and innovation. The only way you will get to set the agenda (as opposed to a hardware vendor or another contractor) with the customer is if you have the expertise to optimize their outcomes through your premium service program. It is better to get paid for what you know instead of getting paid for where you go.
Red Hat is a terrific example of how a “money for nothing” strategy can be used to deliver incredible customer loyalty and superior business results. A premium system maintenance program gives the customer the “nothing” that they want – no breakdowns, no budget surprises, optimal performance – while providing your business with a predictable, high margin, subscription revenue stream.
Smartglasses Face a Blurry Future
At the 2012 Google I/O conference, the big “reveal” was Google Glass. A team of Glass-wearing skydivers live streamed their descent toward the roof of the San Francisco Moscone center where the event was underway. It was an awe-inspiring stunt, but Google Glass flopped due to a buggy and ridiculous user experience, and the project was shuttered in 2015. Or was it?
The website for glass proclaimed “Thanks for exploring with us,” but it also offered hope for the future with “The journey doesn’t end here.” Of course, Google can waste money on pie-in-the-sky projects forever because they print so much pie-in-the-sky money with their AdWords platform. But what about the rest of us? When should we expect some breakthrough capability with smartglasses? And what would that look like anyway?
I actually think other technologies that were related to the first glasses experiments are going to dominate our attention, and that is probably a good thing. Smartglasses initially were a symbol for three separate and distinct technology advances:
A heads-up type display that removes the need for a display screen to be positioned in your field of view.
A hands-free user interface to be able to engage with an application to move the experience along without tapping on a screen or pecking a keyboard or zapping a barcode or whatever other input you choose.
A camera application to capture and share the imagery in your field of view.
Let’s start with number 3 first. I decided to do this blog post when I saw that Snap (the company behind Snapchat) just disclosed in an investor update that they are writing off about $40 million on Spectacles inventory they are not able to sell. In case you have not heard, Spectacles are the smartglasses that are integrated with Snapchat to give the user a hands-free camera application to share the imagery in their field of view with the Snapchat application. It flopped. But that is not the interesting bit. The interesting bit is that the glasses were $129 including the charging case. While not free, that is not bad for a first generation, new form factor camera with LED lighting, a power source, and the electronics for connecting to other devices. I think experiments like Spectacles are going to lead to a simpler form factor for a lightweight, high functioning camera that attaches to your glasses or the bill of your cap. It will simply be able to attach to whatever application you are running via Bluetooth or WiFi, and now you have a hands-free camera to snap images or stream video to applications running on your smartphone or tablet.
Item number 2, the hands-free user interface, is actually here today. It comes in two parts that everyone will quickly recognize. The first is the earpiece/microphone that we have all used or seen others use (Jawbone is a popular brand that has done well in the market). This allows you to give audible input to an application (likely running on your smartphone or tablet) and receive audio back from the application. The second part is Alexa (or Siri, pick your assistant). I think Alexa is actually going to be the game changer because Amazon is so good at productizing computing infrastructure for folks like ServiceTrade to incorporate in our applications. We also have experience with Google and Microsoft – there are good reasons why Amazon is the market leader by a pretty wide margin. I believe Alexa will be another example of their market-leading competence in this area. The applications you use will have an Alexa interface that enables the technician to move the workflow along by saying “Alexa, move the workflow along (as a proxy for whatever application option makes sense.)”
Item 1, the heads-up display, is the hard bit. Not because this is new or novel because pilots, for example, have been using heads-up displays in aircraft since the mid-90s. It is difficult because shrinking it to work in a miniature and mobile environment like a pair of glasses is a difficult piece of physics. The display only works correctly if the user can see the application interface in the same plane of focus as the other items of interest. If I understand what I have researched, it appears the approach being used by Google Glass is a near retina display. The image is projected directly onto the retina, so there is no issue with the depth of focus. The information is just “there” for the retina to absorb without refocusing on a “closer” screen display.
What Google Glass got wrong (in my humble opinion) was trying to introduce all three elements in a single device, while simultaneously assuming that the applications where we might use the technology were readily available. None of the technologies were significantly evolved to enable an “all in one” device to be successful. I am not a fan of “all in one” applications anyway, as I find they typically suck at most of the things they try to achieve for the sake of claiming a longer checklist of “features.”
Instead of the “all in one” that flopped for Google (although the physics breakthroughs they achieved with the display are impressive), I believe you will begin to see small changes sneak up on you. It is easy to imagine someone with a Bluetooth Jawbone and a visor-mounted camera collaborating via Facetime with a remote colleague. There’s nothing extraordinary here because all of the technology is well developed already. I can also imagine a technician setting up their tablet beside a piece of equipment and asking Alexa to play and pause and rewind a recorded video of how to repair a complex piece of equipment – hands-free with an interactive application that we already use every day.
