A Service contract regulates the provision of special product-related services such as maintenance or repairs between the customer and provider. The services defined therein vary in countless ways and range from simple hotline service to spare parts supply and availability guarantees.
Service contracts generally offer companies an excellent option for generating constant and crisis-proof income alongside their primary business. They are also the most sensible option for billing internal service activities. After all, it is relatively difficult to explain to customers why they should pay several hundred euros for a phone call to your hotline. This dilemma can quickly lead to a profitability problem if you cannot bill hotline costs without upsetting the customer.
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A service contract offers more security than the statutory warranty
In the first year, customers can rely on the statutory warranty. Repairs and the supply of spare parts must be guaranteed by the manufacturer during this period. After that, customers are usually responsible for their machines themselves.
The demand for service contracts exists
Buyers of machines and systems often want a little more security and better planning for their budget. In return, they are usually prepared to accept higher costs. Both parties can benefit from this. To ensure that service contracts are accepted and also offer added value for the manufacturer, a few rules should be observed when drawing them up.
Service contracts can be used to Lock-in effects that bind customers to your company. In our article on the different Types of Customer loyalty we have already explained why this is particularly important in the service sector for increasing the repurchase rate.
Service contracts should be standardized and kept simple
A service contract should be designed in such a way that customers and sales staff can understand it!
Don't make it too complicated! The sales department needs a clear sales message to make your After-sales services to the man. Customers, on the other hand, want to know exactly what they are spending their money on and whether the desired services are included in the contract.
This is why contracts need to be simple. Do not offer too many different modules that exclude individual services. Instead, concentrate on a few, clearly defined service packages.
It does not make sense to negotiate extra contracts with every customer. The overview is lost too quickly. Of course, you can negotiate framework agreements with a few large customers. However, this should be limited and restricted to customers with a large machine fleet.
Service contracts should build on each other
Instead of a multitude of small modules, service contracts should ideally be staggered and build on each other: From Basic to Premium in different levels. Of course, a few extra modules can also be designed, which customers can either book or decline. However, the number of these should not be very high. To ensure that the different contracts are clearly structured, you can stick to this simple structure for the gradation:
"Dare to sell availability guarantees (in a further step)! Customers want security when they sign a service contract. There is a high willingness to pay for this. With a 95% availability guarantee, the machine would have to be down for 18 full days before you have to pay a contractual penalty. That should be feasible if you sell high-quality systems." - Dr. Simon Tonat
Availability guarantees are common in many industries, but are not yet used extensively in mechanical engineering to increase sales.
It should be possible to quantify the benefits for the customer
The customer must be made aware of the cost of machine downtime. Some companies are actually not aware of this. If you can do this, you have an excellent sales argument for your contracts. Regular maintenance can save the customer a lot of money. You should also be able to provide figures for this in order to do the necessary persuasion work.
The sales people for your primary products are often not good at selling your services. The Difference between product and service sales must be taken into account.
Your sales staff should be very familiar with the work of your service department and your service contracts. If they cannot respond to even trivial questions with valid arguments, your sales success will be limited.
Regular audit from the point of view of economic efficiency
Companies can generate a significant advantage if they manage to retain a larger proportion of their customers. However, there is no point in simply closing more deals. In fact, this can also lead to significant financial losses if not done strategically.
You should therefore calculate budgets for all contracts that must not be exceeded on average and regularly check whether these are being adhered to in your contracts. You need to keep an overview here if you don't want to pay extra. If your calculation is not correct, either Surcharges and base price increases or make your after-sales service more effective.
Your aim should be to deliver an appropriate service within the budget. Please also note the concepts of Quality assurance in after-sales. If you want to expand sales of service contracts, you sometimes have to be careful not to do too much for your customers. Offering a lucrative customer service and at the same time a concept of Service Excellence is difficult, but feasible.
It is also necessary to get rid of unprofitable service contracts from time to time or to adjust the contractual conditions in such a way that they can be used for profit-oriented work again. Which of these two solutions makes sense in each individual case depends above all on how satisfied the customer is with your previous service. More info
Service contracts are an important cornerstone in making an after-sales department profitable. Some time should be invested here in order to come up with a suitable strategy. If you do not work systematically, you will miss out on relatively large profit opportunities. Or even worse: you will increasingly sell loss-making contracts and dig your own grave.
