At ServiceTrade we know that you want to be the best commercial service contractor in your market. It’s difficult, however, to be the best if you don’t know what the “best” is. You could only guess about how your peers were performing, until now. We analyzed data from over 400 of our commercial service contracting customers to establish performance benchmarks. We used the same business analytics platform available to our customers, Amazon Quicksight, to audit growth statistics from 2017-2018 across every customer account and establish best-in-class benchmarks for the industry. Here’s what we found.

Revenue growth
Average: 17.9%
Top 25%: 54.7%

Customer count growth
Average: 7.5%
Top 25%: 38.4%

The top quartile in the above categories is not made up of only small companies as you may expect. That group of high performers is reflective of the company sizes found across the entire dataset. If you are a large contractor, aggressive growth is attainable.

Revenue per customer growth
Average: 12.7%
Top 25%: 44.4%

Revenue per job growth
Average: 6%
Top 25%: 29.9%

Companies that earned more revenue per customer and job found additional, high-dollar sales opportunities with existing customers such as repair opportunities and additional services. We’ve also heard from many of the top performers that they “upgraded” their customer base by firing the worst customers and selling to more valuable prospects.

As the adage goes, if you don’t measure it, you can’t manage it. This is true of your metrics compared to industry benchmarks. If you don’t measure how your company performs compared to the rest, you’ll never know if you are the best.

Much of the popular culture in management consulting today is focused on the customer experience. Matt Dixon, the author of one of my favorite management books, The Challenger Sale, is spending many of his cycles promoting another of his books, The Effortless Experience.  Shep Hyken is a customer service guru with a new book called The Convenience Revolution.  And my latest book with Shawn Mims, Money For Nothing, focuses on the science behind making a customer feel good about their experience buying from commercial service contractors.  

Yet even with all of this focus on customer experience, I still find that most service contractors remain firmly entrenched in a war to optimize the effort expended in their back office instead of directing their management attention to enhancing customer service. I have come up with a couple of questions that might help challenge that back office focus if the goal is to build a more valuable business.

Question 1: How easy is it to hire a new back office administrator versus hiring a new skilled technician?  

This is an easy one, right? The answer is that hiring an administrator is very easy when compared to hiring a technician. Management’s focus should be on maximizing the productivity of each technician so that they deliver the maximum amount of revenue each day while simultaneously eliminating the risk a customer faces due to potential equipment failure.  Your goal should be to increase revenue per technician 20% per year every year. Never yield in the pursuit of greater productivity for the technicians. Hiring administrators is easier, so transfer as much work as possible off the technicians and onto back office staff.

Question 2: How easy is it for your customer to review and approve a new quote? 

If the answer is that they have to download an Excel file or PDF, print it, sign it, scan it, upload it, and email it back to you, that answer sucks.  That is difficult. Not easy. Compare that level of effort with an online quote with pictures and video of the issue and a single button to push to “Approve” (or request changes) and provide a purchase order for billing purposes.  Oh, and it never hurts that when the customer has viewed the quote online, the salesperson knows it has been viewed and can follow up to answer any questions. Don’t make it difficult for the customer to give you more money and remove risk from their environment by upgrading or repairing equipment (which is also good for you).

Question 3: Which is more valuable: eliminating all administrative overhead or showing an ability to sustain 20% revenue growth every year?

Again, it is an easy answer. Eliminating all of the administrative effort is worth perhaps 5 – 8% of revenue. Growth is MUCH more valuable if you can demonstrate you have a systematic way to sustain it due to your customer sales and service approach.  If you ever intend to sell your business or bring on a new shareholder, focusing management effort and technology purchases on enhancing sales productivity is where you should spend your thought cycles and investment capital.

Question 4: How easy is it for you to show the customer the value of your work online?  

Or do you just send them an invoice with a bunch of text and cryptic accounting codes to represent the value you deliver?  If a customer has to wade through a detailed invoice, guess what is going to draw their eye?  You got it, the numbers on the far right and in the bottom right corner. Guess what they are going to want to talk to you about? The value you delivered? Nope. “Why does it cost so much?” is the most popular question generated by an invoice.

Make it easy for them to see that value without digesting a cryptic invoice.  It should be easy for them to see your work online in the form of service history for their equipment with photos, videos, risk assessments, quotes, etc. so that they see you are thoughtful and thorough in your approach to managing their important assets.

Question 5: How easy is it for your salespeople to show a new customer prospect how you are different?

Do you demonstrate the value of your unique approach to customer service?  Pitching a value proposition of “we try harder” or “we care more” or “we are cheaper” sucks. It is much better to show the customer an online experience where they can conveniently review and engage with your company on ways to reduce risk and eliminate disruptions through a rich set of service history and equipment risk analysis.  

If you cannot show prospective customers examples of this capability, what are you selling? Invoices? How do you expect to command a premium in the market compared to the low price competitor? Simple answer – don’t expect a premium and be prepared to compete on price.

I find all of these questions to be obvious indicators of where management should spend their effort – front office innovations that make customer service and revenue generation easier because the customer gets an effortless, or, better still, a feel good experience.  So where are you spending your management effort? Front office and feel good? Or back office? Think about it.

