Grow service revenue and the boiling frog phenomenon
The world of the services executive is changing at a historic pace. You have to run faster than ever to stay in the same place. And one area causing you major grief is the need to grow service revenue.
You may be suffering from the “Boiling Frog Phenomenon.”
- If you drop a frog into a pot of boiling water, it will frantically try to escape.
- If you gently place it in a pot of tepid water and turn the heat on low, it will float there placidly.
- As the water gradually heats up, the frog will sink into a tranquil stupor, and before long, it will allow itself to be boiled to death with a smile on its face.
Revenue Trends
According to the TSIA (Technology Services Industry Association), since mid-2012, product revenue has been slowly declining while services revenue has been flat to slowly growing. This data is from the 31 of 50 public companies originally part of the TSIA top 50 Services revenue generators that remain on their list:
So, how do we grow service revenue?
A four-pronged effort best addresses growing service revenue:
Increase contract capture rate to grow service revenue
- Make sure your contract adds value to the product or service owner. Please make sure everything they will pay for is included! Your contracts should be set up for different customer segments and include only the elements they value and will pay for.
- Does your sales team sell contracts at the time of sale? Has the sales team been properly trained, and are they adequately compensated? What is your attach rate?
- Who sells renewals and contracts at warranty expiration? Are they adequately trained and properly compensated?
- If your technicians are not selling contracts, are they at least trying to upsell and pass leads to your contract sellers? Remember, they are your customer’s trusted advisers.
Decrease revenue leakage
- Sometimes a contract will not be renewed for factors beyond your control. Read “Service Contracts: 9 Top Reasons For Non-Renewal”.
- On-time renewal is vital. Make sure your renewal process is robust, and someone owns it! When a contract lapses, it is frequently challenging to reinstate coverage, and you discuss when it starts; do we need a pre-contract inspection? Sometimes this gets plain ugly.
- Implement renewal metrics, and someone is accountable for reporting and meeting targets.
- Ensure that the organization is not delivering services for free that the customer is not entitled to. This happens more often than you think, especially if the cost is meager
Introduce new services
Introducing new services has many advantages:
- Adds new value for customers
- Separates your company from the competition and will help product sales
- Allows you to reach out to all customers
- For new customers, both product training and other adoption services are good ways to help your customers start enjoying the value they just purchased. Also, you will have fewer start-up calls because you did a better job onboarding them.
- You will have a significant opportunity to grow service revenue when your company implements the Internet of Things (IoT) and X as a Service. However, you had better be ready for these significant changes. Make sure your team is part of these projects; you have enough people with the proper skills to support the projected growth and that your systems are robust enough to handle different types of invoicing, etc.
Raise prices or decrease discounts to grow service revenue.
- If you are not increasing your prices a few percent a year, you have left money on the table. If you have increased prices, you are on top of the process. But if not, think about increases of about 3 to 4 percent. You may have pushback, but explain that having an experienced, well-trained service team is in the customer’s best interest and that all you are doing is keeping pace with inflation. Be prepared for some complex discussions by clarifying the value your team delivers, especially regarding downtime.
- On the other hand, make sure that any discounts you give customers are earned. Make sure that discounts are based on a win-win proposition. You can provide a discount if you get a multi-year commitment, multi-product contract, good references, etc. because both parties win. But giving a discount just because they ask is over-the-top.
Finally, let’s not forget customer feedback…
Collect, analyze, and use customer feedback. When you know what your customer thinks about your business, you can ensure there are no price–value gaps. This also lets you remove obstacles to contract renewals, find out what services your customers need, and generally let the customer guide you through the relationship.
Feedback is essential to ensure there are no surprises and that you meet your commitments to your business. This alone should help you sleep soundly at night while staying out of the stovetop pot!
Related article: Your Post-sale (Aftermarket) Service Has Become an OEM’s Greatest Differentiator
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 grow service revenue, please get in touch with us or check out some of our free articles and white papers here.