There is a phrase in my industry called the “consumerization of IT.” Basically, this phrase means that the end-user consumer applications for new technology will generally lead the market before the commercial applications become available. Seems counterintuitive until you realize that consumer spending makes up 70% of the US economy. It just makes sense that the titans of technology such as Amazon, Apple, and Google, would focus their research and development dollars to address the biggest available market. If you want to experiment with things that likely will work to improve your commercial application, don’t look for some big breakthrough from a wildly new and different application. Instead, focus on the commercials that you see during the holidays that demonstrate how you can display an eggnog recipe and play holiday music by commanding Alexa to do so. Pay attention to the display of best-selling gadgets at Best Buy from companies like Jawbone that connect to applications on your phone. Then go play around in the context of your work for customers and find innovative ways to put these consumer breakthroughs to work for the benefit of your customers and your company.
Snakes on the Roof!
Every popular book or movie generally hues to a typical formula. A hero faces a daunting challenge and makes a big effort to overcome trouble. The reason this formula works is because humans are captivated by trouble and drama. Jonathan Gottschall, the keynote speaker for the Digital Wrap Conference, documents in great detail the human attraction to dramatic story in his book The Storytelling Animal.
Here are a couple of the money quotes from the book:
“Human minds yield helplessly to the suction of story. No matter how hard we concentrate, no matter how deep we dig in our heels, we just can’t resist the gravity of alternate worlds.”
“Stories the world over are almost always about people . . . with problems. The people want something badly – to survive, to win the girl or boy, to find a lost child. But big obstacles loom between the protagonists and what they want. Just about any story – comic, tragic, romantic – is about a protagonist’s efforts to secure, usually at some cost, what he or she desires.”
If you want to keep the attention of your customers and get paid a premium for your services, you need to give the customer some trouble. That sounds crazy, doesn’t it? “The customer doesn’t want trouble!” you retort indignantly. “Quite the opposite, in fact. The customer really just wants nothing! No breakdowns, no disruptions, no aggravation, no hassles.”
And I couldn’t agree more. But the problem with delivering nothing is that your service is taken for granted, and you will get unplugged from the account by “one truck Chuck” when he promises a lower price. You can almost hear the customer now responding to Chuck’s low price pitch:
“Nothing ever happens around here! Why am I paying these other guys so much? Chuck, thanks for saving me some money! You won the business with your low price!”
Of course, Chuck will screw it all up, and pretty soon the “nothingness” that was taken for granted will become a series of disruptions, breakdowns, hassles, and aggravation. It doesn’t have to be this way.
You can give the customer what they want, which is nothing, as long as you are regularly finding snakes on the roof, snakes in the riser room, snakes in the ductwork, snakes in every nook and cranny of their critical equipment. Of course, these are figurative snakes, not literal snakes. The snakes are the equipment deficiencies that your technicians are recording with photos, audio, and video for the customer to review online via your Service Link. The deficiency snakes are clickbait that constantly reminds the customer how your diligence keeps them from getting bitten by disruptions and breakdowns which inevitably lead to hassles and aggravation.
The customers are only human. They can’t resist clickbait. Clickbait is a good story that shows how you have charmed and corralled the threatening snakes to save them from trouble. When they open your online quotes offering all manner of snake traps and snake killing repairs and upgrades (mind you, no snake oil for the customer!), they are practically gleeful that the hero of the story (that would be you) has again prevailed over the devious equipment snakes that were plotting to harm them. Approved! If you want to keep your customers for the long term, give ‘em some trouble by finding some snakes on the roof!
Every major sports venue has a prominent scoreboard so that fans and participants alike can easily review the score with a glance to the outfield or upward at the jumbotron. Knowing the score is a critical element in decision-making. No point in running the ball up the gut in football when you are behind by 3 touchdowns with five minutes left in the game.
Imagine trying to coach the game, however, by looking at the scoreboard instead of watching the action on the field. Ever notice what is happening with the coaches on the sidelines during the game? Doesn’t really matter what sport. The coaches are riveted to the action on the field or on the court, right? They may glance at the scoreboard occasionally, but most of their attention is directed onto the field of play. So that they can make adjustments during the game to accentuate what is working and compensate for what is not.