 

January 14th marked the start of the AHR Expo in Atlanta at the 1.4-million sq. ft. Georgia World Congress Center. With 50-thousand attendees, that place was a madhouse. I, along with the rest of the ServiceTrade team, was engaged in back-to-back conversations with commercial mechanical service contractors about their growth goals. As we usually do, we made a lot of people very uncomfortable. How? By asking difficult questions and presenting hard data that shook long held beliefs about their businesses. It’s the moment you realize that you’re running your business blind based on gut instincts and then data comes along and knocks the wind right out of you. It hurts. Here’s an example from AHR:

Contractor: What does ServiceTrade do?

Me: ServiceTrade helps commercial service contractors be more valuable to their customers and grow their business.

Contractor: The only thing holding us back from growing are inefficiencies in the office and cost control hiccups. Can you help with that?

Me: We can definitely help there, but how much revenue do you drive per service technician per year?

[Long pause]

Contractor: I’ve never thought about that metric. Based on our total service revenue from last year and the number of techs we had on staff, we did great! We made about $200k per tech.

Me: Our mechanical customers drive $400k to $500k per service technician by focusing on customer service and repair opportunities, but we can talk about back office operations if you’d like.

[Crickets]

Examples like this are common, even among our own customers. We perform account health calls with our customers to compare their performance against a benchmark in their industry. Most are caught completely off guard by what they discover. They never bothered to look at their quote approval rate, they just assumed it was over 95%. They never checked their average days to invoice, they just assumed it was under 5 days. It reminds me of something our CEO always says:

Do you know what happens when you assume? You make an ass out of you and me.


Almost every contractor claims to be data driven. However, the reality is that most contractors are rarely collecting the data they need to make good decisions about how to grow. Sure, they can all tell you their margin across different divisions down to the penny, but you’ll rarely meet a contractor who is paying attention to growth metrics like the:

  • Ratio of PM/inspection to quoted revenue
  • Repair quote volume and quote approval rate
  • New contract sales opportunity and close rate

I’ve met far too many contractors that “just know” these metrics. No data to back them up, just pure instinct. Do you know these metrics for your business? Do you have good data to back them up? Check out ServiceTrade’s business analytics features.

Reals, not feels. That’s what you have to remind yourself every time you attempt to make a data-driven decision. As tempting as it is to rely on your gut and your feels to make decisions, the data and the reals don’t lie. Data doesn’t care about your opinion so don’t be surprised when the data disrupts your worldview and punches you in the gut. As much as it hurts, that’s a better outcome than trying to grow a company by feeling your way through the dark.

Here are a few more blog posts about metrics for service contractors that you might find interesting:

Shelley Bainter asked me to write this blog post explaining why I decided I needed to write The Digital Wrap and Money for Nothing in support of ServiceTrade’s marketing strategy.  It’s a great question. Interestingly, the books are mostly an extension/expansion/elaboration on a collection of blog posts and research that I along with Shawn Mims delivered in connection with ServiceTrade marketing activities.  There are two fundamental reasons that I write, and the books are just an outgrowth of those.

The first fundamental reason I write is because it helps me lead. I believe the best way to prove you are sane enough in your thinking to lead an organization is to commit your most important thoughts to coherent prose.  It did not surprise me at all when I read that Jeff Bezos banned Powerpoint in executive meetings at Amazon and instead required all important decision matters be committed to six-page memos with narrative structures.

If you cannot tell the story you want others to believe and commit to action, you are not prepared to lead. So I use writing to organize the ideas I want ServiceTrade to embrace and extend to our customers as our value proposition. It proves to myself that I am coherent in my thinking, and it gives my executive team something to debate, debunk, or improve for their own narrative purposes with their teams.

The second reason that I write is because I am a big admirer of the trick that two other MIT alums pulled with their company, Hubspot.  Long before Hubspot had a product that was worthy of market leadership, the two founders, Brian Halligan and Dharmesh Shah, had a concept that was worthy of market consideration.  They coined the term and wrote the book Inbound Marketing. It gave the new company, Hubspot, standing in the market prior to the product Hubspot having any significant leading features. Customers will invest in leadership ideas and demonstrate patience with the product if they see a bright future. Halligan and Shah demonstrated leadership and bought their company mind share that they were later able to convert into market share as the product matured.

Similar to inbound marketing for Hubspot, the concept of a digital wrap for ServiceTrade is new and novel among service contractors seeking technology solutions to enhance their business.  The digital wrap gives ServiceTrade something cool to share with prospects in order to challenge their notion of what it means to be competitive in a world dominated by digital experiences from Amazon, Uber, Netflix, Apple, and others.  How am I going to compete with an online customer service experience when my customers are comparing me to these mega digital experiences? ServiceTrade has a novel concept called the digital wrap that enables scalable and memorable online customer engagement.  Writing the books gives our small company standing in the market because we are talking about something unique, differentiated, and important.

You don’t have to publish books to benefit from these reasons that I have adopted for writing. Use the concept of narrative memos like Bezos does to force you and your management team to organize your thoughts into ideas that can be acted upon.  Build compelling stories about your unique capabilities to share with customers in the form of blog posts or videos. It is easier for a customer to consider your product when they see or read a story that compels them to change their assumptions because they believe you are predicting the future.  A good story helps them buy into your value.

