Service First

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One interesting result of commoditization, especially in security and life safety, is that the revenue model has turned upside down. In the past, we told our customers, "We have a great service department so, if you buy from us, we'll take really good care of you." We were using the value added by our service department to justify a higher price and higher profit margin on the system sale.

Now, contractors are beginning to flip that model. Instead of using the service department to sell the system, they're using the system to sell the service department. In a commoditized world, this makes perfect sense. Most contractors make their highest margins on service. So, why not lead the sale with your highest margin product? Tell the customer, "Buy a service contract from us and we'll give you an unbeatable price on the system." The system is a commodity anyway so you sell it at a commodity price and then use it as an incentive to sell the higher margin service contract.

The idea isn't perfect. Basic service contracts are little more than insurance policies and they are just as commoditized as basic systems. Fire alarm inspection contracts are a good example. In most states, commercial fire alarms must be inspected by a licensed inspector at least once per year. Sounds like a good opportunity, right? Sell the fire alarm at a commodity price and sell the inspection contract at a higher margin.

But savvy customers know they can buy an inspection contract from any licensed contractor and the Yellow Pages in most cities has a growing list of contractors offering this service. Even the "licensed inspector" requirement hasn't stopped the resulting bidding war.

Another problem is that contractors know how to accurately estimate the cost of an installed system. But how do you estimate the cost of a service contract? Some systems are going to be trouble-free so a service contract with that customer will cost virtually nothing. Other systems are going to have multiple problems and the cost to the contractor will be high. This turns the estimating process into a statistical challenge and that's not something we're very good at. And, if we don't have an accurate cost estimate, it's difficult to be confident when providing a price to the customer.

For service contracts, many estimators fall back on a fixed percentage of the original system price. But, as your competitors crank that percentage ever downwards, you may be looking for other ideas.

One answer to the estimating problem is to treat different kinds of service contracts differently. For example, it's pretty easy to estimate the cost of an inspection contract. You know how many devices are in the system and you can accurately estimate the time required to inspect each device. Thus, unlike the insurance-policy style of service contract, the cost of an inspection contract can be estimated with precision.

Another answer is to offer different types of service contracts. One interesting idea is the "block of hours" contract. Instead of the conventional insurance policy style service contract, you sell the customer a fixed quantity of service hours at a discounted price. You can also give them a discount on service parts. Then, if something goes wrong with the system, you simply draw from the customer's bank account of service hours. This idea holds little risk for the contractor and, because it gives them a fixed budget amount, the customers seem to like it.

I also like the idea of a preventative maintenance contract. You have to be a little creative here but there are lots of possibilities. Smoke detectors eventually need cleaning or replacement. Security cameras need adjusting and the lenses need to be cleaned. The central computer in an access control system needs disk defragging and, of course, database backup. Maintenance contracts, like inspection contracts, are easier to estimate because you know what you're going to do and how often you're going to do it.

That suggests a combination approach. Sell a conventional service contract at a commodity price when the customer buys a maintenance contract at the same time. Regular maintenance will keep the customer happy and minimize the costs and risks of the conventional service contract (the system is less likely to break if you maintain it properly).

For some systems, like pro audio and video, you can add training to the mix. When you're on site readjusting the mixing console, replacing mic cables and wireless mic batteries, you can also hold periodic training sessions for new users. Again, this should be easy to estimate, it keeps your people in front of the customer and it minimizes the risks of an accompanying conventional service contract.

The future will hold more opportunities to sell higher-margin services on top of commodity-priced systems. One that I find very interesting is the concept of "hosted security". With this concept, you install only the bare minimum of equipment on site-cameras, card readers, mag locks, and such. Everything else, including database computers and monitoring equipment is off-site at the hosting company's offices. The customer can monitor and manage their security through a web browser but, and here's the opportunity, they can choose to outsource virtually every security function to the hosting company.
This is much more than just monitoring. Forget your access-control card? Speak through the intercom, look at a camera and a security guard can let you in. But that guard is miles away at the hosting company site. Need a report? You can prepare it yourself from your browser. Or you can request one by email from the hosting company.

A contractor wouldn't have to become a hosting company but could simply resell the hosting service, just like we now resell monitoring. I expect to see the national security companies offer this kind of service soon. If you want to learn more about it now, visit