CIP- Center for Innovation for the Poor

After Sales Service Costing

Case Study: After Sales Service Costing

Case Study number: 31

Initiated in: 2013

Key terms: internal analysis, budgeting, pricing, costing, incentives, financial analysis

After Sales Costing: SELCO’s After-Sales Costing analysis was an important strategic exercise undergone to evaluate real

cost of solar PV system servicing. Since SELCO inherently bundled energy sales and services, this analytical tool allowed the

company to evaluate the sources of cost in its service business and compare service efficiency across branch unit profiles. The

analysis remains fundamental for solar, and energy companies at large, to design and offer a sustainable service model. More

broadly, the financial framework presented here remains a valuable and important tool for operational structuring, financial

accounting data harnessing, strategic growth decisions, and correct pricing or cost coverage of the after-sales service.

SELCO looks at after-sales servicing holistically, as a marketing opportunity to

better know the client and her needs, attract new customers and build its brand.

After-sales service has proven to be key to maintain trust of financial institu-

tions and partners, and create a quality energy Service Company. In turn, ser-

vice costing reflects the organizational structure and resources that go into ser-

vicing. With the growth and development of SELCO Solar, it has become im-

portant for the company important to differentiate sales and after-sales servic-

ing to remain committed to its mission of service and long-term customer rela-

tionships; the after-sales service costing analysis directly supported this effort.

Over time, the service structure grew with the maintenance and repair needs of

its growing client base, and its ranks include senior-most technicians that har-

ness experience and learning, and prioritize service and complaints.

This accounting exercise assumed a unit (branch, team, or similar vertical) &

head office; as well as a Customer Service Department or team, and a ware-

house; although it remains flexible to any energy company’s supply chain and

operations structure. The analysis first identified three representative units of

different profiles (size, location and performance) which captured the after-

sales experience across the company’s varied units.

The service cost components were identified as operational, overheads and ma-

terial cost; although material cost was analyzed separately because it remained

highly variable depending to the specific product being serviced and the range

of maintenance, replacement or repairing. Within each cost component SELCO

outlined specific categories of cost, such as labor, travel, wage incentives, trans-

port and warehouse; monitoring, management and head office costs; products

and individual repair parts, respectively.

With general data of profit/loss statement, installations, services and salaries,

and the cost of materials; the analysis moved to bridge gaps in data. Where ser-

vice information remained partially manual, partially automated, or sales and

service costs were bundled, the team compensated by allocating an estimate

percentage to service based on observation and discussion across the company.

The different types of assumptions outlined below allowed SELCO to allocate

expenses to among service and sales; however some energy companies may

have outsourced servicing, and thus the allocation and accounting of service

may be simpler.

Thus, the after-sales service costing utilized both top/down (per unit cost of

service) and bottom-up approaches (range of component costs to compose unit

cost of service). This combined method created more accurate, comprehensive

results, and accounted for gaps in service expenses information in the com-

pany’s accounting.

Identification -The analysis was proposed by the

After-Sales Service team, to verify

how accurately previous internal cost

estimates captured the full cost of

service. The analysis took several

months of research and discussion of

key employees involved in service

accounting, managing and operations.

Problem Statement The costing exercise was deemed an

important internal process, of use to

the company and energy service ven-

tures at any stage of growth or matur-

ity.

Service Cost Design Comprehensive analysis of after-sales

services required capturing the follow-

ing data components:

Cost of service with/out material

cost; and including overhead

costs of head office

Contribution to cost of service

(operational and overhead ex-

penses; technical and non-

technical roles)

Average costing of materials

(subject to products or technology

offered)

Branch unit trends: average num-

ber of services completed by

technician per month, average

installations by technician per

month, average technician sala-

ries, office administration costs

per service, technician travel.

The SELCO team also verified these assumptions by choosing a month

of accounts and comparing the realized service and sales expenses. The

analysis then moved to calculate the average cost of service across the

three selected branches units; average material cost for each product

servicing; highest contributions to cost of service in real terms and as a

percentage of service; as well as branch units trends.

The key benefit of doing this analysis it to create a holistic understand-

ing of service components and service price and costs. More broadly,

financial management, and the tracking of costs across the solar enter-

prise allows it to correctly price its products and services, and to under-

stand where the business may require higher efficiency or restructuring.

This analysis can be done if the cost of technicians is increasing, or to

understand the service cost consequence of an inflationary component

of service; or as a benchmark analysis every year or several years, to

update prices and costs.

Limitations:

Allocation rates are defined through study observations& opinions.

Difficult to obtain objective rates –can be improved upon thorough

observation.

Lack of precision: calculations may vary on unit-by-unit, case-by-case

basis, making it difficult to give precise calculations.

Strengths:

Variables are defined, can be changed to suit calculation purposes, and

adapt to company structure.

Identifies highest cost components

Set ‘organization benchmark’ and compare cost of service from data

from various units to benchmark, to compare unit efficiency, iden-

tify problems, and monitor improvements

Project Nuances Material cost not included in the initial calcula-

tion due to high variance depending on the spe-

cific product being serviced, and the level of

maintenance or repair required during service;

making the calculation

At a minimum, this analysis requires data from

profit/loss statement, # installations, # services

completed and salaries of each employee in the

sample branch units. Material cost calculation

requires per unit cost of consumables and quan-

tities required, across the different energy prod-

ucts offered to calculate an average final cost

for each product servicing.

Service options •-First year After Sale: 2 Free Scheduled

Services (6months, 1 year) by CSD; 1 Free

complaint call

•-Annual Maintenance contract: 2 Free Sevices

1 Free complaint call

•-Complaint Call: Transaction cost, actual

spare cos

Financial Analysis outcome

•After-sales services are priced at Rs.250 for 3

services Annual Maintenance Contract (AMC),

however it was found the actual cost of the

AMC is about Rs.999 (Rs.333 cost per service,

on average).

•The price per service and actual cost may be

allowed to diverge due to customer’s ability

and willingness to pay, as well as strategy

company interests, such as mission or position

ing priorities. This difference is accounted for

through cross-subsidies across the company,

sales profits, carbon trading or additional

strategies covering overhead costs.

Impact The internal analysis helped create

a more informed understanding of

SELCO’s service and service

costs, the needs for more detailed

cost accounting and monitoring

Figure 1. Categories of Operational and

Overhead Service Cost Accounting

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