Do you know what your maximum service revenue potential could be based on the product units your organization sells? Is your current service revenue less than this maximum? Do you have a process to upsell service contracts into your existing installed base? If you gave one or more puzzled looks while reading that, chances are you are suffering from upsell leakage.
In our previous article on revenue leakage, we defined two types of leakage: contract and non-contract leakage. In this article, we’ll define upsell leakage. It is very likely that upsell leakage at your business could be twice as big as the other two combined.
Understanding Upsell Leakage
As a service organization, you’d like all your customers to buy your premium service. Some customers will buy ‘gold’ service level for their installed base, others will be happy with ‘basic’ service. It all depends on the use case of your customer and their propensity to value the services you offer. As use cases tend to change over time, you may want to consider setting up an upselling program using the touchpoints from your service delivery.
“If you don’t ask, you don’t give them the opportunity to say yes.”
Not having such a program deprives you of revenue potential; being the delta between your current service revenue and ’gold’ service level.
Defining the Upsell Service Revenue Potential
To quantify upsell leakage we can use a mechanism known to Sales as TAM (Total Addressable Market). Suppose you sold 1,000 units at $10,000 each. Suppose a ‘gold’ service contract has an annual selling price of 12% of the unit selling price. This would put your service-TAM at $1,200,000 per annum.
Imagine your service department has 600 of those 1,000 units on their radar screen. The rest is sold via an indirect sales channel and/ or lost-out-of-sight. This gives an installed base visibility of 60%. Let’s assume those 600 units generate a service revenue of $400,000, split across:
- 10% of units are in (OEM) warranty and don’t generate revenue (yet)
- 50% of units have a bronze, silver, or gold contract generating $240,000
- 40% of units don’t have a contract and generate $160,000 in Time & Material (T&M)
With the above figures, you currently reap 33% of your service-TAM and you have an upsell potential of $800,000. Monitoring this upsell leakage metric should give you the incentive to put a revenue generation program in place.
Identifying the Metrics that Impact Upsell Leakage
In the numeric example, we’ve touched on three metrics that impact upsell leakage.
- Installed base visibility: it all begins with installed base visibility. Units not on your radar screen will not contribute to your service revenue! This is easier to manage for units sold via your organization’s direct sales channel, though it does require an effort to manage the life cycle from as-sold to as-maintained. For units sold via the indirect sales channel, you’ll have to exert extra effort to get access point-of-sale data, maybe even ‘buying’ the data.
- Attach rates: both warranty and contracts are attached to the unit, thus driving attach rates. Attach rates are ‘boolean,’ they say something about having an attached contract, not about the amount of revenue you get through that contract. Attach rates start at the installation/ commissioning date of a unit. Either Sales makes the attached-sale at point-of-sale of the unit or the Service department drives the attaching post-point-of-sale. The driving metric for Service is to maintain a continuum of attachment throughout the life cycle of the unit.
- Service revenue contribution: Within the subset of attached contracts you’d like to have as much revenue contribution as possible, ‘gold’ service being the holy grail. Per service contract you could have any of the following revenue contributions:
- OEM Warranty: 0% of Service-TAM
- Enhanced Warranty: 33% of Service-TAM (only the on-top-of OEM warranty piece)
- Extended Warranty or Basic service: 67% of Service-TAM
- Gold: 100% of Service-TAM
Remedying Upsell Leakage
The overarching paradigm to growing service revenue is twofold: increasing your installed base visibility and making sure you have attached offerings to those units.
Getting visibility on units sold via the indirect channel is slightly more complicated, but once you quantify the associated service-TAM with those units, you may have the ‘funding’ to ‘buy’ the data. This may even lead to revenue sharing models with your channel partners.
The last piece of the puzzle is using the visibility of the upsell leakage gap whenever you have a touchpoint with your customer. Note that the original (service) contract has been drafted many months ago by people who are further away from the business, who could not 100% envision the service reality of today. You thus may end up in an entitlement conversation where the customer has an urgent requirement whereas the contract ‘only’ covers for the ‘basics.’ The delta is an upsell opportunity. Either resulting in an upgrade of the service contract or maybe only upgrading an incidental work order. In case the latter happens more often, you have the data points to convince the customer for the former.
Now, understanding that upsell leakage is potentially twice as big as contract and non-contract leakage together, you may have found your compelling reason to start another revenue growth project.