Best Practices for Increasing Service Contract Revenue

Jul 10, 2020 • Features • research • Mize • Service Innovation and Design

Michael Blumberg offers us an exclusive analysis of the research he has recently conducted to identify trends amongst service organisations when it comes to service contract revenue that shows the secret is 'all about the asks'...

Mize recently conducted a study among service executives and warranty professionals who are involved in marketing and selling service contracts and extended warranty (SC/EW) programs. The findings validate which strategies and tactics offer the best results which in turn will help managers and executives become more effective in marketing and selling extended warranty/service programs.

A total of 96 service contract and warranty professionals have participated in our survey. Just over two-thirds (68%) of the survey respondents were representative of the B2B segment. The remaining 32% were from the B2C segment.

Essential Key Performance Indicators Amongst Field Service Organisations

Attach and Renewal rates are the primary Key Performance Indicators that companies rely on to evaluate the success of their Service Contract and Extended Warranty Programs. A small percentage of respondents (15%) reported attach rates in the range of 51% to 70%. Most respondents (45%) reported attached rates of 26% to 70%).

Concerning renewal rates, while a majority (71.5%) of the respondent’s report renewal rates of less than 50%, over one-quarter have renewal rates of 76% or higher. Half of these respondents have renewal rates over 90% demonstrating that this level of performance is possible.

Higher attach and renewal rates were observed among respondents from the B2B segment. This is attributable to the fact that companies in the B2B segment are often more engaged with customers during and post-sale than those in the B2C segment. B2B companies may have multiple interactions with a customer before, during, and after the sale then B2C companies. For example, in the purchase of a refrigerator, the retailer may have only one chance, usually at the point of sale, to sell an extended warranty during the point of sale. In contrast, the seller of Construction Equipment may have multiple interactions with the customer throughout the lifecycle of the equipment. This increases their opportunities the seller must upsell, and cross-sell extended service programs.

Configuration

One of the key drives of successful Extended Warranty programs is Contract Configuration. This term, configuration refers to:

the length of contract coverage,
level of customization,
processes/services engaged
resources deployed in delivering the services
entitlement levels offered.

With respect to length of coverage, most respondents (82%) surveyed to date indicate the typical length of SC/EW programs is equal to or less than three (3) years. Among these respondents, slightly more than half (48.0%) offer programs that range in length between 1-2 years, while 52% have programs of 3-4 years in length. The survey results suggest SC/EW programs have a shorter coverage period within B2B than B2C. Slightly more than half of the B2B respondents offer programs that are 1-2 years compared to only 18% of B2C respondents.

Customization

In terms the level of customization provided, over three quarters of the respondents offer SC/EW with some level of configuration. While approximately one-half (54%) offer mostly Standard Configuration, they also indicate that some of the programs have some level of customization. However, only 18% offer mostly Customized programs or entirely customized programs. The remaining respondents offer only a standard configuration. Customized programs are more prevalent within the B2B sector than B2C. Nearly 82% of B2B respondents offer programs with some level of configuration while only 44% in B2C.

Flexibility of Terms

Slightly less than half (48%) of the respondents surveyed indicate that they provide their customers with the ability to terminate their contracts after they are purchased. Among those who allow early termination, the majority (58%) allow for termination with penalties. Higher attach rates and renewal rates are associated with companies that provide ability to terminate early.

Approximately one-half (52%) of the respondents surveyed provide their customers with the ability to negotiate the price paid for service contracts. Higher attach and renewal rates were observed among companies who provide customers with the ability to negotiate. This practice is more common within the B2B Segment.

Processes

When it comes to processes covered, most (86%) respondents will correct failures that customers experience during the coverage period. Other types of processes engaged as reported by 20% to 30% of respondents include preventive maintenance, calibration, planned inspections, consumable replacement, recalls, and remote product monitoring.

In delivering these services, most respondents provide the following resources as part of the SC/EW program:

Spare Parts (64%)
Advanced exchange/parts swap (54%)
Onsite Field Service (82%)
Depot Repair (50%)
Remote Support (57%)

A smaller percentage of respondents also offer Diagnostic tools (14%) and loaners (7%) as part of the SC/EW configuration.

Entitlements

Entitlements are another aspect of SC/EW configuration that customers will consider in their purchase. Entitlements can be viewed as the level of service they can expect to receive once a problem or claim is reported. Almost one-half of the respondents (43%) provide a field service response time guarantee. Another 39% include guaranteed parts delivery time. Other types of entitlements that maybe found with an SC/EW configuration include resolution time guarantee (21%) and telephone response time (36%) and loaner if problem can’t be resolved within 24 hours (18%).

Frequency of Communications

Survey respondents typically notify customers that their SC/EW programs are up for renewal. One half (50%) of the respondents indicate they provide more than 75-days advanced notification; 16% provide 90 days or more notification. Higher renewal rates observed among companies that provide 90 t0 76 days advanced notification. Two-thirds (68%) of respondents provide only 1-2 advanced notifications. The remaining 32% provide 3 or more notifications. Higher Renewal Rates are observed among respondent who provide 3 or more notifications

Front Line Personnel & Automation

A majority (54.2%) of respondents involve front line service personnel in the sale of SC/EW contracts. Approximately, two-thirds (68%) provide formal sales training while less than half (46.2%) use automation to facilitate the ability front line service personnel to sell SC/EW programs. Higher attach rates and renewals are cited among respondents that use automation to facilitate sale by front line service personnel

Summary & Implications

In summary, the more distinctions a company can make about its SC/EW program, the more likely customers will be to purchase it. In other words, customers consider the value of a service contract before they purchase it. This maybe an “eye-opener” for manufacturers and their channel partners who take the view that a warranty is a warranty. Just because customers purchase their product doesn’t mean that they’ll purchase the SC/EW.

As the survey results indicate, the key drivers of a successful SC/EW program are level of customization, coverage and configuration, flexibility of terms, frequency of communication, use of front-line service personnel in sales process, and use of automation. When it comes to selling service contracts and extended warranty programs, it’s about the asks. These observations underscore the importance of implementing solutions that enable Durable Equipment Manufacturers and their Channel parts to set up, sell, administer, track, and analyze various service programs.