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We’ll give the first ten readers to respond a copy of Billy’s new book, Money for Nothing. Send your request and mailing address to  shelley.bainter@servicetrade.com

Every Sunday evening I receive an email from the software investment banking team at Key Bank Capital Markets. The subject line of the email is “Software Valuations,” and the email contains a link to a weekly report that details the valuation metrics of about 100 different software companies. All of these companies are public corporations, so their stock information is readily available for the folks at Key Bank to analyze. Most of the companies they follow are software as a service (SaaS) companies, and because ServiceTrade is a SaaS company, this report is very interesting to me as the CEO and a shareholder of ServiceTrade. It is my job to maximize the value of our stock for the benefit of all of our shareholders, and the Key Bank team helps me do this through their analysis of SaaS company valuations.

Here is an annotated version of a table they publish for about 70 different SaaS companies. I limited the table to 10 of the entries to make a point about the importance of growth to shareholder value.

 I sorted these from high to low based on the value-to-revenue multiple. The value-to-revenue multiple indicates how much the total of each company’s outstanding stock is worth as a multiple of their anticipated 2018 revenue. The number-one performer is Shopify, with a value-to-revenue multiple of 17.2X. The total value of all outstanding Shopify stock is equal to 17.2 times the revenue expectation for Shopify in 2018. You are reading that correctly. Investors are willing to buy Shopify stock at an extraordinary premium because they believe Shopify is going to grow, grow, grow. And Shopify is delivering on that promise. Note that Shopify expects to grow revenue by 51.1 percent in 2018 compared to their revenue in 2017. That’s a terrific growth rate. Also note that Shopify has a value of NM (Not Measured because they are not making a profit) in the category of price-to-earnings. That’s because Shopify is going to lose money in 2018. They will probably also lose money in 2019 and 2020 because they are investing like crazy to continue to grow. Despite this lack of profit, their stock is still extremely valuable.

Contrast Shopify with ChannelAdvisor. Their stock trades for just 2.9 times the revenue expectation for 2018. It’s interesting that Shopify and ChannelAdvisor offer a similar value proposition with their software applications – they both help small merchants sell their products online. The biggest difference is that Shopify is expected to grow 51.1 percent in 2018 and ChannelAdvisor is expected to grow only 6.8 percent. The expectation of growth explains why Shopify is almost six times more valuable than ChannelAdvisor.

Why is any of this relevant to your business? It is very relevant because their business model is similar to yours in that they sell a subscription program to their customers. If you are following my advice and developing a subscription program for maintenance, monitoring, and inspections for which you sell an annual or longer contract, your business is similar to these companies, and investors will ultimately value your business in the same way they value these businesses. The point I am trying to make is that growing is better than grinding when it comes to creating value for shareholders.

Grinding means pushing everyone in the organization to squeeze more profit from the current revenue stream. I have nothing against profit, and I think you should aim to be profitable. But grinding does not significantly increase the value of your business if there is the possibility to grow the business instead.

Growing is much more fun for everyone than grinding, for all of the obvious reasons. Growing means that new stuff is happening all the time. New products are being introduced to the market. New customers are being served. New employees are joining the company to help take care of the new customers. New promotions are being handed out because there is more responsibility to be shared. New offices are being opened. New equipment is being purchased. New tools are being deployed. New training is underway on how to use new tools. New, new, new means fun, fun, fun.

Grinding sucks because old tools are breaking and not being replaced. Old employees are leaving and not being replaced or taking on more responsibility for no increase in pay. Old customers are complaining because they are not getting good service. Old trucks are breaking down and disrupting the workday. Old, old, old means suck, suck, suck.

What is your plan for growth? How are you going to orient your company in a direction that gets to the fun of growing? It begins with a commitment to growth. If there is no expectation in the company that growth is an important metric, then no growth will occur. Set growth targets as part of your planning process, and don’t be shy about asking people to stretch to achieve something ambitious. For organic growth, plan to grow by 10 percent per year, and think about pushing for 20 to 30 percent (depending on the size of your company). All the best employees in your business will rally around the growth goal because none of them signed on for a career in which not much was achieved. Your employees will get much more career development from an aggressive growth strategy.

Maximizing the value of your business is the most tangible outcome associated with a successful growth strategy. The difference in valuation of the companies tracked by Key Bank in the SaaS market based on their respective growth rates is extravagant, and it should be a lesson for anyone who wants to build value with a subscription business model. The intangible value of having a growth strategy is that you will attract, develop, and retain a better class of employees who value your company because they expect to experience greater career development. They will be exposed to ever-increasing levels of responsibility, which leads to higher job satisfaction and better retention. Growing is fun and grinding sucks, so aim for growth and get more pay and have more fun along the way.

