Many of these programs have done very well in penetrating the market, often reaching 20 percent or more of residential heating customers within 8 to 10 years. This degree of market penetration reveals a strong latent demand for the service. In fact, the residential customer views the utility as a preferred provider.
Nevertheless, profitability may remain troubling. Some observers believe that many programs do not earn a profit on a full-cost basis. This concern should prompt utilities to examine a few key areas before entering the appliance service business.Local Contractor Resistance
Resistance from local contractors always looms when utilities enter the appliance business. Invariably, the local contractor community views utility involvement in service contracts as an infringement on its "territory" and unfair competition. Although many contractors have petitioned regulators and legislators, alleging cross-subsidization and unfair competition, no case has forced a utility to withdraw from the business. But the costs have proved substantial for both sides.
Utilities should distinguish service contracts from appliance sales when gauging contractor resistance. Service and repair contracts may actually benefit private contractors. Very few contractors offer service contracts, so most utility programs actually generate more major repair and equipment sales business for the contractors. But service contracts also carry the implied threat of future utility entry into equipment sales-which, for the contractor, targets the principal money-making segment of the business. In reality, however, utilities have been offering service contracts for 30 years; none has ever expanded into equipment sales from service contracts.
Several utilities have defanged the issue of contractor resistance by working in partnership with a selected group of local contractors. Each party does what it does best: The utility handles marketing, billing, accounting, and quality control. The contractors perform the actual field repair work. The two parties split the revenues using formulas that reflect product costs. In this "win-win" arrangement, the participating contractors receive a steady flow of new revenue (most unusual in their business) and position themselves to take over major repair work or equipment sales after the service contract runs out. The utility gains field capability without investing in the equipment, parts, inventory, or training it would need for its own staff.Product and Pricing
Most utility appliance service contract plans include only repair service, with coverage limited to space and water heating equipment. The standard repair contract sells for $50 to $60 per year-an appealing price to a large market. Nevertheless, many customers place greater value on service and are wiling to pay a higher price.
Offering repair service coupled with preventive maintenance offers several advantages. First, the preventive maintenance/repair combination ensures a better product for the customer by reducing emergency calls. Second, an annual preventive maintenance call marks a tangible, visible service that should aid customer retention. Utilities with repair-only plans have noted a high dropout rate among customers who have not required service for two or three years. On the other hand, repair service is more profitable since repair is required for only a portion of customers. It operates like an insurance product providing an underwriting profit.
Other types of equipment are ripe for inclusion repair service. Central air conditioning-a major homeowner concern-is a natural. It offers summer business to balance winter space heating repairs. Any other equipment in the home-electric or gas-can certainly be included.
Price sensitivity is also important. The typical utility plan that sells heating and water heating coverage for $50 to $60 per year appeals to a large market; on the other hand, a program priced at over $100, which might include a preseason preventive maintenance call, will prove more difficult to sell but offers higher profit potential. Price sensitivity varies by segment. Senior citizens with modest incomes will value a repair service that eliminates worry. They represent the most productive market segment for the $50 to $60 program, but may be less willing to buy a higher-priced contract.Marketing
When all is said and done, marketing and associated costs will play the most critical role in the appliance service business. The product is complex and requires a direct appeal to thousands of potential buyers. Accordingly, marketing costs can run as high as $70 during the first few years and even $20 to $30 in a mature program. For a product priced at $50 or even $100, such marketing costs are substantial.
Direct mail, bill inserts, newspaper inserts, and telemarketing offer the most productive marketing options. But while they might appear straightforward, in reality they require skill and experience to use well. Small differences in wording, timing, and selection of the target group can translate into large differences in response rates and cost per sale. Further, an effective marketing program may include several supporting media and an inbound phone response capability. All of this must be managed for best response and lowest cost.Operations
Managing the business operations can be complex. Each repair represents a distinct, unique transaction. Each completed repair can differ in many categories: cause of failure, age, type, manufacturer, model of equipment, and so on. As a result, discharging the repair obligation in an effective and efficient manner requires a versatile and skilled workforce, full inventory of parts and equipment, close accountability, and a strong quality assurance.
Appliance service is also seasonal. The workload peaks after the first cold snap in October, while April and May are quiet. Using permanent staff to meet the peak is not feasible; operations management must have complementary work or a supplemental workforce to balance workload. Appliance service employees often use utility maintenance work to balance peaks. Subcontracting to specialists in heating, ventilation, and air conditioning (HVAC) systems can help avoid staffing problems.Partnership Arrangements
By partnering with private contractors utilities can maximize intangible benefits from entering the appliance business. First, such ventures can speed entry into the business by leveraging an inplace skilled workforce at low investment. Eventually, the utility can parlay these advantages into improved overall customer satisfaction. Second, a partnership effort can help blunt contractor resistance and even improve business practices and profitability among local private contractors.
A utility may view its role narrowly as simply supplying high-quality fuel and energy to its customers in an efficient and reliable manner, but the customer views the utility's role as warming the home, drying the clothes, or lighting the room and providing other more tangible results. A well-managed appliance service contract business improves the utility's product by increasing the reliability and efficiency of energy-using equipment. This effect can be substantial: A mature service contract program can reach 20 percent of the residential customer base.
A service contract business structured as a partnership can also help upgrade HVAC contracting practices. Contractors come in many "packages"-large and small, residential or commercial, sales or service-oriented, and specialized by brand and equipment type. They operate largely without accepted service standards. Customers often have trouble difficulty determining which contractors are reliable. But in a partnership structure, the utility first screens contractors against a set of standards that encourage contractors to improve performance. In the long term, this effect may prove the most significant advantage of entering the appliance service contracting business.NEED BIOCallout or Side Subhead
Appliance service contracting recalls many of the utility's core business skills-customer service, knowledge of the customer base, and a positive image.
SidebarAntitrust ConcernsLocal contractors may object if utilities invade the appliance business. Last year a Pennsylvania court said the state regulatory scheme gives antitrust immunity to utilities who offer cash grants to home builders to install heat pumps. But it warned that electrics could lose immunity if they tie heat pump promotions to "all-electric" restrictions in new homes. See, Yeager's Fuel, Inc. v. Pa. P&L Co., 22 F.3d 1260 (3d Cir.1994).
SidebarRegulatory ConcernsEntry into the appliance business may trigger oversight by state regulators if utility activities qualify as "promotional practices," as shown by these excerpts from Arkansas rules:Merchandise Sales. Merchandising [or financing] activities . . . not completely segregated from public utility activities and property shall be deemed promotional practices. . . . [I]f such activity is operated as a nonutility business [it] must meet the following requirements: Collection for financing is not made on the customer's utility bill
Utility payment records are not used for credit approval
[B]illing inserts are not used to advertise.Incidental Repairs. [P]romotional practices shall not include . . . [i]nspections, repairs, and service . . . to prevent hazardous conditions or service interruptions.See, Re Promotional Practices of Elec. & Gas Pub. Utils., Dkt. No. 90-205-R, Order No. 19, Jan. 25, 1994 (Ark.P.S.C.).
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