Converting Customers to Full Contract Maintenance

"It is not the strongest of the species that survives, nor the most intelligent, but the one most responsive to change." – Charles Darwin

This quotation deals with the basics of life, and recently there have been a series of trends that are facing dealers to adapt, such as: electronic commerce, strategic manufacturer alliances, scarce labor, consolidations on all levels, and increased customer demands, just to name a few. How you adapt will determine your survival.

Who your customers choose to buy from is going to have more impact on you in the future. You can find out if you are getting all of your customers' business in two ways: first, ask them directly, second, calculate their potential spending and compare to their purchasing from you. Let's look at some interesting questions:

1. Why do you care if you are getting all of their business?
2. How do you calculate their potential spending?
3. How do you sell you company's services for providing full service?
4. Where do you start and how do you measure success?

You can view business in a couple ways, do you want all of the business from some customers, or some business from all the customers. Certainly you can choose one or the other. What we have found as consultants to dealerships, distributors and manufacturers both in the Americas and Europe is that there is more profit if you have all the business from some customers. By getting all of the business you establish a relationship and establish a value for your services and products.

• The dealership captures the full business opportunity from the account. Revenue is increased, due to supplying all unit, service, and parts needs. Gross profit as a percent of that revenue increases, because the dealer shifts the product mix to primarily service with related units and parts.


• The marketshare of the dealership increases, if the fleet maintenance account was not supplied entirely by the dealership before the contract was signed.


• Customer satisfaction and retention is increased, as the dealership has regular reviews with the account and ample opportunity to maintain a positive relationship.


• Cash flow is stabilized, because the dealership receives regular monthly payments from the account and can plan for their own expenses related to maintenance of the fleet more easily.


• The dealership benefits from the ability to source rental and used equipment from and to these Full Maintenance accounts.


• If you don’t take this approach, your competition eventually will come in to lock up this account with some form of this sales strategy.

There are several places to start. You can ask many of the manufacturers. These companies have tracked the spending of the end-users for years. Many manufacturers have “consumption factors” for labor and parts based on the model, class of truck, age, or type of application. Sometimes the “rule of thumb” has been 20 hours of labor and you balance parts to labor billing. The parts value will vary considerably with class of truck, application and brand. One dealer told me he uses $2,000 per year in purchasing for each class IV and V truck in his area. The level of spending also will be impacted by inflation.

Other places to research for end-user consumption factors are your own history files. Look at what you have been spending on your rental fleet - group it by model, class and age. Any dealer maintaining a good rental fleet has history and knows when they are experiencing a good level of maintenance. When we review a rental fleet we expect the maintenance to not exceed 15% of the annual rental revenue for the entire fleet.

Additional sources within your dealership are the service history reports which many dealers can access by class, model, customer or repair functions. Look at the installed base of trucks in your area, look at your large customers, extract information from your own files to include relevant labor factors and parts usage for your brand and area of the country.

Take a very simple view of consumption factors and your installed base. You have a large customer with 48 units (Class IV & V). If we used the values listed previously we could begin to estimate their potential spending. If your labor rate is $65 per hour and each truck needed 20 hours of maintenance per year, then for 48 trucks you could expect about 950 hours of work or $62,400 in labor billing. Now based on your history reports if you found parts dollars equal to the labor billing, you would know that this account would spend $62,400 in labor and $62,400 in parts for a total of $124,800. Armed with that information, you can now look at their annual spending and determine if they are doing most of their work with you. Of course, new trucks will have less maintenance or more warranty than older trucks. You need to balance your evaluation based on age, and many other factors.

Recently I was working with a dealer, and we were talking about a large account. The historic report showed that they had spent $185,000 in parts and labor. We were looking for a way to “lock up the account.” In discussion, we decided to offer the account an 8% discount for the next year if we could do all their work on this group of trucks. This meant that we would bill them $170,000 over twelve months in equal monthly payments. They liked the fixed cost per month and the guaranteed pricing. We then had to plan how we were going to organize and manage this account for that price.

In reviewing the account we had seen that there was a considerable amount of emergency service causing trip charges, overtime rates, and equipment downtime. We knew that if we had more control of the maintenance and scheduling of maintenance we could improve the uptime, reduce the emergency work, and reduce our time invested in these units. Our risk was being sure that we managed the contract within our estimate of the annual time.