Amazon does not settle for “good” in the realm of customer service. It is not enough for the customer to simply get what they paid to receive. Amazon wants customers to enjoy the experience in the same manner as a guest might enjoy a good party. Great brands now want to copy Amazon because Jeff Bezos has become the wealthiest guy in the world due to the crazy success of Amazon stock. Smart business owners want the same value for their shareholders, so they are behaving like Amazon and aiming well beyond the idea of simply satisfying the customer. They truly want their customers to “feel good” about the experience of buying from them. This current obsession with the customer experience is certainly a good thing for customers. Because so many companies are now focusing on innovation in customer service, the bar for “feel good” status is climbing higher every day.

The most popular approach today for measuring customer satisfaction is the Net Promoter Score, or NPS. Wikipedia reports that more than two-thirds of the Fortune 1000 are currently using NPS. Here’s how it works.

Customers are asked a single, simple question:

How likely is it that you would recommend our company/product/service to a friend or colleague?

Respondents are then given an option to answer that question with a number rating on a scale between 0 and 10. 0 means that the customer would never recommend the company to a friend or colleague, and 10 means that they would absolutely recommend the company to a friend or colleague.

Next, respondents are categorized into the following groups:
Promoters – those who score the business with a 9 or 10, likely to promote to others
Passives- scored 7-8, not likely to benefit or harm your brand
Detractors- scored 6 or less, a liability for your brand

The final NPS score is calculated by subtracting the percentage of Detractors from the percentage of Promoters, with the Passives not contributing at all to the score. As an example, if you were to survey 100 customers and 35 score as Detractors (0 to 6), 25 score as Passives (7 or 8), and 40 score as Promoters (9 or 10), your NPS score would be:

Promoters – Detractors = NPS 40 – 35 = 5

Your NPS for this survey sample is a 5. Anything above 0 is considered to be positive, and a score approaching 50 is terrific.

Now I think all of this is probably a little too simplistic, and you will find lots of scientific criticism for NPS from survey theory experts if you go looking for it online. My opinion and the opinion of all of the other critics is not what really matters in this case. What is important is that two-thirds of the Fortune 1000 are relying on this information in one form or another to help them improve customer satisfaction. A lot of big brands with big budgets are focusing lots of energy on measuring customer satisfaction. The other important thing to note is that this wildly popular tool skews heavily toward “feel good” as the goal for customer service. Only scores of 9 or 10 are credited positively, and anything less than a 7 is negative. I would say anyone that scores a company with a 9 or a 10 feels really good about their experience with the company. So two-thirds of the Fortune 1000 are scheming for ways to get more scores in the range of 9 to 10 because that is the only way to improve their NPS score. That’s a lot of companies with a lot of focus on making customers feel good about their brand.

What does this emphasis on outstanding customer service mean for you? Your business is going to be compared to all of the customer service innovations of Amazon and two-thirds of the Fortune 1000 because they are all “focused like a laser” on customer experience these days. NPS is hot because customer service innovations are hot because customer loyalty is hot because growth is hot because Amazon is hot. Customers are not going to compare you to your “always go low on price” competitor down the street any longer. They are going to ask “Why can’t you be more like Amazon and give me notifications when I am due for service or when the technician is en route to my location?” The customer service bar is going to be set by the sum of all of the best experiences the customer has ever encountered across all companies in both their personal and professional life.

The good news is that most customer service innovations can be observed and imitated if they fit your idea of great customer service for your company. The case of Amazon is particularly intriguing because up until a few years ago Amazon had absolutely no influence over the products customers were buying from them. They were simply a reseller of other companies’ products. Any innovation they delivered to make a customer feel good was not a product innovation but instead was focused solely on the buying experience. In my next post, I’ll discuss the “feel good” customer service themes direct from Amazon that should probably be among the guideposts you use in establishing your “feel good” customer service strategy.

Your reputation has always been important when recruiting talent because the best techs want to work at the best companies. But the mediums job seekers use to search for potential employers has changed. Word of mouth is still around but pales in importance compared to your company’s online reputation. Before a job seeker even applies, your website, social media presence, and online reviews help them through the first two phases of the job hunt: Discovery and research.

1. Be Easy to Discover

When a technician starts their job hunt and isn’t familiar with all the local companies, where do you think they start? Google, of course. They’ll search for companies in their industry and the top results will be the first companies they research. That’s how Google has trained us all. The top search results are the best bet, and searching for local companies is no exception. Fortunately, the fresh, dynamic content created by your Digital Wrap is exactly the kind of indicator Google uses to rank websites. Just by performing the day-to-day tasks associated with the services you offer, your techs will be collecting customer reviews and generating rich content that will help prospective employees (and customers) discover your company.

Millennials, almost exclusively, find and research new job opportunities online. Most of my millennial friends discovered, researched, and applied for their current job completely online without talking to a single person. From discovery on Google or a job board to exhaustive research of prospective companies, they did everything on their laptop or smartphone. They browsed the company website and social media for information about the mission and culture. Where applicable, they researched customer reviews. They paid especially close attention to the reviews from current and past employees.