Why is it, then, that commercial service contractors so often obsess over the accounting systems that measure the score while completely ignoring the customer service systems that provide real-time feedback regarding the action on the field of play? Keeping score is not the same as winning. Winning means that everyone is executing the plays for the business to the best of their ability and in the interest of great customer outcomes. Accounting systems and accountants have almost zero impact on the game, and yet they are often placed at the very center of decisions regarding how to execute a winning game plan. That’s like asking the statistician to draw up the winning play on fourth and long with the game on the line instead of entrusting it to the offensive coordinator. The score at any time in the game matters, but it is a small element in a winning coaching strategy.
To be fair, customer relationship management systems, electronic commerce, and customer service applications (along with marketing automation) are newer applications on the market relative to the older and more established accounting and enterprise resource planning (ERP) applications. It is worth noting, also, that these newer applications focused on sales and customer service are the fastest growing breed of applications on the market. It makes sense. If you are going to compete in today’s fast-paced and online markets, you have to observe and measure what is happening on the field – play by play – instead of just waiting for the score to be tallied. How are the salespeople performing on their calls and quotes? How are the technicians performing identifying opportunities for repair? How are the customers grading your customer service via online reviews? How often is the service level agreement being met or exceeded? None of these items register in the accounting system, but all of them will have a profound influence on your ability to win the game.
There is nothing wrong with glancing at the scoreboard a few times every quarter to tweak the playbook. Winning consistently, however, means a relentless focus on the play by play action in the field while making constant adjustments. Keeping score is not the same as winning. Remember this maxim when you prioritize how you invest in applications for running your business.
Get Busy Growing
“It comes down to a simple choice, really . . . Get busy living or get busy dying.”
— Tim Robbins as Andy Dufresne in The Shawshank Redemption
Growing your business is a simple choice. And if you are not growing, the business is in decline, whether you realize it or not. Equilibrium is dangerous, and it is also difficult to maintain. The slightest perturbation will knock the system out of balance and cascade it toward its natural inclination. If that natural inclination is growth, growth will continue. If that natural inclination is a decline, the decline will hasten. Growing is the better of the two choices, and it is actually easier and more fun than the alternative – grinding away just to keep what you have already.
Why do I say that growing is easy? It is easy for many reasons, but foremost among them is because talented people gravitate to growth. And the opposite is true as well. If your business is growing, talented people will come aboard and stick around to advance their interests, while using their talent to build your brand. If you are not growing, you will find yourself surrounded by dead weight on the payroll that you must lug around to achieve the results you desire. You will work harder and achieve less, and that is no fun. Less work for more pay is a better alternative.
So, how are you going to grow? So that you can attract better talent, work less, and earn more pay? A good place to start is simply committing the organization to growth. Say it out loud to everyone. “We are going to grow!” Then set targets and build a plan, because it won’t happen just because you say it (although saying it helps). Here is a simple set of ingredients that I find work well in a growth recipe. You can modify and add others, but these make a good start.
Choose Your Customers – It is difficult to grow when customers are a source of aggravation and heartache in the business. Who wants more of that? Choose customers that you actually enjoy serving, and who appreciate what you do for them. Fire the others as quickly as you can, or raise their prices until they are forced to fire you. The simple act of choosing good customers will give you miles and miles of credibility during your organization’s journey to consistent growth.
Keep the Customers You Choose – Great service businesses are built upon long lasting customer relationships. Set up your service programs to maximize the outcomes for your best customers. If you can eliminate customer churn, your growth every year will simply be the additional customers you add through the sales cycle.
Add New Customers – If you know the type of customers you want, and you also know how to serve them well, and you have a sales team that you pay to go sell to them, you should grow every year. Simple logic, right? If you cannot add customers, then you need to determine if your salespeople are ineffective or if your service program somehow is not attractive. If you have already been successful in the first two principles above, you might need to replace your salespeople.
Commit to an Apprenticeship Program – If you know you are going to grow, you will need skilled labor to service the customers. In case you have not noticed, there is a skilled labor shortage. It can be very difficult to hire quality trades people to deliver the service in the manner that keeps the customers you choose. Go ahead and commit the resources to hiring, training, and developing talent to support your endless growth cycle. Always be hiring. The pressure of the growing payroll will add urgency to the sales efforts of the organization.
Offer a Branded Service Program – It is far easier to rally an organization around your branded service program than around platitudes like “integrity, honesty, hard work, motherhood, apple pie.” Be specific in the creation of service programs and features that define your brand. Commit to technology innovations that establish the bedrock of how you deliver service so that the organization can actually enjoy growth instead of being crushed by it. “Work harder and care more” is NOT a sustainable growth strategy.
