In my post last week, I said that the #1 reason that customer service contract revenue is declining is “Your value proposition no longer works for your customers.” Then I had a vigorous discussion with Ravi Deva in the LinkedIn Warranty Innovations Group. Here is the discussion:
Ravi Deva – “While some of the reasons listed have a little validity, the major reason clients do not renew service contracts is because warranty providers take them for granted. In my personal opinion, the art of conveying the features and benefits of a service contract at the beginning of the business relationship is quite tenuous at best and the subsequent follow-up from the warranty company and service provider is no better later on. Most warranty providers have no idea of how to understand customer acquisition costs, lifetime customer revenue cycle, and how to evaluate continued risk and renewal costs subsequently. Therefore, the subject of renewal of warranties and service contracts is never fully appreciated, which results in customer attrition.”
Sam – “So either the customer does not appreciate the value of the contract or there really is no value. And if the seller did a better job of explaining the true value proposition, then the buyer would be more inclined to renew- right?”
Ravi – “Yes! Being in the industry, if anyone ever made a pitch to me the way I have seen the majority of pitches being made, I myself would never opt for a warranty in the beginning let alone renew one. The reason I buy, and when required to renew, warranties and service contracts is because I appreciate the various components of risk – cost, downtime, inconvenience, and potential added replacement cost of the equipment. The industry as a whole is guilty of not being able to come up with a viable and convincing marketing strategy!”
Sam – “I am in complete agreement with you. And what you described is why I made my #1 reason the comment about not delivering enough value. If I may, I will include your comments for a follow-up blog – OK?”
Ravi – “You are most welcome. I look forward to reading your blog.”
So, Ravi believes that the contract designers and sellers, in general, do not understand the drivers of value for their customers. And I agree. However, the reason I said “in general” is because there are some service marketers who go to great pains to make sure they know the elements of contracts that the customer’s value. And they do a very good job of communicating the value propositions to the buyers and the contracts salespeople.
The way we identify the key drivers of value is to talk with a cross-section of customers. We ask them a range of questions that can then be analyzed to determine what will be purchased. And we segment the customers, based on their feedback, to identify groups with similar needs so we can create unique contracts for each group. For example, in a recent engagement, I wound-up recommending three contracts (like the well established Bronze, Silver and Gold) except each contract was designed to provide meaningful value to a specific group of users – we settled on Academic, Self-Maintainer and Critical Availability users.
After we defined the elements of each contract and set tentative prices, we explained the new contract structure to the product sales team. They were very enthusiastic and vocalized their complete support since they could now see themselves sitting with a prospect and demonstrating how the company delivers value during the total lifetime of the relationship. They were not afraid to talk about service and support and, in fact, quickly saw how they could use the support organization as a competitive differentiator.
This approach yields results that are a vast improvement over Ravi’s experiences. Why not give it a try?