Indeed and Glassdoor, two of the largest job listing websites, are the dominant players when it comes to company reviews by former and current employees. When you Google a company by name, the employee rating of that company on Indeed or Glassdoor are often in the top results. Very quickly, a potential candidate can see what real employees think about a company. This can work for or against you. From a job seekers perspective, zero company reviews is concerning, a bunch of bad reviews is a death knell, and a mix of mostly good reviews is a great sign. I say a mix because people will be suspicious of your reviews if they are all five stars. Just like with your customers, it’s ok to ask your employees to leave a review of your company, just be sure that the review truly represents what they think, not what you think. Don’t instruct them to leave a good review and be responsive and respectful of any results you receive.

2. Be Easy to Research

If they find your company online, potential employees are going to look at your company website before they apply for a job. Is your website going to help recruit them? Does it have the information they ‘re looking for? Candidates aren’t just searching for a company that has an opening. They want to know about company culture and values. What do you stand for? They want to get a feel for what it’s like to work there. Is it fun? Is it challenging? They want to know what the opportunities for growth are. Will they advance their technical skill set or have an opportunity for advancement? They also want an easy application process. The bigger the barrier to applying, the fewer candidates you’ll receive. For example, a simple, mobile-friendly web form that collects their name and phone number with a call to action like “Are you a skilled technician and want to learn more about working at Aardvark Services?” will receive a lot more candidates than a Byzantine application process that asks candidates every possible question and requires them to upload a resume. You’ll definitely do more work to qualify candidates and get more that aren’t a fit but, in the midst of a skilled labor shortage, that’s an acceptable cost. Chances are, you’ll lose candidates you want before they even have a chance to apply if your application process is too difficult. Keep it simple.

Social media is a powerful tool when recruiting, especially Facebook and LinkedIn. When a candidate is considering a company, most will review the company’s social media profile and posts to learn about the brand. Compared to the corporate website, job seekers expect to find a candid representation of the company’s personality. Posts about company events, employees, and corporate values go a long way to help them get a better feel for the company.

It’d be nice if you could meet all of your hiring demand with a flood of great candidates that found you online, but that’s not going to happen for every company. Most likely, you’re going to have to get your hands dirty and actively recruit new employees. Armed with a reputable brand and a strong presence online, it will be easier. All you have to do is ask.

For entry-level office and field positions, one ServiceTrade customer Guardian Fire Protection has another interesting recruiting approach. Once a month, they host an open door interview day. Anyone who shows up is guaranteed an interview. Now, some interviews are MUCH shorter than others, but everyone gets a shot. They advertise the event through craigslist, social media, and through their website. For a relatively low investment of time and money, they’ve filled multiple open positions. When they ask successful candidates that show up on the interview day why they didn’t just apply online, candidates often say that they didn’t feel like their resume was good enough.

If potential employees don’t already know about your brand, your website and reviews should drive discovery through search engine optimization. Once they discover your brand, your online reputation should drive their research to the conclusion that you are a great company to work for and that they should apply. You can do a lot to help your recruiting efforts by making the discovery and research easier for job seekers. Want a big bonus? Being easy to discover and research will help out your potential customers, too.

Read part 1: Fraud Doesn’t Pay, But Consistent Results are Worth Billions

One day you will want to have some outsider set a value for your business as part of an exit strategy or for the purpose of passing the business to a new generation. What management metrics will you use to guide your efforts during the many years leading up to that valuation day? How can you deliver steady, market-beating results that are not affected by the various dips and swings that you inevitably experience while serving your customers? The key is to find a strategy that minimizes volatility and maximizes consistency over a long period. You need to deliver for real what Bernie Madoff falsely projected in order to impress the investors that will ultimately value your business.

Revenue and gross margin are not perfect measurements for management success, so what are the measurements that matter? How can the owners of the business look back at the past month or quarter and make a judgment regarding success or failure? If the business is an investment, it should be measured like an investment, and the investments that people value most highly are those that deliver predictable returns over and over again. Bernie Madoff famously played on this investor bias by cooking the books to show steady and consistent returns, no matter what the market conditions, in order to lure more investors to his Ponzi scheme. Investors will always pay a premium for an investment with steady and consistent returns. So what are you going to measure to be certain you are optimizing for consistent and predictable returns?

Your service contracting business, just like an investment firm, faces uncertain market conditions. Instead of swings in the Dow Jones Industrial Average, the S&P 500, and the NASDAQ, you are dealing with cold weather, hot weather, fuel price fluctuations, tight labor markets, and swings in customer buying sentiment brought about by the same economic indicators that affect Wall Street. In the face of all of these potential distractions, you need a simple and effective formula to focus your team on the long-term measurements that matter so that they can more effectively navigate a path through the potential chaos. I have a simple, easy to remember measuring stick to help you focus your management team on the outcomes that maximize shareholder value, but before I reveal it, see how you do in answering these questions:

  • 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 these contract customers? This is the predictable maintenance, monitoring, and inspection revenue that always shows up on the income statement regardless of market conditions.
  • What is the total contract value (TCV) of future committed revenue for maintenance, monitoring, and inspections for all customers under contract? Are your customers signing two-, three-, and four-year commitments to you?
  • How many customers pay you in advance for your maintenance program? What is the amount of deferred revenue on the balance sheet? A higher amount of deferred revenue means that customers are paying you in advance for your services. Paying in advance means they are more committed to your services and your contract. It also means you can use that cash to fund sales to new customers.
  • What is the ratio of planned service revenue (maintenance, inspections, quoted repairs) to unplanned service revenue (emergency service calls where something broke)? Higher ratios mean better customer service, and better customer service means customers will stick with your company for a longer term. Customers do not like unplanned expenses nor the disruptions they represent.
  • What is the net revenue churn in the customer base? How much revenue did you earn this year from customers that have been with you for over a year relative to the revenue from those same customers for the prior year? Ideally, this ratio is 90% or even higher. Minimal account 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, and ideally, gross churn should be less than 10%.

