Most service organizations know that long-term service contracts are one of the holy-grails of service revenue and profitability. Yet, despite their importance, many organization don’t know how to effectively market and sell them. Michael Blumberg, president of Blumberg Advisory Group, recently released new industry research (available for free here) with some key insights for service executives on this important topic. We sat down with Michael to ask a few questions about his findings.
What surprises you most from the survey?
The top take away is that the configuration of extended warranty and extended service programs has a tremendous influence on the sale of these programs. In other words, the length of coverage, level of customization, processes engaged and resources employed in delivering the warranty and entitlement levels offered play a key role in driving sales. This is an “eye-opener” because many companies have the view that a warranty is a warranty. However, our findings suggest that the more distinctions that can be made about the program, as defined through the configuration, the more effective the company will be at selling it.
Is there anything more important to service profitability than contract attachment and renewal rates?
Some field service executives may argue that KPIs associated with service costs and productivity such a first-time fix, cost per service event, mean time to repair, etc. are more important to service profitability. However, without service revenue there can be no profits at all. Contract attachment and renewal rates are the KPIs which measure how well a company is doing with respect to securing this revenue. The truth is that service contracts can be very profitable in and of themselves. One reason is because they provide an annuity for the service provider in the form of a recurring revenue stream. The second reason is because a sizable percentage customers who purchase a service contract require very little service or no service at all. This means the service provider doesn’t incur significant costs in servicing that customer.
How do companies successfully market and sell service contracts to customers? After all, they do little good if customers don’t buy them.
Most companies rely on sales aids (e.g. brochures) and direct sales. Usually, these activities occur at the product point of purchase. However, companies who continue to sell service contracts after the product sale are likely to generate additional service revenue. Other sales and marketing tactics which have proven to be effective include customer testimonials, reputation management, telemarketing (i.e., outbound sales), public relations (e.g., press releases, article placement, etc.) and analyst reviews.
You identify 50 percent attachment rate and 75 percent renewal rates as best in class. Why are so few service organizations able to achieve those levels?
First, service organizations need to adopt the right mind set about extended warranty and extended service programs. They must understand that service is separate, distinct, and unique from products. This means that service leaders must place as much time and effort into configuring, marketing, and selling service contracts as their counterparts in the product organization place on designing, marketing and selling products. After all, service won’t sell itself. Just because the customer owns the product doesn’t guarantee they’ll buy the service. Second, the service organization must have the right systems and processes in place to market and sell service contracts. For example, processes and systems that facilitate a company’s ability to configure, price, and quote customized service contracts. It is astonishing to learn that approximately, one-third of the survey respondents utilize spreadsheets to perform these functions.
How do you envision new technologies (e.g. IoT) impacting traditional service contracts — and how will smaller firms keep pace?
These technologies will either make selling service contracts a dream or a nightmare for service providers. While recent technologies like IoT, AI, and big data will make it possible for companies to deliver outcomes, it is the service contract that defines what exactly the outcome will be. It provides the terms and conditions, the hours of coverage, the level of availability, the resources provided, and the processes engaged in delivering the agreed upon outcome to the customer. In many ways, selling an outcome based contact is no different than a traditional service contract. That’s why companies of all sizes need to become proficient at configuring, marketing, selling, and managing service contracts. Gaining mastery over this function is how smaller firms can keep pace.