- THE MAGAZINE
To start with, this is a self-funded warranty. There are some programs currently available where protector manufacturers sell you a warranty and you can certainly incorporate them if you want to. But today, we’ll be talking about a warranty that you provide your customers yourself.
If you remember, how the selling system works is that, when it comes time to ask your customer if she would like protector, instead of asking whether or not she wants protector, you offer two protectors. The first one is a high-quality protector, and the second is another high-quality protector that you offer with a 1-year warranty (and for which you charge $0.05 more per square foot).
The way the warranty works is, if the customer has a stain she cannot remove herself, she can call you and you will come out and attempt to remove it at no charge. If you can’t remove it, you’ll refund them the cost of all the protector they had you apply on the job.
The critical element to this program is that you charge $0.05 per square foot more for the protector with the warranty than without. So, on a 500-square-foot job, the protector with the warranty would cost $100, while the protector without the warranty would run $75. We’ll use low numbers to be as realistic as possible; the cleaner is charging $0.20 per square foot for the protector with the warranty and $0.15 for protector without.
(Note: always offer the protector with the warranty first and explain the whole program. Then, and only then, offer the lower-priced, no-warranty protector.)
Our carpet cleaner does 15 jobs per week with an average of 500 square feet per job. We’ll assume that he maintains this pace for 48 weeks annually, for a total of 720 jobs a year.
Because our cleaner really wants to succeed, he uses the two-protector system and offers it to every customer regardless of what he thinks the customer wants. And as promised, he sells protector on 80 percent of his jobs. So out of the 360,000 square feet of carpet he’s cleaning, he’s putting protector down on 288,000 square feet.
Assume all his customers that chose protector went with the warranty. In the real world this won’t be the case, but you’ll be amazed to see that most customers that chose protector will chose the one with the warranty for the small difference in cost. And it doesn’t make a difference in terms of the numbers. In fact, this example is something of a worst-case scenario in terms of evaluating the cost of the warranty program .
When our cleaner provides protector with a warranty, he’s charging an extra nickel per square foot, right? This means that he’s generating an extra $14,400 in income (288,000 X $0.05). This money needs to be put into a separate bank account and entered into his books as reserve funds. After all, you are going to perform some warranty service calls, and this money is not yet taxable income when it is held in reserve.
Several major manufacturers and distributor organizations have done some extensive research on the subject of warranty callbacks and they all conclude that you will get callbacks on about 5 percent of the jobs on which you sold protector with a warranty. This means that our cleaner will have to go back out on 29 jobs. (288,000 total square feet protected, divided by an average job of 500 square feet, comes to 576 jobs. Five percent of 576 is 29.)
Now, our cleaner doesn’t want to not get anything for those spotting calls. So he pays himself $60 per call out of the reserve fund. This means that he earns $1,740 in warranty call fees from the reserve fund. This still leaves $12,600 in reserve.
Now for the bad news. Let’s say our intrepid cleaner can’t remove any of the stains he gets called back out on. The warranty says he has to refund all the money he charged for protector on those jobs. That means that he’s going to refund $2,900, which is 29 jobs X 500 square feet X $0.20 per square foot.
But look. Even in this worst-case scenario, our cleaner still has $9,760 in his reserve fund! And we’ve only been talking about the extra nickel per square foot he charged for the warranty! He still has the other $0.15! In this example that represents $43,200 in additional income (288,000 X $0.15)!
We need to subtract the cost of the protector, which costs $0.03 per square foot for premium protector, for a total materials cost of $8,640. The labor costs are practically nothing because you’re already in the house.
There is a pure, bottom-line additional profit of $34,560. Plus, add in the $9,760 still in the reserve fund and you have an increased profit of $44,320 from one truck. If you have multiple trucks, well, you do the math.
Now, I’m not a CPA, but I suggest that you talk to yours about how to handle the leftover money in the reserve fund at the end of the year. You may find out that this nice little nest egg can be put into your retirement fund tax-deferred.
Now think about doing this year after year in order to provide for the kind of retirement you’ve always dreamed of! If you liked this article circle 149 on the Reader Inquiry Card.