Still Not Making Money?

A well-run service department should be making money, producing a 15 to 20 percent net profit. In fact, your service department should be the most profitable department within your company, but it’s usually not. There are two reasons most companies find service unprofitable. First, they are not priced properly. It costs a lot to run a service department and there are very few billable hours to spread that cost over, so the end result is predicable: The hourly rate is really high. The foundational problem is that most companies simply charge what everyone else charges and then hope they make money. Translated, many company owners have never gone through the detailed process of setting profitable, hourly rates. However, let’s assume you are one of the few, and you have developed profitable hourly rates. So what’s the next hurdle?

If pricing is correct, the next hurdle is management. The service department is a bear to manage. Again, let’s assume you are priced for profit and your service department is well managed. If that’s the case, consider yourself among the top 5 percent of well-run service departments across the country.

Priced right and managed properly but still losing money in service? There’s a reason for that. There are four profit killers within your service department, any one of which has the ability to suck all the profit out, even if you are priced and managed properly.

Under Billing

The typical service technician underbills the customer by at least $10,000 per year. This is not intentional on the technician’s part, but it happens. If you are still charging by time and material it’s easy to see how underbilling could happen. The tech works two and a quarter hours but he only writes down two hours. He should have marked up the parts 80 percent but only marked them up 50 percent. Bingo: Underbilling. OK, you’re on flat-rate pricing so you can’t possibly underbill the customer since the price is precalculated and in black and white within the book, right? Wrong! The average tech performs 3.5 tasks per call, but that same average tech only records two tasks. Underbilling again. 

Nonbillable Time

Nonbillable time is the single most expensive cost of doing business in your service department. Typical nonbillable time for a service tech is about 50 percent. Sounds high; it’s not. By the time you combine vacation, sick and holiday time and then throw in shop time in the morning and afternoon, travel time between jobs, callbacks, warranty work, customer no-shows and a few meetings or training sessions, you only bill out an average of about four hours a day.

Maintenance Agreements

I have been encouraging contractors to sell maintenance agreements for 27-plus years. One of the huge benefits of a maintenance agreement program is that you can use them to fill in the slow times. When a tech is sent out to perform a maintenance agreement, he or she is at least thinking, “Gee, things must be slow.” Now keep in mind that all of nature abhors a vacuum. If there is a block of time or space available, it will be filled. If you send a technician on three maintenance agreements after lunch, how long do you suppose it will take him or her to complete them? All afternoon! If the structure of your agreement calls for performing the agreement in 45 minutes, and it takes them an hour and a quarter to perform it, your profit is gone.

Lost Sales Leads

Teaching your service technicians how to create qualified sales leads will not only reduce service costs but will also turn retrofit sales on full blast. In general, I don’t want my service techs selling the replacement of equipment because the average tech will underprice the replacement by 20 to 40 percent. We do, however, want them to set the sales lead for the owner or salesperson to meet with the customer. Setting the lead will earn the tech a $20 to $25 spiff. If the sales person closes the sale, the tech earns another $20 to $25 spiff. If you train your techs to set the leads while in the customer’s home, retrofit sales
will skyrocket.

Again, service should be the most profitable department within your company. Addressing even one of the above areas will help a lot.