When setting up high-tech hardware service contracts there are three immutable rules:
- Set prices based on value-delivered
- Any discounts must be earned
- Continuously demonstrate the value of the contract to purchasers.
Each of these “rules” will be discussed in this post.
In the old days (pre-2000), many businesses priced their contracts at 10% of list price. It sounded good and customers were trained to believe that it was a fair price. Anything greater than 12% was seen as gauging and anything much less than 8% implied poor service or an unreliable product. Well, as Bob Dylan sings, “The Times They Are A-Changin.” Today, customers expect to pay a price that is less than the value they will reasonably receive in any given year while understanding that contract usage will vary with amount of equipment use, type of equipment, operating environment, skill of the operators, etc. In other words, they expect a deal but, in most cases, they are not greedy.
Unless your customers understand the real value of your contract, it is unlikely that they will be ready to pay a fair price. Educating your customers is your job as a service marketer, contract manager, or anyone charged with simultaneously growing service revenue and customer satisfaction. We will discuss this challenge in the final section of this post but, for now, please assume that the contract does actually deliver real value to your customer.
Once you can demonstrate the value of your offering you must set the selling price. This step is critical because if not done well you will either underprice, and leave money on the table, or overprice the contract and scare your customers from buying the service. The best way to set the price is to work very closely with the person in your company that sets product prices. You will get a consistency across all product lines and take advantage of someone whose main job is pricing.
In the B2B world, if we are selling, then we should expect to be asked for a discount. The end-user, purchasing, a senior manager, or your company’s sales or services people may raise the issue. If someone in the buyer’s organization raises the issue then the next paragraph should help you deal with the objection. If your own sales or service folks raise the issue then you have a serious education process ahead of you and/or your value proposition may not be as solid as you believe. That is on you to resolve quickly.
If you are providing good value for money, you should have no need to give-in to discounts requests. You should have a strong enough case to demonstrate your value proposition. But, having said that, there are some discounts, called earned discounts, which create value for you and which should be on your price-list.
Here are three examples of earned discounts:
- Multi-year orders – The customer commits to a 2, 3 or more year contract term and, in exchange, you agree to hold the price over the contract term. The issue that comes up is what happens if the customer cancels before the end of the agreed contract term. The business-like action is to agree to the cancellation, with something like a 3 month paid termination period, and a back-charge for the difference of amount due based on the shorter term. If this amount is small, then consider the financial trade-off of the extra income compared to the goodwill garnered by not pushing the issue. A special case is when the customer prepays the whole amount of the contract. In this case, I recommend giving a pre-pay discount approximately equal to the interest the money will earn in a bank account. It shows you are fair and is the right thing to do.
- Multi-units placed under contract at the same facility –This is a good deal for you if you can get agreement that any pre-scheduled work, like annual preventative maintenance checks, will be performed on the same visit to the facility. Offer a few percent discount on the contract cost, including multi-year discounts.
- Create a special discount for a special arrangement with the customer. About 8 or 9 years ago, I set-up a unique contract, with a steep discount and special value, for a major university research facility that agreed to purchase our equipment and allow us to use the site as both a demo location and reference account. Our company traced significant orders back to the demo opportunity and our client still believes the arrangement was very beneficial to both parties. Small decrease in service revenue for that location, but a large increase in both product and services revenue resulting from the reference and demo opportunities. Remember that service is still a part of the company!
Demonstrating Value After The Contract Is Signed
Every chance you get you should be demonstrating the value of the contract. The easiest way is to itemize all service reports with the list price of everything they would have to pay if they did not have the contract. For example, for a service call you should list:
On the other extreme, a major network provider created an automatic tool that not only captures and reports (on a monthly and YTD basis) the out of pocket costs for each contract but also add in the value off all contract components such as:
- Software updates
- Proactive alerts
- Case management
- On-line training
- An agreed value of the difference in network outage time with and without the agreement.
And to add frosting to the cake, they include an analysis of all satisfaction survey results to show the decision maker that in addition to saving lots of money their employees are extremely satisfied with the overall performance. This contract renewal (which is in the many millions of dollars a year range) is as close to a sure thing as you can get!
Remember, if you are selling contracts you should set price based on the value the customer will receive, only discount when you get something of value in exchange, and work hard to demonstrate the value you are delivering well before it is time to renew the contract.