How does service add value to a business?
Recently I worked for a Lawn Sprinkler (irrigation) company. Wearing a pair of khaki pants, a t-shirt, and a good old pair of RedWing boots, I looked like Bill Murray in Caddy Shack. What I learned from the experience was fascinating.
Building a Customer Base
Landscaping and, more specifically, the lawn sprinkler business is a season business. In the Spring time you will repair systems which were damaged from improper winter maintenance. In the Summer months you will install new systems. And in the Fall you will clear the systems of water for the Winter months ahead. The quickest way to build a customer base is to put a sign on the lawn of a new customer during their system installation and flyer the neighborhood for additional business. The typical homeowner in the United States moves every 7 years, which means (on average) 14% of each neighborhood will change hands each year. An individual moving to an unknown area will see the "We Install Lawn Sprinkler Systems" sign driving home one night and, trusting the great wisdom of their new neighbors, will follow their decision to use your company. Most landscaping companies do not label their systems with their contact information. This is a poor business practice and an opportunity for you to acquire their customer base.
Installation & Service
The best time to purchase a lawn sprinkler system is September. The demand for new systems is low, given the growing season for grass has past, and many landscaping companies are looking to pull in what business they can to cover payroll. April and May are the busy months for installations and you will pay a premium to have your system installed during this window. After the original installation, they will work the service business to make their profits. A typical residential customer will spend $200 or more in services annually with a landscaper to maintain a lawn sprinkler system. $75 to turn the system on each Spring, $75 to drain the water lines of the system each Fall, and typically another $75 during mid-Summer to fix the sprinkler head that Mr. Homeowner chopped off with his new riding lawn mower. Keep in mind the landscaping company pays their service reps between $10-15 / hour. Three (3) hours of service cost the company $40-$50 in labor including taxes and will bring in $225 annually in service business per customer. With 1,000 or more customers, that's close to 1/4 Million US Dollars to help homeowners toss water on their lawns. And that doesn't mention parts mark-up.
Here is an eye opener! A simple part that cost $5.50 wholesale in bulk for the landscaper will be sold at a premium of $24.99 retail during the repair service. No, I'm not kidding. A part that cost less than $6 will be listed on the service slip under "Parts" for just under $25. In New England, a typical homeowner will average 2-3 replacement sprinkler heads a year for a common system. Why is this unique to New England? Snow. Yes, when the snow plow is pushing snow along a driveway, they will many times dig a little sod where the driveway ends. They are like farmers digging up potatoes. The sprinkler heads that were strategically placed at the edge of the driveway to ensure proper water coverage have now been crushed by a half ton snow plow. The sprinkler heads are made of plastic and, well, lose the battle with the plow blade.
Let's use the example of a company with 1,000 existing customers and installing 200 new systems each year. Each new system will generate $1,500 in sales with a cost of labor and parts of less than $800. Each of the 1,000 customers will require, on average, $225 in services at a cost to the business of less than $70 in labor. Each of the 1,000 customers will also require $50 in parts annually at a cost of $12 wholesale to the landscaper. In total, that is $575,000 in sales with a cost of goods & services of $222,000. From there, the landscaper will have insurance, rent, the cost of equipment to operate, and a few other fixed expenses.
Sales: $575,000 = 200x1500 + 1000x225 + 1000x50
Cost: $222,000 = 200x800 + 1000x50 + 1000x12
How does service add value to a business? Whether it's a seasonal business or a software company who offers a product, service is a key contributor to the income statement. The unique knowledge of the service reps and the low payroll cost provides stable cash-flow through a residual income stream from their customer base.