It may feel risky to you to strap on a bunch of ambition and commit to growing your company year after year after year. It is far riskier, in my opinion, to grind away with mediocre people just to keep what you have already earned. Go ahead and be ambitious. Get busy growing and enjoy the best things in life.
Are your services significant?
Significant objects are worth more than regular objects. At least that is the conclusion arrived upon by the significant objects project and its team of researchers. Joshua Glenn and Rob Walker, a writer and a journalist respectively, set out to prove that stories can increase the value of objects. While it is tempting to view the goal of the exercise as justifying the existence of the writing class, the results of the experiment are unequivocal. Humans value stories, and they become invested in the life objects that reinforce the stories they enjoy.
Joshua and Rob purchased one hundred pieces of stuff from garage sales, thrift stores, and related trinket outlets for a grand sum of $129. They then enlisted professional writers to conjure stories related to each piece of stuff to accompany the auction of said stuff on eBay. The auction value of the storied stuff as measured by sales price on eBay was $3,612 – a return of 2,700%. Pretty good margin, huh?
So what is the return on your services? How much are you able to charge above what it costs you to deliver? Somewhere between 30% and 50%? Maybe your services would be more significant, and therefore more valuable if you delivered your services with the story describing what happened. I don’t mean an invoice. The story is what you saw, what you did, why you did it, and what likely trouble the customer avoided because of you. It is also the photo essay of images that reinforce your story. And I am not suggesting you type it all out. Record it as a video or audio memo. It will take all of 2 to 4 minutes extra, and it could be worth a lot over the course of the relationship with the customer.
Humans learn from images, story, rhythm, and rhyme. It is programmed into us since the days of the cavemen and the campfires. Since you are not going to insist the technicians become poets or rappers, you should at least insist that they relay their good work to the customer in the form of images and stories. When you teach the customer something about their facility, it reinforces the good decision they made in contracting with you. Over time, the accumulated review of your work will imprint your brand in a manner that is not easily supplanted by the “one truck Chuck” competitor that is always willing to go lower on the invoice. You will be able to raise prices because your services have become significant through the power of story.
We have seen this phenomenon time and again at ServiceTrade as our customers are surprised and delighted by how easy it is to get customers to approve online quotes when the photos demonstrating the reason for repair are literally viewed inline with the quote. They are likewise surprised at how much customers value the Service Link feature that presents the “story” of the services delivered online with a gallery of photos, video, and audio for review. They shouldn’t be. Humans sharing photos and stories is the basic power behind the growth of Facebook into a company valued at $500 billion in a little over 13 years. Maybe some of that Facebook photo and story magic will work for your brand. Can you think of a better way to make your services more significant?
Amazon Prime Lessons for Service Contractors
Everyone knows Amazon has been on a tear lately. Here is their stock performance over the last 5 years as compared to the broader S&P 500. Wow! A big part of that success has been the Prime subscription program.
Amazon customers who subscribe to Prime to receive the following benefits:
Priority shipping. It varies by area and items from FREE 2-day shipping to FREE 2-hour shipping.
Prime videos, music, and books. Certain titles are available to stream or borrow for FREE.
Photo storage. Amazon will store your photos so you don’t have to worry about losing them on a device.
And there is a long laundry list of other Prime benefits that you can review here. Most folks probably only care about one or two of the benefits, but which parts of the bundle are valuable to which customers probably varies considerably. So Amazon just includes a bunch of stuff to cast the widest net into the market. They are committed to the costs of most of these things anyway, so why not maximize the revenues across their most attractive customers while getting the glow of a great customer service reputation? It also leads folks to spend more time and money with Amazon products.
So, what are you doing in your service contracting business to get more by doing more for your best customers? Do you have a Prime program? Is there a tier of service that includes the basic preventative maintenance program PLUS a bunch of extras that get them to pay upfront?
Here are some suggestions for how to form a program that pays you similarly to how Amazon is paid.
Give it a name. Sales people cannot talk about your program and customers cannot reference it if it doesn’t have a name. Amazon chose “Prime,” whose root is from the Latin word prim or primo, meaning first, as in first in line. This is a good name because it conveys some meaning while also being easy to remember. You should do likewise. Obvious choices are names like “Premium” or “Platinum” or “Gold,” which are unimaginative, but at least connote value easily. Ideally, you can name your program in a way that has both meaning and rhythm and rhyme so it is easy to say and easy to remember.
