Ready to dive deeper into the revenue-managing aspects of memberships in ServiceTitan?
In Memberships 101, our Back 2 Basics Webinar Series in March, we broke down everything you need to know about memberships and recurring services. In Memberships 102, we build on that basic foundation and explore two key aspects of memberships to help you expand your knowledge base and manage revenue more effectively.
With expert advice from Joel Pachefsky, Senior Program Facilitator at ServiceTitan, you’ll learn how to:
Understand what deferred revenue is, why it's crucial for memberships, and how to recognize it at the right time.
Implement and leverage membership add-ons to increase revenue and customer value.
>>Need a refresher on membership common terms or how to set up a membership? Watch the full webinar on Memberships 101 on-demand.
“Deferred revenue and add-ons are a little bit more complicated,” Pachefsky says. “We’ll touch on the basics of how we set it up and how we use these different features. But please talk to your CSM (customer success manager) about these things.
“You can go to TitanAdvisor, that rocket ship on the top right hand of your screen, scroll all the way down underneath your TitanScore, and you can book time directly on your CSM’s calendar to talk through a little bit more about your specific situations,” he adds.
What is deferred revenue for memberships?
Deferred revenue is a revenue recognition method for your membership billing.
“It’s a way to earn recurring revenue,” Pachefsky says.
When businesses sell service memberships to customers, they typically charge a lump sum upfront for a fixed period of time (annually) or set it up as an ongoing monthly fee.
Pachefsky says the annual plan is much the same as the Amazon Prime model, where you can pay for the service once per year. The monthly plan is more like a Netflix account, where you pay each month. Both plans, however, continue until the customer cancels the service.
With deferred revenue, the critical point to understand is when to recognize that membership revenue as income.
Best practice is to not recognize that revenue as income until your business actually performs the recurring service for that customer, Pachefsky says.
“It makes it a lot easier from a cash flow perspective, from a profitability perspective, to see, ‘Hey, this is when that income is actually coming in. Now we should recognize it as revenue.’ Or when we do the service, that's when we should recognize it as revenue,” he says.
Setting up memberships with deferred revenue
When creating memberships in ServiceTitan, you first need to set up three things:
Job type
Recurring service
Pricebook category
Your job type and recurring service might be labeled “membership tune-ups” or “membership visits.” These are typically set as low priority and only apply to specific business units, such as HVAC maintenance, electric maintenance, or plumbing maintenance. You’ll also select your dollar threshold for “sold” and the duration for how long it takes to do the service.
At the bottom of this screen, check the callout box that says:
“Make selecting a recurring service event required when booking jobs, if recurring service events exist for the location.”
“Because we're using deferred revenue, this is really important,” Pachefsky points out. “It's kind of a check to make sure that you're actually consuming one of those recurring services.
“A quick pro tip: Just make sure this one is selected so that when you're booking out those recurring services, your CSRs will be able to actually consume that recurring service event.”
Next, create a pricebook category. This is where you’ll add your sales tasks, renewal tasks, billing tasks, and some items in your invoice template.
“I just want to make sure I've got that category that I can put all these different services into this one place. So, I've got an easy way to find them,” he says.
To set up a membership with deferred revenue:
Go to membership types, and click on one to edit.
Name the membership type.
Create a tag associated with the membership type to easily identify it.
Set up duration and billing. Choose either a monthly or fixed option.
Add any discounts and where to apply them.
Choose a single location or all locations.
Go to billing to create membership pricing. Use the membership pricing table to automate this process by matching prices to the proper tasks in your pricebook.
“You get to choose whether you sell a membership for the same amount that you bill a membership, or if you renew a membership for the same price that you sell it for,” Pachefsky says.
Setting up billing for deferred revenue memberships
With billing, it’s important to understand the sales tasks, renewal tasks, and billing templates.
“In order for deferred revenue to work, when we collect money from our customers, we shuffle that money to a specific pricebook task,” Pachefsky says. “Those tasks have to be from your pricebook. Everything you sell to your customer has to come from the pricebook.
“Now, we start getting into our deferred revenue setup. Every single task where you take money from customers has to be a deferred revenue task,” he explains. “To do that, we want to make sure we set up specific general ledger accounts that route to a liability account.”
Best practice is to set up two kinds of membership revenue accounts:
Liability account
Income account
When the customer pays for the membership, the money should route directly to your liability account. Then, when you perform the recurring service, the money automatically transfers from your liability account to your income account.
“You want to make sure that general ledger account actually hits your deferred revenue account, or your membership liability account. Because that's where the money is going to sit until you perform the recurring service,” Pachefsky says.
The sales task code triggers the customer’s membership.
The renewal task code renews an expiring membership.
The billing task code connects to a billing template, which should include only one service item.
“And if you set prices in the membership pricing table, the service item price should be zero. But it will pull in the proper price. So it'll pull that $10 a month when you actually do your recurring billing,” he says.
Next, you’ll add the recurring services that are part of the customer’s membership.
The idea is to set up an invoice template that clearly shows the customer what services they receive during each visit and their cost, but also shows you that the deferred membership revenue is routed to the proper liability account before moving over to the income account.
That way, you recognize that revenue as earned income each month when you perform the recurring service.
You can ask ServiceTitan to calculate deferred revenue for you automatically, or you can do it manually.
“This is really good if you've got different business units,” Pachefsky says. “For example, if you sell a membership for two HVAC recurring services or tune-ups per year and a plumbing inspection, you might want to allocate 30% to plumbing and 70% to HVAC. You can choose where you want to allocate some of that money.”
How do you recognize deferred revenue when dismissing a recurring service event?
Customers buy memberships, but sometimes conflicting schedules get in the way of scheduling them at the appropriate time.
When a customer dismisses a recurring service event, ServiceTitan gives you the option of recognizing the revenue anyway as part of the membership the customer paid for, or choosing not to recognize the revenue for the dismissed event.
And if a customer calls to cancel their membership, you have the option to create a charge refund invoice to settle any unpaid balance. Or you can choose not to refund the balance.
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What are membership add-ons?
An add-on is a way to customize your memberships. You can do it by adding additional business units, by adding additional items to the membership, or by creating an a la carte membership.
Go to your pricebook, and click on “view/edit.”
Create a new pricebook service, such as an add-on for an additional business unit.
If adding items to membership, create the add-on as a sub-task.
If adding a la carte items to membership, create a shell with a menu of all your items.
“And what all these different things are, essentially, they’re add-ons,” Pachefsky says. “If I go into each of these services over here and go over to that workflow, what they do is they adjust the membership being sold with the following changes... We're adding additional tasks to the membership's billing template.”
Lastly, just remember that memberships and service agreements in ServiceTitan are two different things.
“Service agreements are much more customizable, and they’re really good for commercial settings or where someone has a unique setup,” Pachefsky explains. “Memberships are really out of the box, we sell the same kind of thing to most of our customers.”
Also, techs can sell memberships out in the field, whereas service agreements are typically sold from the office.
>>Special bonus video for add-ons! We ran out of time to fully dive into add-ons during the webinar, so here’s a quick video to explain further.
>>Watch the full webinar on Memberships 102 for even more great tips.
