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.
Value Pricing
In the old days (pre-2000), many businesses priced their hardware service contracts at 10% of the list price. It sounded good, and customers were trained to believe that it was a fair price. Anything more significant than 12% was seen as gauging, and anything much less than 8% implied poor service or an unreliable product. 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 the amount of equipment used, 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. As Bob Dylan sings, “The Times They Are A-Changin.”
Educating your customers is your job as a service marketer, contract manager, or anyone charged with simultaneously growing service revenue and customer satisfaction. Unless your customers understand the actual value of your hardware service contracts, it is unlikely that they will be ready to pay a fair price. We will discuss this challenge in the final section of this post, but for now, please assume that the contract does 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 closely with the person in your company that sets product prices. You will get consistency across all product lines and take advantage of someone whose main job is pricing.
Discounts For Hardware Service Contracts
In the B2B world, if we are selling, 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, the following paragraph should help you resolve the objection. If your sales or service folks raise the issue, you have a severe education process ahead of you, and your value proposition may not be as solid as you believe. That is on you to resolve quickly.
If you provide good value for money, you should not need to give in to discount requests. You should have a strong enough case to demonstrate your value proposition. But some discounts called earned discounts, create value for you and 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, consider the financial trade-off of the extra income compared to the goodwill garnered by not pushing the issue. A particular case is when the customer prepays the whole contract amount. In this case, I recommend giving a prepay 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 a hardware service contract at the same facility –This is a good deal for you if you can get an 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 discounts 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 exceptional 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 benefited both parties. There was a slight decrease in service revenue for that location but a significant increase in product and service 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 demonstrate 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 the following:
On the other extreme, a primary 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 adds in the value of all contract components such as:
- Software updates
- Patches
- 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 their employees are delighted with the overall performance and saving lots of money. This contract renewal (in the many millions of dollars a year range) is as close to a sure thing as you can get!
Lessons Learned About Selling Hardware Service Contracts
Remember, if you are selling hardware service contracts, you should set prices 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 deliver well before it is time to renew the contract.
About Middlesex Consulting
Middlesex Consulting is an experienced team of professionals with the primary goal of helping capital equipment companies create more value for their clients and stakeholders. Middlesex Consulting continues to provide superior solutions to meet the needs of its clients by focusing on our strengths in Services, Manufacturing, Customer Experience, and Engineering. If you want to learn more about how we can help your organization create more hardware service contract revenue, please get in touch with us or check out some of our free articles and white papers here.