Five Steps To Service Contract Program Success
A White Paper for Service Organizations
A White Paper for Service Organizations
In our highly complex and global economy, most every commercial entity is concerned about distinguishing their products or services vis--vis their competition. In addition, from the sometimes bitter lessons learned from the last economic recession, companies strive to maintain a viable and profitable on-going revenue stream by offering entitlements such as extended warranties and/or service contracts.
It does not take an exorbitant amount of contemplation to realize that having a sufficient number of contractual arrangements with clients, whereby they pay an agreed-upon price for a contracted term for some kind of viable service is a good thing!
It may surprise many to know that even some very large and financially stable companies admitted that they survived the last recession on the strength of their on-going service arrangements with their clients.
What truly is surprising is how few entities really know how to setup, maintain and market a program that will reliably provide significant and stable revenue streams over the years and will improve their clients" impression of their customer service.
Although not all commercial/corporate entities can provide the kind of service that will sustain them as well as contribute positively to the bottom-line, not enough companies have even given this kind of profit-making enough of an effort.
Those that have often fall short of their goals.
For the purpose of this paper, we will speak of "Extended Warranties" and "Contracts" as being the same. This is not entirely true but that"s another White Paper, in and of itself.
We"ll use the term "Program" to define a plan to create, configure, market, and maintain a contract for service over a specified period of time.
Therefore, no matter what kind of service contract program you are contemplating putting into effect there are certain basic pitfalls you should avoid and certain criteria and rules you need to insist on.
Avoiding Common Pitfalls:
Some common pitfalls in creating, configuring, maintaining and marketing an ongoing service contract program:
1People assume that simply providing the same kind of service they have in the past is sufficient to tantalize clients into subscribing to an ongoing service contract plan. This means the only difference between regular (ad hoc) service and a contract is that the latter requires payment up front, hardly exciting to a client. Contracts need to give more value to the client.
2People create a one-fits-all type of contract and a take-it-or-leave philosophy when it comes to selling the program to clients.
3Although everyone knows that if you handle a product you need to market and sell it, decision makers do not think of marketing or selling a service contract.
4If it"s a service contract then only the Service Department needs to be involved. Therefore, even though the skill sets of those who sell for a living are right there in your Sales Department, they are not invited to participate in the program.
5The opposite is also true, i.e. let the Sales Department handle it and the Service Department will be fine in executing whatever they come up with. Often this results in highly creative but overly complicated and unachievable commitments.
6A program is setup in such a fashion as to prevent the proper monitoring and analysis of the program. The current infrastructure does not support it and no thought has been given how to measure its success.
7Similarly, maintaining a contract is assumed to be automatic and therefore things fall through the cracks and unhappy clients move on to other sources of service without notice because no one was looking (monitoring)!
8Pricing a contract is often pure conjecture with no "actual vs. estimate" review at the end of a contract.
9Renewals of contracts are often underestimated in terms of effort. Companies struggle to renew and place a burden on themselves as well as their clients during the renewal process.
10Not enough differentiation is made with clients as to ad-hoc vs. contract services.
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Do it Right:
1Commitment:Implementing a successful program will take considerable effort and resources in the beginning and must come-from-the-top. This means that everyone needs to know that corporate management is dedicated to making this happen. This is not a departmental project. Nor is this simply something your Service Manager can do in his/her spare time!
2Selling: You need to sell a program. Simply offering some kind of contract to a client does not bring in the revenue you may think it will. You need to sell the program and include value that a client won"t ordinarily get without a contract in place. Things you should include in your contract are discounts for future purchases of parts or consumables, priority handling of calls, early notification of new products and services, shorter turn-around times as well as more personalized approach by providing technical information, historical reports, and white papers that will benefit those clients that agree to a contract with you. Sometimes even giving a special email or telephone number to contact differentiates you and shows the client value (at a very low cost). Dell Computers does a great job of this with their "Service Tag" concept.
Be prepared that as in the equipment or products you sell you"ll need to market and sell your program. In fact, if you don"t normally sell products repetitively to the same customers, you"ll be pleased to realize that selling service contracts can be repetitive in nature and so you need to push this even more than your product sales in some instances.
3One Size Doesn"t Fit All: When architecting your original thoughts for a service contract program remember that your clients come in all different sizes, attitudes, and needs. If you have only one type of contract you"re probably losing money. Think of your original equipment sales cycles. Your clients probably did not all pay the same price for the exact same parts or equipment or options nor is it likely they all bought the same number of pieces so don"t expect anything different when selling your contract program. Whether it"s how much they"re willing to pay, the age of the equipment or their perception of how much service they will need, it"s going to be different from one type of client to another. Have alternatives ready at your disposal.
