By Sam Klaidman
No matter what type of capital equipment your company sells, service contract attachment is a key driver of business revenue. Here is an example: In early April 2018, GE reported a new order received by its Aviation business. They said:
“American Airlines, which helped launch GE into commercial aviation 45 years ago, said it would power 47 additional new Boeing 787 with GE Aviation’s GEnx-1B engines. The $6.5 billion deal includes a 20-year service agreement. This order follows a previous order for 42 such planes placed several years ago.”
As I showed in a recent post about GE Innovation, orders like this are one reason that GE Aviation closed out 2017 with an equipment backlog of $32.8 billion and a service backlog of $137.7 billion. In other words, 81% of the Aviation business’ backlog is attributable to services. Deals like these are very unique and not likely to be landed by the typical OEM.
What is a good service contract attachment rate?
Although there are many variables that impact individual business’ contract attachment, we have two good sources of data, based on numerous samples, to help us figure out how good or bad we are performing. For example, TSIA (Technology Services Industry Association) reported in February for reference year 2017 that the contract attachment rate for hardware and software companies was 67% and 81% respectively, while the best companies reached attachment rates of 90% and 100%. And in a joint late-2017 report, Blumberg Advisory Group and Giuntini and Company said that 30% of hardware companies had an attachment rate greater than 50%, while 7% of hardware companies had an attachment rate greater than 70%.
What is the right target?
It depends. TSIA members are the largest suppliers in the business and may well be heavily biased towards software companies so an average attachment rate of 67% is not crazy. They sell to the largest companies who are typically more risk adverse than smaller businesses. The Blumberg/Giuntini team surveyed large OEMs and their distributors so their idea that a 50% contract attachment rate should be the target is probably appropriate for equipment manufacturers and their channels. No matter how big or small your company is, a target contract attachment rate of ≥50% seems to be a realistic starting point. If you are exceeding 50%, well done but don’t slow down. If you are significantly below 50%, you have lots of work to do.
It takes a team or the 30,000-foot view of selling service contracts at the time of sale
Step 1: Service does what it usually does when creating any service product. In this case, they create and price the contract. The time of sale price should be less than the price charged when the warranty is about to expire for two reasons:
- Some of the contract attributes are already included in the warranty
- People are paying early for any additional years and this discount is an incentive to include the contract with the product order
Step 2: Marketing does what it always does when bringing a new product to Market. For new services, Marketing must include the service team in any and all sales training because service understands best the value proposition of each type of contract.
At a 2015 SiriusDecisions conference, they had a session specifically devoted to the Marketing efforts used to support recurring revenue generation. They identified four types of models that generate recurring revenue and were probably focused on software or software intensive products.:
- Subscription/SaaS – A contract for use / service over a set period of time, (typically annually)
- Consumable -Revenue made from consumable products needed to operate main product
- Fee Per Transaction – Revenue from a small fee is levied against each transaction
- Maintenance – Revenue from service contract or a set period of time (typically annually). (Note: This post is all about Maintenance)
These following two figures look at the marketing investment for each model in two ways:
Subscriptions and maintenance require the lowest communications cost and the highest Field Marketing costs.
Step 3: Sales must make sure that their sales teams are fully compensated for all orders they book. In some cases, the sales people have specific product and service targets. In extreme cases, both targets have to be met before the sales people begin to collect an overachiever bonus. Service people should actively lobby individual sales people to invite a service representative along on important sales meetings. This extra effort does not detract from the sales person’s commission, etc.
What to do to ensure hitting your contract attachment target
The most important thing to remember is that nobody will buy a contract, or anything else, unless they will receive benefits that when monetized exceeds the cost. Importantly, you need a proven methodology to identify contract attributes that are valuable to specific customer segments. If you are not hitting your contract attachment target, revisit your methodology.
The sales team must believe that the contract is indeed valuable. This is critical because if the sellers do not believe they will never sell. Also, the sellers must believe that talking about a contract will not convince the buyer that the product is unreliable. Buyers know that products fail and/or need periodic calibration. They want to know how the seller will behave with any significant problem and the contract addresses that.
Marketing has to make sure that websites, proposals, price lists, and sales documents have all appropriate contract information. For example, contracts may need product numbers. Also, new seller training must include service contract sales.
At the end of the day, service has the most important responsibility. Service must make sure they consistently meet the specific conditions of any contract offered. Failure to do this will turn off both the buyers and sellers and defeat the whole effort.
Si2 Associate Partner
Sam Klaidman is an Si2 Expert in Service Marketing, Service Operations Management, Customer Value Creation and Customer Experience. He helps clients achieve their growth objectives by designing and commercializing new services and the associated business transformations.
In addition to a 20-year successful career as a leader of two high-tech, B2B, Customer Service organizations, Sam also utilizes his prior 20+ years’ hands-on experience in Engineering, Manufacturing, Consulting and General Management to help clients grow their services business and win Customer Loyalty.
Sam’s recent experience includes an assignment as Interim Vice President of Customer Service for a Chicago-based instrumentation company and 12 years as America’s Vice President of Customer Support for Oxford Instruments, a UK-based multinational scientific instrumentation manufacturer. Prior to Oxford Instruments, Sam served seven years as the Global Vice President of Customer Service at Bytex Corporation (a high-end data communications equipment manufacturer serving Fortune Global 100 organizations. Some recent value creation and CX clients include Bruker/Hysitron, CA, EMC, FLIR, Zoll, Malvern Instruments, Oxford Instruments, Metalogix, Cannon Instruments, and MERA.
Sam is a Life Member of the IEEE and recently completed a three-year stint as executive director and member of the Customer Value Creation International Board of Directors. He is Founder and Principal at Middlesex Consulting, a Massachusetts based consultancy that helps the services teams of B2B capital equipment companies that want to grow their top and bottom lines
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