This is the second of two parts to a blog about metrics you should consider to manage your service contract selling process. In the first segment of this blog post, I discussed the five metrics for the service contract sales process that I think are most important:
- Database accuracy
- Orders received ($)
- % Offers accepted
- Contract and warranty decided before the expiration
- Customer satisfaction with the contract sales process
Additional Metrics For Your Service Contract Sales Process
Once you implement some or all of the metrics discussed in Part 1, you may want to add a number of these metrics to get a complete picture of your contract selling process:
1. Percent of orders received outside the sales process – They are called bluebirds because they unexpectedly fly in through an open door (or something like that). Two reasons that you might get a bluebird are:
- The customer thinks he renewed, and when he finds out he is not covered, he immediately signs up.
- A time and material (T&M) customer convinces you to put him on a contract during an outage, and you agree. The agreement may be because they have lots of equipment, and it all goes under contract when only one needed a repair, or they purchased a multi-year plan, and you believed the total revenue was worth the current cost.
2. If the percentage is in the low single digits, that is good. A high ratio indicates that something is seriously wrong in the selling process.
- Year-to-date value of contracts not renewed and warranties not converted – These metrics make the value of “lost business” highly visible. Each lost business stream should be analyzed to identify the root cause of not capturing this service revenue. When a business “is lost,” it is imperative to assign a reason code for the customer not accepting your offer.
- The percentage of contracts booked at the list price is a little tricky. When creating your price list, it is essential to quantify all possible earned discounts. (Earned discounts are those you willingly grant in exchange for something of value to your business and are available to all purchasers.) This metric allows the team to be better monitored to avoid lost revenue or add a new discount to your price list. Sometimes, your selling people may feel pressured to extend a discount to close a sale; this is poor practice and should generally be avoided—more on this in another post.
- The sales cycle length in days – Here, we are calculating the time from offer to acceptance or decline, not to incentivize or pressure the selling team but to manage the end-to-end process. A shorter cycle cuts down administration time and is less likely to annoy the buyer! For example, if you determine that 90% of all decisions are made in 75 days, you can launch your sales effort 2 ½ months before a decision is needed, with a very high probability of getting a resolution in that time; the stragglers will always take longer.
- Percent of initial product purchase orders or license agreements with an attached service contract – This is a massive deal for most companies. The ideal time to sell the contract is when the customer is buying the product; they have money, and it is frequently easier to include it in the order than to go back a year later and try to get the money. A recent TSIA (Technology Services Industry Association) report indicated that 67% of all sales included contracts (89% of enterprise software and 58% of enterprise hardware orders). Of course, many of us are not selling mission-critical products to the whole business, so we generally see a much lower percentage across the board. However, no matter how critical your product is, you should be working with the product sales organization to land contracts with the initial order.
- Time (in days) from book to cash – Cash collection is critical to the business. If the accounts receivable days outstanding are excessive, your finance group may ask you to include an early payment discount on your price list. This is an example of an earned discount that can enormously help your company.
Conclusion
In this and the prior post, we have discussed 11 metrics that provide a well-balanced look at your overall contract sales process. This list is not all-encompassing; not every business needs to track all 11 metrics. However, different metrics provide insights into areas of your process that you may not have considered. Keep your eyes open for opportunities to deploy metrics that work for you.
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 measure your service contract sales efforts, please get in touch with us or check out some of our free articles and white papers here.