Charge a subscription fee. You should collect a monthly or quarterly or annual fee in exchange for the program. Angle for annual for the obvious reasons, but offer other options that might appeal to different customers. Try to price it where the average customer would happily pay for the benefits and you would make a decent margin on average. Some customers will be more profitable than others, but maximizing profit is not the angle for the program fees. Locking the customer into your services as the preferred vendor is the goal.
Offer expedited service response. Everyone likes the idea that they will get priority (hence the “Prime” name) service relative to others. If you are committed to great service, go ahead and make the promise to your best customers that you will respond with skilled technicians to any problem within 1 or 2 hours. Maybe there is also a promise to return a call or web inquiry within 15 minutes. You are probably committed to it anyway, so why not get credit for it?
Include basic maintenance services. If there is a PM protocol for the equipment that will be under your care, and you are committed to delivering the work, go ahead and build it into the program. It makes it easier to schedule the maintenance when it is included (you don’t have to ask or wonder if they will pay), and you will get opportunities to upsell based upon the maintenance reviews.
Offer a lower rate on all planned services. It is good for both you and the customer for all services to be planned instead of emergencies due to failures. When you quote repairs and upgrades that can be scheduled instead of emergency, the rates will be cheaper. The more customers you get into proactive mode instead of reactive emergency mode, the more efficient you can be with your scarce technician resources.
Offer an online account. Give your customers a reason to come to your website. Show them online details of their plan, history, equipment, quotes, etc. It lowers your cost and makes your company stickier and more memorable.
Offer a performance guarantee. After you get their equipment into good order AND you have a regular maintenance routine or remote monitoring to expose any risk, offer emergency service response at the subscriber program rates. It shows your confidence in your plan, and it incentivizes the customer to approve your quotes for planned repairs so that the equipment stays in the program. Any equipment exhibiting failure symptoms that are noted and quoted by you comes off the plan if the quote for planned repair is rejected or ignored.
When customers feel that you have been thoughtful in meeting their needs with a premium customer service program, they will happily pay a program fee to claim their membership. You can use the steady cash flow and predictable schedules to hire and grow and expand the program. Then you can put the Amazon python squeeze on all of your competitors and laugh as they wiggle and squirm in the grip of your escalating capability and brand value.
Whole Foods Whole World
I bet the grocers that had a bad day when Walmart got into groceries about fifteen years ago are having a really bad week now that Amazon has announced their intention to buy Whole Foods. The innovations Amazon is going to bring to grocery buying go well beyond low price and internal operational tweaks. Amazon is going to use technology to transform the grocery buying experience, and the old competitors focused on their tired, old, internal metrics will be toast.
Marc Andreesen, a famous internet entrepreneur and venture capitalist, once said: “Software is eating the world.” You can read his editorial in the Wall Street Journal here. It’s true. Customer service innovations driven by software are transforming every industry. Netflix to Blockbuster. Uber to taxis. Amazon to booksellers, hosting companies, and now grocers. When will it be your turn? Which side of the statement will your company be? The eater? or the eaten?
Do you suppose the first innovation Amazon is going focus upon is how Whole Foods does accounting? Is that where they are going to put their innovation muscle? I ask the question because it seems that accounting remains the first priority of service contractors when they think about how to apply technology to their business. But it sounds really silly in the context of the Amazon acquisition of Whole Foods, doesn’t it? As I have said before, your perfect accounting process is perfectly irrelevant to your customer. You should have a good one, but it will not save you from an innovative, customer-focused competitor.
I am not going out on a limb when I say that Amazon understands that accounting is irrelevant, and their focus with Whole Foods will be transforming how customers buy groceries. They will eliminate aggravation and uncertainty for the customer through technology. I bet there will be an awesome mobile app for pricing your groceries in the aisle and eliminating the checkout line. I bet you will use that app to find the groceries you seek without wandering up and down the aisles. I bet you will get interesting recipe ideas based on the ingredients you buy often. I bet your buying preferences will lead to deliveries to your house via drone for the items you buy on a regular basis. I bet the best customers with the most money to spend on groceries will gravitate to Amazon and their innovations. I bet I cannot even imagine the things they will do to make grocery shopping more convenient, and none of it will relate to how they do accounting.
So when will it be your turn? Will you be the eater, or the eaten? Are you considering how to upgrade your customer’s buying experience with your services? Or are you piddling around with how to extend your accounting to wring a small bit of extra margin from your internal processes? Are you building an innovative and growing brand that attracts customers to you? With an experience that they cannot easily trade for the low price guy? Think about it. Who do you want to be in your market? Amazon, Uber, Netflix? Or the other guy?
