Developing a Profitable
Service Annuity Business
WHITE PAPER
Copyright © 2014 by MaintenanceNet, Inc. All Rights Reserved.
The competitive landscape for products sales has gone through dramatic changes over the last few decades. Times have changed and margins are decreasing. With competition on the rise, companies are feeling the pressure to focus on price rather than compete on value proposition. In many cases, the products are so similar that the only apparent differentiator to the end customer is a lower price. As manufacturers attempt to hold a price point that doesn’t give away the farm but is low enough to stay competitive, the reality is that the typical channel partner cannot survive today by competing on price alone. And with product sales grossly declining, they are looking to other avenues to maintain profitability.
In this age of declining profit margins, there is only one option for manufacturers and channel partners. You can only do so much to add physical value to many of the commoditized products that you’re selling, but the ability to add signi ficant value to that product by wrapping services around it are endless. So why have so many organizations across the supply chain ecosystem still not made the appropriate investments to develop a dedicated service annuity practice?
The Proof Is in the Profits
Value-added services can equate to a doubling or tripling of profits for
manufacturers, yet service contracts remain one of the most repeatable and the most neglected sales opportunities available. And unlike product sales, service contract margins have remained largely intact. If products are consistently being sold, why aren’t organizations consistently selling the maintenance services around those products? And, if maintenance services are typically sold with each product, then why aren’t manufacturers and their Tier 1 and Tier 2 channel partners effectively tracking and selling the renewal maintenance on this same product? Not to say that there aren’t organizations building a healthy services business today. However, industry numbers show that there are very few companies that are successful in this endeavor. In fact, IDC reports that an estimated 50% of original maintenance agreements go un-renewed on average. For a technology industry that sells over $95 billion in hardware support in the U.S. per year, according to Gartner, 50% is a tremendous renewal opportunity.
With service contracts, forward-thinking manufacturers have found they can potentially double their margins without doubling the amount of work. In the past, most companies would equate doubling of margins to selling twice as much product. That’s not a very effective way to grow a business. Certainly, doubling sales is a good thing, but in reality you should be able to double sales and quadruple profit — if you have a dedicated service annuity practice in place. Generally speaking, service contracts should be estimated at 10-17% of an organization’s overall product revenue numbers. In addition, the margins of any good service contract business can average 80-90% for manufacturers and about 10-20% for their channel partners, depending on the product being
If you’re not taking full advantage of the platforms and service contract management practices available today
you may be
missing out on
transforming a
mediocre service
business into
an exceptional
service annuity
business.
Strengthen Customer Relationships
Some manufacturers put too much focus on winning new customers rather then preserving the customer relationships they already have. It’s common knowledge in business that it’s more expensive for an organization to identify and secure a new customer relationship than to keep and grow existing relationships. For the supply chain, a huge opportunity exists to build loyalty and trust by serving as a trusted advisor to current clients, starting with learning more about the their IT environments than they know about the environments themselves.
Showering your clients with services and value-added solutions that differentiate your organization from the competition is crucial, and staying on top of service contract lifecycles provides perhaps the single most important key to extending your relationships with these customers over the long haul.
Become an Indispensable Partner
Service contracts represent a high-value profit center that, unfortunately, has eluded manufacturers for decades. Often, business customers are managing multiple service contracts that exist in multiple departments across a number of locations. They have very little visibility into the service contracts they’ve purchased and the status of these service agreements. Without this essential insight, the customer also experiences increased risk due to inadequate or missing coverage of critical assets. They might even find they are paying for support on products they do not have deployed. By taking a consultative approach to understanding which products and services the client is utilizing in their environment, how these solutions are being maintained and when their services are due to expire, your sales team can build a trusted advisory role.
Leveraging today’s most advanced, channel-friendly service contract management tools and services will give you the business intelligence you need to take on this role. Not only will these new data-driven technologies allow your clients to make more enlightened business decisions, but they will also put you in position to help customers predict and manage the lifecycle changes across their IT environments. Even better, your sales team will be able to quickly take action on service contract opportunities to drive sales expansion across your installed base.
The economy, while gaining strength, still has been hit hard by job losses. Now
more than ever, organizations throughout the world are turning to MaintenanceNet
to bring about dramatic improvement in their ongoing service annuity initiatives in
order to stay ahead of the competition revenues.
–
Shayne Skaff, President, MaintenanceNet
Capture, Manage and Automate the Annuity
As mentioned, retaining customers and driving higher margins is a benefit to building a good maintenance services business. There’s yet another important advantage to building a successful services business: service is not a one-time sale, it’s an annuity, and should be managed as such. If a manufacturer has the right technology tools in place, together with their channel partners they should be able to manage the lifecycle of any service agreement that they have sold and enable the renewal to be sold at a future date.
Investing in extendable service contract management tools and automation solutions should therefore be a top priority for the supply chain ecosystem. These data-powered tools do all the heavy lifting for you, reducing the cost of
sale and eliminating the operational time and costs of delivering renewal quotes out to your customers to capture ongoing service sales opportunities.
It’s also important to remember that not all service contracts are renewable. Product lifecycles are shorter for some products than others, and therefore, product refresh becomes extremely important. If you can’t track the service contract lifecycle on a product then you’ll never be able to talk with your customer about the cost to replace versus renew.
With the correct tools in place to manage the installed base data you already have, you can automate the sales process to drive action and close more service sales, and at the same time gain insight into product refresh opportunities. With a continuous flow of actionable data, you’ll gain a services annuity engine that not only has an immediate impact on the bottom line, but also grows exponentially over time.
It should be clear by now that the benefits to implementing a service annuity practice are undeniable. From ongoing sales expansion, to higher profits and margins and building stronger ties with customers, there’s no reason to sit on the sidelines. Start building your service annuity practice now.
This white paper is provided to you courtesy of MaintenanceNet, a leader in service revenue generation solutions.
For more information about how MaintenanceNet can empower your sales teams to reach their full service revenue potential, please call us at (866) 699-7212 or visit our website at
Services Made Simple
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About MaintenanceNet
MaintenanceNet is the global leader in service revenue generation. Our Service360® cloud platform accelerates recurring service revenue by integrating big data, automating the sales process, and innovating a world class customer experience. The key to MaintenanceNet’s success is its ability to uncover and automate recurring revenue opportunities within a sales practice. By aggregating disparate data sources and turning incomplete or inaccurate customer data into actionable and reliable business intelligence, MaintenanceNet increases service revenue and profits for customers by reducing friction in the sales process. MaintenanceNet’s Service360® platform and its AutoQuoteTM solution, fueled by its data foundation, serve as powerful sales enablement tools that deliver billions of dollars in sales opportunities to the global market. MaintenanceNet makes service sales simple, predictable and repeatable.
©2014 MAINTENANCENET, INC. ALL RIGHTS RESERVED.
