Lets start off by agreeing that the price and volume of your product sales is always high relative to the price and volume of your service contract sales. This is because service contracts are only sold to product users. And annual contracts always cost less than the product! Given this, here is a chart showing the relationship of product sales to two typical contract types with very different value propositions,
Why is this important?
As you plan to implement a service contract selling effort, or even plan to increase your current level of contract revenue, you should be making informed decisions about the skills, experiences and roles of current and potential contract sellers. This chart and the next one should be used together to help you get the most from your selling dollars.
These are the high level steps in selling contract:
In companies, where total revenue and profit is top-of-mind, the first attempt to sell a service contract should be by the product salesperson as part of the initial order. To be successful, the service marketing person should create and deliver an in-depth selling services course for the selling organization. Sales professional’s compensation should also encourage the required selling effort. If the product salesperson is not successful in selling the contract then the company has to wait about 8 to 12 months before the warranty expires and you can begin your contract selling effort.
Depending on which value proposition you deem appropriate for the customer, you need someone to sell or renew either a medium value contract or a low value contract. If the service selling organization is growing, you might have your more experienced seller focused on the medium value contract and the newbie selling the low value contract. If there is only one seller then the low value contract should get a lower priority but still must be addressed within your overall selling schedule (remember a minimal support contract user may be upgraded in future years). Whatever you do, be sure to use the same person, or whoever is currently filling that role, when selling renewals.
Customer Lifetime Value (CLV)
CLV is a semi-complicated calculation that marketers do to determine the total potential revenue the business can expect from each new customer. From the service perspective, it need not be so complex. From your records (or you can make a conservative assumption), you can determine the average number of years a customer will keep the contract renewed – maybe 8 to 10 years. You also know the initial contract price and can make assumptions of when and how large a price increase will be enacted. Doing simple math, you can project how much each contract order will be worth. For example, assume that your product sells for $75,000; your contract sells for $5,000 per year and typically stays in effect for 10 years. Over the 10 years, your contracts generate an additional $50,000 in high margin revenue. This can be a major eye-opener!
As part of your service seller training, including the product salespeople, you should explain the CLV and how much money each contract could be worth to the company in the long term. Also, explain how the income will be used, i.e., add more support people, bonuses, one-off benefits to the contract holders. This piece of information should motivate the sales team.
Finally, consider each sales interaction as a transaction. And like other transactions, you should send a survey when the transaction is completed. The results should be shared with each individual to make sure they are not becoming the “classic used-car salesperson” and are really informing the customer of the value they are being offered or have purchased. Like other sales efforts, an annual service sales meeting (including the product salespeople who sold contracts) is a great way to say “thank you” for their efforts and collect organizational feedback.
As we always say in the field – “GOOD Selling.”