BrightCite

Service companies like health clubs (who provide ongoing memberships) and interior plantscapers (who sell weekly maintenance) are faced with a sales situation that can make or break their businesses. How to structure contract

Long term contracts provide predictable cash flow, insulate clients from competition and reduce client churn. However, they can be harder to sell and renew because the client faces more risk from the transaction. The secret weapon for selling long term contracts – a strong money-back guarantee to reduce client risk.

Month-to-month contracts (or no contract) provides less initial sales resistance and better conversion rates. But, attrition has a greater impact on cash flow and clients can be lured away by cost cutting competitors.

Selling Less To Sell More
More and more businesses have been migrating their contract service models to month-to-month. Why? Because consumers are demanding that service companies share the dis-satisfaction risk. It provides the customer with extra value in the transaction without a written or formal guarantee. Companies are understanding that value and turning it to their advantage. Here’s an example from the health club industry via The Houston Chronicle:

“Why are Life Time and Town Sports succeeding when Bally has stumbled? One key difference is in membership structure.

In an interview, Simkins said Bally was highly leveraged to member financing under its original structure, which required that customers commit to long-term memberships at lower rates.

Analysts prefer the Town Sports and Life Time models, which are primarily month-to-month and target a higher income clientele with more expensive fees.

A Bally spokesman said the company began offering month-to-month memberships in 2004, to provide customers with more choice.

One downside to a month-to-month structure, however, is it gives customers an easy out if the fee becomes too burdensome. Analysts said the industry has been generally resistant to recession, but acknowledge that an economic downturn could cause customers to turn in their gym memberships for jogs in the park.

CIBC World Markets analyst Vivian Ma, who gave Life Time a “Sector Outperformer” rating noted, however, that the industry has experienced steady growth since 1987 and showed no significant slowing during two recessions. Life Time outperformed the industry during the most recent downturn in 2001 and 2002, she adds.

As for Town Sports, Simkins said the company is tied to New York City’s economic health, and noted that unemployment in the city is relatively low. About 70 percent of Town Sports’ store base is located in the New York City metro region.”

How is your business selling it’s services? How could your business be selling it’s services? That may be the most important question of all.