First, create the top-of-the-line contract you think your top clients will benefit from. This could mean providing parts and labor at no charge, fastest turn-around time, loaners, advance replacements, discounts on consumables, special documentation they may want, and freebies such as a complimentary preventive maintenance visit(s) or specially prepared troubleshooting guide, etc. Remember, you"ll be asking for the highest price you can for your premier program so give the client more than just what you would have given had they simply called in for service (without a contract). You need to argue that this contract is far more beneficial to them than any other so pack it with benefits.
Secondly, give this program a distinguishing name or label. The words premier, total care, gold, platinum etc come to mind but you know your customers best and a short name that can evoke an image of ultimate service is desirable even if it sounds silly to you. Once you"ve established the name for your top-of-the-line offering, create two or three more levels each level having fewer benefits in return for a lower annual price. Within each level, be prepared to offer installment payments for those clients who may not be able or willing to write a single check in advance.
Thirdly, you want to sell any of these programs as "evergreen", meaning that your clients will sign on and renewals will be automatic. It is best not to encourage "renewal remorse". That is to say, unless your clients require a renewal proposal or Purchase Order, try to sell them on the fact that they will receive uninterrupted service by simply paying whatever renewal invoice you send. This puts the responsibility of reviewing a renewal or reconsidering the level of program they might want on their shoulders. Again, this can be accomplished only if you provide identifiable value to your clients.
4Selling Assistance:Don"t make the mistake of considering "service contracts" as solely a service department function. Unless you are an unusual exception to the industry, most heads of service department (Service Managers, Support Managers, etc) barely have the time to keep up with the hectic environment they"re in, let alone sell and administer the program all by themselves.
Consider "incentivizing" your sales personnel by letting them assist in the sales of the program and giving them a commission on each and every contract sale and renewal. Make it scalable, so new contract sales yield higher commissions than renewals. By doing this you are harnessing the sales talent of the very people you"ve hired to sell your products for you and are giving them still one more avenue to make additional money. They too are the ones who, through the product sales cycle, know the client and have a stake in their happiness. Involving them in the sale of the program relieves the service manager of the task and matches the sales process with the experts.
This does not imply that you can"t have key personnel in the service department receive some incentive also although this can become complicated when sales and service demands conflict with each other.
Additionally, once your sales people are on board with the concept you might consider trying to sell a service contract with the initial sale of the equipment. This will automatically make your customers aware that you have this kind of program and may commit immediately to it even if it doesn"t take effect until after the original manufacturer"s warranty period. We all have visited a Sears or other retail outfit and have heard the sales clerk ask if we wanted a contract even before we purchase the item. Could it be that they have realized the dramatic effect contract sales can have on the bottom line?
One caveat, don"t let your sales department have exclusive architectural control over the program. Salespeople tend to be creative (and that"s a good thing) but without strict guidelines and rules you can wind up with several hundred programs and an administrative nightmare. Construct your rules for the programs jointly with management, sales and service representatives. This way everyone buys in.
5.Contract Administration: Even companies who have carefully architected their programs and successfully implemented them forget that administering, monitoring and analyzing the results of those programs are critical elements in ensuring continued success. Most companies simply guess at the price they want to charge for contracts and don"t have the inclination, time, or the wherewithal to establish whether or not they guessed correctly. This means you need to have firmly in place, a mechanism for easilyanalyzing profitability of your contracts. This does not mean a single analysis but an on-going analysis as contracts, coverage"s, and installed equipment tend to change over the years. A first year contract may be very profitable but it can be due to the fact that the equipment is relatively new and did not need a lot of attention. Therefore if you want on-going profitablecontract revenue you need on-going monitoring!
Consider your infrastructure and how you will handle renewals. If you have a good volume of contracts, you"ll need software support for this. If you"ve created the right kind of programs, a limited number of levels, and easy to recognize client benefits, your on-going analysis will be easier. For example, a client once used to expend 2.5 person days per month renewing their-over- 2,000 contracts. They constantly made mistakes in billing and occasionally missed renewals just because they never put the right infrastructure in place to expedite renewals. New equipment was sold to existing clients and the contracts were never adjusted to reflect that as there was no clear way of alerting someone of that fact. Once they implemented a clearer program and bought into the right software support they recognized their shortfalls, corrected for them and within 1 year"s time increase contract profitability by 23% while eliminating administrative overhead by over 90%!
by: MSI Data
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