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      5 min read

      Best Practices to Increase Service Contract Revenue

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      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.

      Key Performance Indicators

      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 in the gap between 26% and 70%.  

      Concerning renewal rates, while a majority (71.5%) of the respondent’s reported 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 B2B companies are often more engaged with customers during and post-sale than those in the B2C segment.  B2B companies often have multiple interactions with a customer before, during, and after the sale, compared to B2C transactions.  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 to upsell and cross-sell extended service programs.

      Service Contract Configuration

      One of the key drives of successful Extended Warranty programs is Contract Configuration, related 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 indicated their 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 ranging between 1-2 years, while 52% have programs of 3-4 years.  The survey results suggest SC/EW programs have a shorter coverage period with 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. 

      Custom Configuration

      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 provided 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% of B2Cs.

      Terms Flexibility

      Slightly less than half (48%) of the respondents surveyed indicate that they provide their customers with the ability to terminate purchased service contracts.  Among those who allow early termination, the majority (58%) included 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 contracts. Higher attach and renewal rates were observed among companies who provide customers with the ability to negotiate (most common among B2Bs).

      Covered 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:

      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%).

      Renewal 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 between 76- and 90-days’ notice. Two-thirds (68%) of respondents provide only 1-2 advanced notifications. The remaining 32% provide 3 or more notifications.  Highest Renewal Rates are observed among respondent who provide 3 or more notifications.

      Front Line Personnel and Automation

      A majority (54%) 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%) 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 sales by front line service personnel

      Summary & Implications

      This survey’s findings indicate that 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 commodity. Just because customers purchase their product doesn’t mean that they’ll purchase the SC/EW.

      As the survey results reveal, 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.

      Automate with Mize

      The Mize Service Contracts Management system enables functionality to:

      • Set up flexible service programs configured to your industry, product, and customer needs
      • Administer Contracts, Support, and Claims to improve profitability and customer satisfaction
      • Enable your company and Channel Partners to optimize Service Contracts sales, renewals, and fulfillment
      • Empower Customers to manage risk, limit repair costs, and minimize product downtime.

      See the Mize system – request your demo today.

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      BLOG AUTHOR

      Tim Nissen

      Tim Nissen has built companies through marketing in categories including technology, manufacturing, energy, commercial real estate and business services.