Why People Buy A Service Contract

Dec 03, 2020 • Features • Covid-19 • Service Innovation and Design

Sam Klaidman, Principal Advisor with Middlesex Consulting, reflects on the drivers behind why your customers buy the service service contracts you offer, and outlines if and how that has changed since the pandemic...

For over 20 years, I was the Vice President of Service for two companies. In one company I had global responsibility and in the other I was responsible for the Americas. To keep up to date with industry trends, I attended local, and some Global, AFSMI meetings and I read as many service-related articles as I could find.

I was always jealous of people who published articles and got their name “out there.” Then I retired and started my own consulting business. I felt like the time was right for me to share my ideas and collected information with my peers.

Thanks to an introduction from a friend, I was able to get an article published in the September 2008 issue of American Laboratory. The topic I chose was “Why Companies Sell Service Contracts and Why People Buy Them.” Since then, I have written 16 articles and whitepapers and posted approximately 220 blog posts. Most of these were about some aspect of the business of Field Service. Yet when I searched through the 220 post titles, I realized that I had never updated my original article even though our industry has gone through major changes since the original piece was published.

Buying a service contract pre-COVID

Before COVID, the people who purchased service contracts were Manager level. They had day to day responsibility for whatever their equipment was being used for. In that first article, I listed the four reasons why people purchased contracts:

Maximize Uptime
Predictable costs
Peace of Mind
No hassle

When I have an assignment to grow service revenue, I survey customers and ask them to rate these same four characteristics where one is most important. Here are the results of three of my pre-COVID engagements:

The first and last columns are part of the same survey for the same client. The last column is for a small number of customers with many instruments that provide the company with excess testing capacity. Yet the managers were interested in a service contract for all their instruments! Not because they were worried about maximizing equipment uptime, but because they were interested in minimizing their daily hassles. They were willing to spend company money to reduce their job-related stress.

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Changes in customer’s wants and needs now

Today, the reasons people want service contracts are more varied than ever before. When it comes to buying hardware service contracts, we are seeing two significant changes:

The purchasing decision is being made by a more senior individual than the department manager.
The reasons to buy a contract are frequently based on more and different strategic factors than in the past. They are as varied as the reasons they purchased your product as well as the high-level strategic goals of the company.

Here are some of the challenges that most business executives (including your customers) are dealing with today and which will continue for the foreseeable future:

Grow revenue and reduce costs
Minimize CapEx
Digitize their business
Introduce a servitization business model
Mitigate known and unknown business risks
Provide a safe and secure environment for their employees
Figure out how to retrain key employees
Deal with an aging workforce

Your customer’s challenges will result in changes to how you create, price, and deliver your services in 2021 and beyond. Here are a few well know changes:

Enable customer self service
Move to a blended workforce of direct and contract field engineers
Migrate from a transactional to an outcome driven service organization
Innovate to embrace the notion of touchless service
Personalized and multichannel services

Changes in the Sales environment

These three snippets from a recent report, 2021 Predictions for Sales Leaders: THE YEAR OF VALUE, highlight some of the changes that sellers must be prepared to manage. These conclusions are generic and impact both product and service selling:

In 2020, CFOs got more involved with every purchase being made and every dollar of spend was scrutinized. Those who were able to quantify the outcomes associated with their spend were able to get their projects completed. Those that were not able to articulate value saw their projects overlooked by those who had a higher level of perceived value to the business.
To succeed in virtual B2B sales cycles in the coming year and beyond, it’s critical that CROs (Chief Revenue Officers) work with their sales leadership to ensure that their teams are intentional in discussing and quantifying value early in buying conversations and that every opportunity is substantiated with the strongest business case possible based on true economic impact and outcomes. To thread the value conversion through the full customer journey and ensure retention and expansion remain positive, sales leaders will also need to work with the customer success leaders to ensure that the company is proactive in communicating the outcomes of their solutions in order to maintain renewals NRR (Net Recurring Revenue) remains high.
Unlike in the beginning of 2020, sellers can no longer take clients to hockey games or dinner to build rapport. Instead, all information sharing happens digitally, via email or a web conference. You have minutes, not hours, to make an impact. According to McKinsey, “digital self-service and remote rep interactions are likely to be the dominant elements of the B2B go-to-market going forward, when selling to both SMBs and large enterprises.” And 89% of companies expect these changes to stick, anticipating they will need to sustain these virtual go-to-market models for 12+ months, per McKinsey.

Selling services now and post-COVID

The best time to sell a service contract is at the time of equipment sale. This is because your product sales teams are dealing with customers with the same issues your service sellers are experiencing. But the product people have successfully addressed their prospects challenges when presenting and closing your product sales. Therefore, the sales team can integrate your services into the overall justification (use case) and close the product and service sale at the same time if they are professionally trained and properly compensated. Also, adding services into the use case will likely differentiate your company and help close the deal.

Obviously, we all have a sizeable number of service contracts which are already in place and renew every year or so. If you are experiencing difficulties in securing renewals on a timely basis, then I suggest you spend some quality time with your sales management peer and get some help on how to dig out customer’s most pressing challenges. You can then present your solutions in a way that shows the customer how you can help them achieve their objectives while feeling that they are minimizing their personal risk.

If you find that there is a large gap between what you are offering and what you believe the customers want, then you have to put on your service marketing hat and find out their needs and the price they are willing to pay. Then you must update your offerings and create new value propositions for each customer segment and the services and contracts you want them to buy. Sometimes you can do it all by yourself and sometimes you will need a more experienced consultant to interview a representative number of customers and find out what your customers are willing to pay for. The consulting investment is generally minor compared to the contract sales you achieve.

Whatever you do, you must make sure that your contracts and other services create enough value for your customers so they will find it exceedingly difficult to move to a time and materials model or worse, move to a third party vendor.