Building Customer Loyalty, A Service Contract at a Time

I always thought annuities were something paid to me. But sometimes it's the other way around.

Every spring we call the Bethesda Shade & Awning Shop (now in Gaithersburg) and ask them to put up the awnings at our Chevy Chase home. They put them on, take them down in the fall and hold them in storage during the winter. We pay them $325 every year for all of that, and the price seems to go up about five bucks a year.

Same with air conditioning and heating. Every spring, Tuckers Air Conditioning & Heating (also in Gaithersburg), arrives for an annual AC inspection. Then they come back in the fall to make sure the furnace is working. We got tired of writing checks to Tucker, so now we pay an annual service retainer of around $200, which covers two basic visits.

I marvel at these little companies.

They are what Warren Buffett refers to as "toll bridge" businesses -- something you pay for with some regularity. Think cigarettes, razors, Starbucks and mouthwash.

When Tuckers' technician advised me to clean my AC coils a couple of summers ago, I figured it was probably a waste but told them to go ahead anyway. My summer electric bill dropped like a stone.

"The service contract is our bread and butter," said Ken Tucker, who is 45 and a native of Silver Spring. The 700 contracts bring Tucker about $140,000 a year, or less than 10 percent of the $2 million in gross revenue the company collects. But they lead to a lot more money because they keep the company in regular touch with its customers. And on many visits, technicians find something additional you need. (Remember my coils?)

"These are the people we take care of," Tucker said. "My mantra is repeat customers. They are customers who, if they ever need to have equipment, we are the first they look at."

He said his goal is to double the number of service contracts to 1,500 a year. That would bring him around $300,000 in reliable cash.

Tucker attended Catholic University and has a knack for numbers. His brother, Mike, knows heating and air conditioning, so they started Tuckers in 1995 in Mike's garage in North Potomac with $10,000 in savings and a $50,000 loan from their mother. They used the $50,000 to buy two Ford vans for house calls. They have about a dozen vehicles now.

The vast majority of the business is residential, with a small portion of commercial customers. To build customer loyalty, first-year "core clients" were given 10 percent discounts for life. If a customer thought he was overcharged, Tuckers gave the money back. The company tried to respond to every emergency call within 24 hours, even if it meant losing money. If a customer recommended Tuckers to a neighbor or friend, the customer got a $50 credit on the next job. (I know. I have the $50 credit to prove it.)

Tuckers grossed $200,000 the first year, and the business was profitable by 1999. The brothers each took a $30,000 salary for the first few years, rolling everything back into the business for new trucks, top-notch employees, equipment, rent, office furniture. They were helped along by a $67,000 small-business loan in 2000.