All of these questions are directly correlated with the value of a service contracting business (or any subscription or maintenance oriented business for that matter), and not one of them deals directly with the question of gross margin for service calls. Service call gross margin is important, but gross margin on contract maintenance, monitoring, inspections, and planned repairs is actually much more important. Predictable growth is even more important. No investor will complain about an occasional expense hiccup for unplanned services in the context of a highly predictable, growing stream of high margin, contract service fees. The very nature of unplanned repair work (it is unplanned!) makes it volatile and not particularly valuable to an investor, so optimizing gross margin on this work is the least of your concerns. Try to eliminate these disruptive emergency service calls altogether if you can.

I recognize that many of the questions above are kind of technical and difficult to absorb until you get into the swing of these measurements. It comes down to three simple questions to ask over and over again:

How Many? How Much? How Long?

How many customers you have? How much you earn from them? And how long you keep them?

These three questions that we’ve been talking about underpin the basic value-building fundamentals for almost any business. Read more about How Many? How Much? How Long? value calculations here.

Bernie Madoff was arrested in 2008 for running what is believed to be the largest Ponzi scheme ever. Over a period of more than twenty years, Madoff had convinced wealthy, high profile private clients like Steven Spielberg and the Wilpon family (owners of the New York Mets) along with sophisticated commercial clients like MassMutual, Banco Santander, and HSBC to entrust their money to his firm. The reason these folks went along with the scam is not because Madoff delivered eye-popping results with a brilliant strategy. He was not like John Paulson, who famously made over four billion dollars personally in a period of less than twelve months by using credit default swaps to bet against the subprime mortgage lending market. Madoff drew high profile clients and sophisticated financial firms into his orbit by falsely projecting modest but consistent returns. Over a period of 174 months (just longer than fourteen years), Madoff reported results that were only modestly better than the return of the Standard and Poor’s index, but over that very long horizon, he only reported a monthly loss seven times. This extraordinary consistency led several financial forensics investigators to question Madoff’s legitimacy, but the allure of consistent, albeit modest, positive returns was a powerful magnet for investors. They all turned a blind eye to the fraud while funneling enormous sums of money to Bernie.


The lesson for the service contractor is not that fraud is a good road; Bernie is serving a 150-year sentence for his crimes and the related $17.5 billion in losses he cost his clients. The lesson for the service contractor is that predictable, steady growth over a long period of time is an irresistible attraction for sophisticated investors. One day you will want to have some outsider set a value for your business as part of an exit strategy or for the purpose of passing the business to a new generation. What management metrics will you use to guide your efforts during the many years leading up to that valuation day? How can you deliver steady, market-beating results that are not affected by the various dips and swings that you inevitably experience while serving your customers? The key is to find a strategy that minimizes volatility and maximizes consistency over a long period. You need to deliver for real what Bernie falsely projected in order to impress the investors that will ultimately value your business.

In an earlier blog post about Red Hat, I described the efforts that Red Hat undertook to avoid being labeled as a company that provided “break-fix” support for technical issues associated with Linux technology. The directors at Red Hat were savvy investors, and they understood that a volatile “break-fix” revenue model was far less valuable than a consistent subscription model. During my time with DunnWell, the service contracting company that preceded ServiceTrade, I witnessed firsthand the difficulty of delivering steady, predictable income performance when the mix of services leans too heavily towards a “break-fix” model. One particular management meeting stands out in my mind. It was a March meeting to review the February results, and the tension between the steady, predictable outcomes of maintenance work as compared to the more volatile “break-fix” type work became vividly clear.

February temperatures that year had been brutally cold throughout much of the country, and lots of sprinkler pipes had frozen at our customers’ locations, even in the southern states. The emergency revenue was very high for that February as we responded to so many frozen pipe situations. The maintenance and planned repair revenue, however, was somewhat lower than expected, but the total revenue exceeded our target by about fifteen percent based upon the strength of the emergency service calls. The gross margins were OK, but not what you would expect when you have much higher revenue to absorb the delivery costs. “Shouldn’t the margins be higher since we charge more for emergency work?” I naively asked. “Nope,” replied Sean McLaughlin, the head of operations. “We have to pay an arm and a leg to get people to respond to these emergency calls on a bitterly cold winter night. It is always a scramble. Costs are higher, and the administrative burden is also higher because you have to constantly field calls from the customers and then call them back with updates.” Looking at the numbers I guessed “So the maintenance revenue is lower because our people were focused on chasing down problems instead of staying on top of the planned work?” Sean snorted “That MIT education is paying real dividends for you right now, isn’t it?”

