Introduction
In the B2B, high-tech world, service revenue is one of the significant sources of revenue, revenue growth, and profit for the whole business. In some companies, the service revenue can be 50% to 70%of total revenue, resulting in more than 70% of the overall profit! So, the efforts to design a service contract will have a significant payback.
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 critical decisions the Service Vice President, Director, or Marketer must make is the service contract (plan or agreement) strategy. That means designing a service contract to generate maximum revenue or designing for maximum customer benefit. However, with the correct information, the either/or decision becomes no decision – create a contract to achieve both objectives.
Finding Out Why Customers Buy Service Contracts?
This is the crucial question. It takes a lucky guess to offer and price the correct components that hit the customer’s sweet spot without knowing why your customers purchase the contract. 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:
- Availability or uptime – For most businesses, getting the maximum utilization of a capital asset is critical, either for return on investment (ROI) or to achieve 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.
- Save money or control costs – A contract will save the buyer money over the long term if packaged correctly. 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 service costs. This means the buyer never goes over budget for that line item.
- 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 at any time, 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 year-end.
- Convenience or no hassle – Many high-tech vendors, especially the smaller ones, will not accept blanket orders and require a PO before they 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 POs to operating departments, and the department has to set up procedures to send these to vendors and notify 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 determining exactly why your customers, 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 their experiences 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 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 the interviewer will tone down their particular input. The same happens with satisfaction and loyalty surveys; outside interviewers usually get insightful comments.
You can design a service contract, or series of contracts, which will engage a large number of your customers when you understand the following:
- Why do 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 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 a contract. (Note the difference in “most Important” between people who did and did not convert a warranty to a contract.) It would be foolhardy to extrapolate this data to other companies customers.
How much easier would it be to design and sell a service contract without guessing what to include or emphasize?
Click here to learn how to design a service contract using our Centered Customer Market Discovery methodology.
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 design a service contract or series of contracts, please contact us or check out some of our free articles and white papers here.