Service contracts generally offer companies an excellent option for generating consistent, crisis-proof revenue alongside their primary business. They are also the most sensible way to bill for back-office activities. After all, it’s relatively difficult to explain to a customer why they should pay several hundred euros for a phone call to your hotline. This dilemma can quickly lead to a profitability issue if you can’t bill for hotline costs without upsetting the customer.
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A service contract offers more protection than the statutory warranty
During the first year, customers can rely on the statutory warranty. The manufacturer is responsible for repairs and the supply of replacement parts during this period. After that, customers are generally responsible for their own machines.
There is a demand for service contracts
Buyers of machinery and equipment often want a little more certainty and greater predictability for their budget. They are generally willing to accept higher costs in exchange for this. Both parties can benefit from this. To ensure that service contracts are accepted and also offer added value for the manufacturer, a few guidelines should be followed when drafting them.
Service contracts allow you to Lock-in effects that will build customer loyalty to your business. 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 written in a way that both customers and salespeople can understand it!
Don't overcomplicate things! The sales team needs a clear sales message to After-Sales Services to sell it. The customer, on the other hand, wants to know exactly what he’s spending his money on and whether the desired services are actually included in the contract.
That is why contracts need to be kept simple. Don’t offer too many different modules in which individual services are excluded. Instead, focus on a few, clearly defined service packages.
It doesn't make sense to negotiate separate contracts with every customer. It's too easy to lose track of everything that way. Of course, you can negotiate framework agreements with a few large customers. However, this should be done sparingly and limited to customers with a large fleet of machinery.
Service contracts should build on one another
Instead of a multitude of small, fragmented modules, service contracts should ideally be tiered and build on one another: from Basic to Premium, with varying numbers of tiers. Of course, a few optional extra modules can also be designed, which customers can either add or decline. However, the number of these should not be very high. To ensure that the various contracts are clearly structured, you can follow this simple tiered structure:
„Go ahead and try selling availability guarantees (as a next step)! Customers want peace of mind when they sign a service contract. They’re willing to pay a premium for that. With a 95-percent availability guarantee, the machine would have to be down for 18 full days before you’d have to pay a contractual penalty. That should be quite achievable if you’re selling high-quality equipment.“ – Dr. Simon Tonat
Availability Guarantees are common in many industries, but are not yet being fully utilized in the mechanical engineering sector to increase revenue.
It should be possible to quantify the benefit for the customer
You need to make it clear to the customer how much a machine breakdown will cost them. Some companies are actually unaware of this. If you can do that, you’ll have an excellent selling point for your contracts. Regular maintenance can save the customer a lot of money. You should also be able to provide figures to support this and make the necessary case.
The salespeople who handle your primary products are often not very good at selling your services. The Difference Between Product and Service Sales must be taken into account.
Your salespeople should be very familiar with the work of your service department and your service contracts. If they can’t provide sound answers even to trivial questions, your sales success will be limited.
Regular review from the perspective of cost-effectiveness
Companies can gain a significant advantage if they manage to secure long-term contracts with a larger proportion of their customers. However, simply closing more deals is not enough. In fact, this can even lead to substantial financial losses if the initiative is not implemented strategically.
Therefore, calculate budgets for all contracts that, on average, must not be exceeded, and regularly check whether these budgets are being adhered to in your contracts. You need to keep track of this if you don’t want to end up paying more than expected. If your calculations are incorrect, you must either Surcharges and base price increases be introduced or your after-sales service be made more effective.
Your goal should be to deliver appropriate value within the budget. In this regard, please also consider concepts related to Quality Assurance in After-Sales. If you want to expand your sales of service contracts, you must therefore sometimes be careful not to do too much for your customers. Offering lucrative customer service while at the same time adopting a concept of Service Excellence Achieving this is difficult, but possible.
It is also necessary, from time to time, to terminate unprofitable service contracts or to adjust the terms of the contract so that the business can once again operate profitably. Which of these two solutions makes sense in a particular case depends primarily on how satisfied the customer is with your performance to date. More Info
Service contracts are a key pillar for ensuring the profitability of an after-sales department. You should invest some time here to develop a suitable strategy. If you don’t approach this in a systematic way, you’ll miss out on relatively significant profit opportunities. Or worse yet: you’ll end up selling more and more loss-making contracts and digging your own grave.
