In the B2B, high-tech world, one of the major sources of revenue, revenue growth, and profit for the whole business is service revenue.  In some businesses, the service revenue can be 50% of total revenue and the result in more than 70% of the overall profit!  And here is a paragraph from December 13, 2013, Daily Finance Investor Center talking about Cisco:

The company noted that it’s had trouble in emerging markets lately while also seeing its network equipment business — Cisco’s primary segment — stalling out in growth. Indeed, Cisco’s product revenue, which made up more than 77% of total sales as of the most recent quarter, saw merely 1.1% growth for the quarter, only about 25% of what the company’s service revenue growth achieved. 

When working to grow service revenue, one of the most important decisions that the Service Vice President, Director, or Marketer has to make is the service contract (plan or agreement) strategy.  That means whether to design the contract to generate maximum revenue or design for maximum customer benefit.  However, with the right information, the either/or decision becomes no decision at all – just create a contract that will achieve both objectives.

Why Do Customers Buy Service Contracts?

This is the key question.  Without knowing why your customers purchase the contract, it takes a lucky guess to offer and price the correct components that hit customer’s sweet spot. Let’s approach this on two levels:
Why do customers generally buy contracts?
Why do your customers buy contracts and which components are the key drivers of the purchase decision?

Why Do Customers Generally Buy Contracts?

In my experience, there are four reasons why customers buy contracts:

  1. Availability or uptime – For most businesses, getting the maximum utilization of a capital asset is critical, either for return on investment (ROI) or just to achieve their individual or group objectives. There is no ROI while the asset is waiting for service.  Remember that most processes require inputs and, while your equipment may not be considered “mission critical”, it falls into that category if it limits the mission critical asset’s output.
  2. Save money or control costs – If packaged correctly, a contract will save the buyer money over the long term.  There are usually savings because the contracts bundle some individually priced services and include priority support, which improves uptime.  When an all-inclusive contract is purchased there are no additional services costs.  This means the buyer never goes over budget for that line item.
  3.  Peace of mind – It is always a good feeling to be able to pass a problem to someone who is prepared to provide a solution.  It means that you can go to sleep knowing that, if an equipment problem occurs anytime, you will not be the first person called. Not going over a budget also contributes to your peace of mind and improves your sleep, especially at the end of the month, the quarter, and especially at year-end.
  4. Convenience or no hassle – Many high-tech vendors, especially the smaller ones, will not accept blanket orders and require a PO before they will dispatch a service technician.  In many organizations getting a “not to exceed” PO is as painful as a root canal procedure, especially when there is a down piece of equipment. Some businesses issue a block of PO’s to operating departments and the department has to set up procedures to send these to vendors and notifying the purchasing department so invoices get paid.  Failure to do both can result in delays or lots of grief from Purchasing – which are not fun.

Why Do Your Customers Buy Contracts And Which Components Are The Key Drivers Of The Purchase Decision?

The four items in the above list are generic.  Customers buy contracts based on specific needs and wants.  Your challenge is finding out exactly why your customers, both individually and as a group, choose to purchase or decline your contract offers. You also need to know how they believe your company will perform when a contract is in place.  This set of expectations is based on their direct experience with you, what they have heard from some of your other customers and experiences they had with other service organizations. To get that information, the customers must be asked, either by your organization or a third party.

In my experience, customers do not always tell the whole truth about such feelings when questioned by the service organization.  They do not like the thought of burning bridges with people they count on to get their jobs done.  They are much less inhibited when talking to an outsider because they feel their particular input will be toned-down by the interviewer.  The same thing happens with satisfaction and loyalty surveys; outside interviewers usually get very insightful comments.

You can design a contract, or series of contracts, which will engage a large number of your customers when you understand:

  • Why customers buy and decline
  • The elements that are most important in their decision-making
  • How your organization is perceived

Middlesex Consulting frequently performs these surveys for our clients.  Here is an example of the type of information we share with our clients.  This is real client data (on a 1 to 5 scale) looking at the importance of contract elements for customers who either elected or declined to convert a warranty to contract. It would be foolhardy to extrapolate this data to other company’s customers.  (Note the difference in “most Important” between people who did and did not convert a warranty to a contract.)

How much easier would it be to design and sell service contracts without having to guess what to include or emphasize?

If you would like to learn more about this service, please email Sam.