We reviewed the history and found that account was running about 50/50 on labor to parts billing. We also found that the labor work was below our target profit level by 3% points and parts was below our target profit for that department by 2% points. We took the contract and worked on both segments. In service we took the $85,000 and divided by our posted labor rate or $65 and found that we had to stay at 1,308 hours a year for these units. Now our service manager had a benchmark of performance on this contract.

We also looked at the parts side of the business and told the parts manager that we would expect to bill this contact internally at a standard profit level. We expected him to have the parts for these units in stock 100% of the time (we gave him all of the models, serial numbers and modifications that had been done to the equipment). With the scheduled maintenance and knowledge that we have these units under contract we expect our inventory to turn well and not be increased as a result of this work. Our service manager will be working with the technicians to give parts more advance notice of the service work and needed parts requests in advance.

This account we are talking about was primarily buying parts and service. Other accounts also rent equipment from you, buy equipment on a regular cycle, and purchase other material handling equipment for their business. These all represent portions of their consumption rate. The issue for you is to determine how much they “consume,” over a standard period of time, and then you need to determine how to improve their business through your management of those same resources.

The process to focus on is around Market Analysis, Account Identification, Account Acquisition/Penetration and the Entry Strategy. You need to organize your attack. Select where you are going to focus you efforts. If your business is strong, has a good infrastructure and employees are plentiful, you might take on a significant amount of new accounts with this full maintenance sales strategy. If you are tight for employees, concerned about what change will do to major accounts you might tentatively approach a few smaller customers. Either way you still need to follow procedures.

How broad is the product offering you are going to present? In some cases the full maintenance contract includes everything, in others there are considerable limitations. Be sure of what you are willing to offer. Be flexible in adapting to what the customer wants. The best maintenance contract is one that meets the customer’s requirements, yet is profitable for you.

• There is an expense savings to the account for outsourcing the fleet maintenance process. Both direct costs and administrative and accounting expenses are analyzed, and the maintenance contract is written to assure savings to the account.


• The change in fleet maintenance will increase the uptime of the customer’s fleet. Presumably the dealership will manage the maintenance schedules of the units and their replacement cycles at the optimum level, thus maximizing performance of the fleet. In addition, the dealership will have determined the optimum number of units to have in the fleet, and will have back-up trucks available at all times.


• Finally, fleet maintenance enables the account to focus on their core business. By invoicing the customer on a set schedule and only for the fleet maintenance contract, there are savings in accounting and administrative time. The dealership performs these services and reports the information to the account in a summarized fashion. The benefit to the customer of shifting this responsibility is a reduction in the requirement for skilled management employees, which will enable the company to utilize its managers in different areas.

You start with the end in mind, as Dr. Steven Covey has told millions, in his “Seven Habits of Highly Successful People.” What is your definition of success? How do you measure attaining success based on your definition? That tells you what you need to measure.

Consider your best customers. You are valuable to them. What else can you do that makes you more important to them? Can you make their business more profitable? Can you free them up to focus on their core business? Your business provides equipment, parts and service that aid them in running their business.

If you are looking for a profitable business, total purchasing of each customer with your business and longer-term relationship with an account, then working to sign customers up for full maintenance contracts is probably for you.

Someone recently told me, “There are three ways to make money with service: first, you sell hours or labor; second, you purchase labor and material and mark it up before selling it; and third, you assume the risk for the customer and charge them for it.” Service is becoming the central trademark for dealers. It is something that cannot be delivered over the Internet (so far). It is difficult to stockpile and sell later; it has to be delivered at the point of use, and cannot be demonstrated with out delivering it. Parts are a derived revenue stream of service performed, and if you have the contract to perform all of the service, you also know when the equipment needs to be replaced, what maintenance has been performed, and the application for the equipment.

Service is going to be the new sales strategy of lift truck dealers. Equipment will be sold because we have the service contract. Locking up the account through a contract is like stocking fish in a lake, making that lake good for fishing.

View Full Chart

This simple control sheet will provide helpful information about your contract for each piece of equipment. It may be updated manually, in a computer spreadsheet, or through computer reports.