During a typical month, DunnWell would deliver between 92 – 96% of the planned maintenance, inspection, and repair work that was available under contract. We called this measurement the “due versus done” ratio. It represented the amount of work delivered and invoiced divided by the total amount which customers had authorized, either via a maintenance contract or an approved repair quote. To be strictly correct, it should have been called the “done versus due” ratio, but it was named before I got there, and “due versus done” had a better ring to it. That cold February, the “due versus done” ratio sagged downward to about 80%.

When the metric lagged, Joe Dunn, the largest shareholder in DunnWell, would remind everyone that “the customer has written a check and laid it on the counter, and we couldn’t be bothered to show up and cash it.” Put in those terms, it seems pretty silly to let anything get in the way of cashing a check, but it was surprising how often people with good intentions could become distracted by chaos and neglect to pick up those checks. The distractions typically take the form of some emergency, and in the case of this cold February month, the distraction was caused by frozen pipes and irate customers. But the February revenue was really good, and the overall margin was good, so what was the problem?

The problem is that not all margin dollars are equal. That sounds silly, but it is true. For this February period, DunnWell did not cash some checks for planned maintenance because we were busy cashing checks for emergency work. How do you suppose the customers that were due for planned maintenance felt when we did not show up as promised? How about the customers whose pipes burst? Do you suppose they were happy with the emergency response fees? And do you believe those emergency service dollars are going to show up consistently every February like contract maintenance dollars do? Nope. Emergency service calls by their very nature are unpredictable – the opposite of consistent results. So even though revenue was higher and overall margins were acceptable, that cold February was a failure. Just because the gross margin on every job is in an acceptable range does not mean that the business is performing in a way that maximizes value for the owners. The emergency “scramble” gets in the way of the Bernie Madoff lesson that teaches us that consistency is better.

So fraud is never a good road, but Bernie understood very well what investors want. You can take a lesson from his fraud and focus your business on minimizing the chaos and disruption of “break-fix” type services and instead attempt to maximize the revenue you receive from consistent revenue services like monitoring, inspections, planned maintenance, and planned retrofits and repairs. Next week, we will do a follow-on post to describe the metrics and give example management charts that you can use to be certain you are on the right road to maximizing the consistency of results to yield the highest value for your shareholders.

Read part 2: Consistent Results are Worth Billions, Part 2

I hear customer prospects cry out for “the perfect application for my business that does everything” in nearly every sales call that I make. It does not exist. I have argued again, and again, and again that every business of any size will ultimately buy multiple applications to serve the diverse needs of their business functions. Look at your phone. One application? Or many? Displaying the weather is different from transferring money from your bank account is different from measuring the intensity of your workout is different from keeping up with your social network. Likewise, your accounting function is different from your sales function is different from your customer service function is different from your marketing function. The idea that one application will be sufficiently good for your business to remain competitive in all of these different functions is silly, and any software vendor promising you that outcome is a silly vendor.

But what about the follow-on question. If I am going to buy many applications, how much should I expect to spend? How do I value applications that make my business more competitive in a world where technology innovation increasingly determines market competitiveness? Well, before you even consider how much to pay, you need to perform the first and most basic test in the software buying cycle. Go to your favorite online search engine and enter the following query:

[INSERT NAME OF SOFTWARE APPLICATION HERE] API documentation

The first organic link below all of the advertisements from the software vendors that are trying to sell you a competing application should be a link maintained by the vendor of the application in question. That link should lead you to detailed documentation for how the application you are considering can be integrated with other applications that you use. Application Programming Interfaces (APIs) are the key to a new world of connected innovations for your business. Without good APIs that are publicly documented, the application you are considering is worthless. You should not pay anything for it.

Go ahead and try the search for a couple of high-quality applications that are on the market today. Insert “ServiceTrade” or “ZenDesk” or “PipeDrive” or “Marketo” or “Hubspot” or “Slack” into the query above. Check out the first organic link below the advertisements. What do you see? This query is the first test to determine if an application is worth at least a penny.

Let’s say that your application passes that first test. What now? How much is it worth? Well, it sort of depends on how much it increases the value of your business. In a prior blog post, I argued that the questions that determine the value of your business are How Many? How Much? and How Long? How many customers do you have and how many can you attract with your value proposition? How much can you charge those customers for the services that you provide to them? How long can you keep those customers when you are charging a significant premium compared to your low price competition? These are the questions that you should use to evaluate how much a new software application is worth to your business. The more the software impacts these measurements, the more you should be willing to pay because it is going to make your business more valuable.

Does the new application help me attract new customers? Does it help me charge them more because it provides my service with some new features that customers value? Does it help my business become sticky so that it is difficult for customers to fire me and replace my service with a low-cost competitor? If the answer to these questions is “yes, absolutely, definitely” then the application is probably very valuable. If the answer is “no, not really” then the application is only worth some fraction of the money it might help you save by eliminating administrative burden. Let’s look at some examples from ServiceTrade’s business to set some benchmarks for how much to pay.

The biggest technology application expense category that ServiceTrade faces is for infrastructure services that power our customer’s experience with our product. Amazon and Google charge us for technology that provides neat features in our application. The ability to send a quote to a customer via an email with a link that presents the quote online with photos and video and audio and a “one click to approve” button that drives revenue for our customers is largely dependent upon capability provided to ServiceTrade by Amazon. The ability to map customer locations for scheduling efficiency, see the locations of the technicians in real time, and prefill the fields for setting up new customer location records is largely dependent upon capability from Google. The applications from Amazon and Google are VERY valuable to ServiceTrade because they help us attract new customers and charge them a premium, and we spend about 6% of our revenue on these types of applications.

Now, ServiceTrade makes about 80% gross margin on the applications we sell, so we can afford to spend heavily on making these applications great. If your service to your customer drives a lower margin, say 35%, then 6% of revenue makes no sense for any technology. The apples-to-apples comparison, in this case, is probably close to 7% of gross margin (roughly), which would equal 2.6% of revenue for an application that really helps you deliver differentiated value to your customer. So for a $10 million dollar service contracting business generating 35% gross margin, the equivalent amount would be $260,000 per year.

The next biggest category of technology expense at ServiceTrade is for sales and marketing applications. We have Salesforce, Marketo, Salesloft, and a handful of other applications that help us present our value proposition to customers in a way that drives new sales. These applications help us increase the How Many customers metric. We spend about 1.5% of revenue on these types of applications. Again, to adjust for gross margin, that would be about .6% of revenue for a 35% gross margin business. So for a $10 million dollar service contracting business with 35% gross margin, the equivalent annual expense would be $60,000.

The next biggest category of technology expense at ServiceTrade is for customer service oriented applications. These are the applications that help our engineers and our support staff keep track of how things are going for our customers and to monitor the application for errors or potential signs of trouble. We spend about .4% of revenue on these types of applications. They are tangentially oriented toward helping with the How Long can we keep our customers question. Clearly, these are far less valuable than Google and Amazon, and also less valuable than the sales and marketing applications, both of which help us drive up the How Many? and How Much? elements of our business value. Adjusting for gross margin again, and you get .16 as the percentage of the revenue in a 35% gross margin business. A $10 million service contracting business should consider spending $16,000 per year on customer service infrastructure.

Finally, there are the administrative applications like accounting, email, file sharing, calendar, reporting, office productivity, etc. These are the applications that every business needs, but their value is simply in keeping the administrative burden of running a “tight ship” as low as possible. ServiceTrade spends about .3% of revenue on these type of applications, and it is unlikely that the expense of these will scale linearly as we grow. When we double in size, I would expect that percentage of revenue to be about .2%. So for a $10 million dollar service contracting company generating 35% gross margin, the administrative applications in the business should be on the order of .08% of revenue, or about $8,000 per year on accounting, email, reporting, calendar, office productivity, etc.

If we total all of these up for a $10 million service contracting business, the percentage of revenue spent on technology applications is about 3.44% of revenue or about $344,000 per year. Now my ears are almost bleeding from the screams and bellows of “That’s Crazy!” that I can hear coming from service contracting customers reacting to this number. But is it so crazy? Are applications that help your business become competitive in attracting new customers, driving new revenue, and charging a premium price really worth that type of spending? Consider these two examples. How much do you pay for an application like Square that helps you collect money from a customer in the field? It consummates the sale by getting the cash now. You happily pay about 2.5% of revenue for this type of application. How about the central station monitoring application that enables you to sell a high margin monitoring service? You happily pay between 30% and 50% of revenue for this valuable addition to your service arsenal. So no, 3.44% of revenue is absolutely not crazy for a full set of applications that help you drive value in your business.

The problem is that you are probably significantly overpaying for administrative applications like accounting and underinvesting in applications that drive new customer acquisition, service differentiation, and revenue. And I also bet your accounting application provider is telling you “we have a plugin for sales, and customer service, and technician management, and every other thing you might need” in order to justify the crazy price you are paying for that application. Am I right? Probably.

So how can you alter your portfolio of applications through time to push down the expense associated with administrative applications so that you can reinvest those dollars in applications that actually drive up the value of your business to its shareholders? Applications that enhance your ability to add customers, charge them more for your services, and hold onto them longer? Well, the first step is to only consider modern software as a service (SaaS) applications that have publicly documented APIs. These will generally be cheaper than the older, legacy server-based applications, and they will deliver more innovations to your business going forward. Software investors are NOT investing any of their precious capital in old server applications, so these legacy applications are going to stagnate and die. No point in throwing your money away on a dead horse.

The second step is to ask the basic questions around How Many? How Much? and How Long? for new applications you are considering. If the applications you are considering do not contribute to these value metrics, then simply look for the low price alternatives that meet the SaaS and API criteria and determine how much administrative expense they might save you. You can spend up to 100% of the savings on the administrative applications to eliminate manpower spending.

If the applications do in fact help you attract more customers, charge them more for valuable new features, and hold onto them forever, open up the wallet and let fly for up to 2 – 3% of the revenue you expect to drive by being the most innovative service contractor in your market. I assure you that the best service contractors will collect a 15 – 25% revenue premium in their market, which easily justifies the spending on the applications that drive that differentiation. I will also assure you that competing on technology innovation is much more fun than competing on price.