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Profitable Support Revenue

30.03.2009

Cameras and Software Licenses after-sales

Camera

Yesterday, I was talking with a friend of mine who imports high-end Japanese consumer optical goods. He was telling me about how call volumes were increasing but sales were decreasing. Much of these calls were around service. I asked him if service was a big profit center for him. I was surprised to hear that it was not a profit center after 10+ years in the business. The following applies to someone reselling cameras as much as it applies to the creator of software licenses.

When product companies (factories, distributors, and retail) start, they often focus on initial product sales. As they mature (and their industry matures), the value of their customer base needs to be used and they focus more on services, support, accessories, etc. This is exactly the stage my friend is in– much of his product line is sold at zero margin because of intense market pressure.

How should my friend better use his install base and create a real revenue stream outside of initial product sale? If he increases service rates he will likely drive his customers elsewhere. He could sell extended service plans (like the US), but there is always a feeling that such programs do not justify the cost.

Support contracts that are paid periodically are in effect insurance. The risks must have a reasonable chance of happening. In the US, auto insurance companies typically pay for windshield glass damages caused by rocks. While most people can afford this cost and their annual fees far exceed this cost, they feel good that the insurance company is paying for this– it justifies the insurance decision. One of the best ways to justify the support contract is to offer “preventative maintenance” services. For a camera, this can be a cleaning and inspection. For software, this can be a implementation and configuration inspection.

In addition to ‘justifying the insurance decision”, I have found that such programs are a business benefit because the create positive customer face time. Customers often use the opportunity to ask about their product and become far more satisfied when they learn to use it properly. It is also a great time to discuss how they are using your product (and the basic customer problem environment) in order to s up selling opportunities. From my experience, I could justify the cost of preventative maintenance exclusively from the follow-on orders that it directly creates. Keep in mind that preventative maintenance is on your schedule– there is no urgency so you can utilize slow service periods or trips to nearby customers as triggers for the visit. In nearly all cases, you will need to remind the customer that he is eligible for this service and agree on when.

Now with a justification, we need to make the insurance. For my friend, labor has a lower internal cost than parts. Other benefits like response time, loaner equipment, etc also have relatively low internal costs. For him (in addition to the preventative maintenance package above), I would recommend that the service agreement covers 100% of all labor (but not the cost of parts), priority (in the queue) for service work, free call-in support, and make loaner equipment an un-promoted benefit. For a software company, I would recommend free version updates, bug fixes, and telephone/email support (24×7 is great cash since almost nobody wants to actually use the off-hour component).

In general, your product has many competitors and you must be aggressive with price. Your support service has little or no competition, therefore you can be rigid with pricing. Make a fair price (around 15% is normal) and refuse to discount. You can justify this by communicating to the customer that such support fees keep the products supported and ensure your value– if we starve the support, the product is in higher risk of “end of life”. The only exception to this no-discount strategy is that you should discount extended duration (eg 3 years instead of 1 year) packages– this reduces the number of renewal opportunities and since each renewal cycle is always less than 100%, you can justify some mutual savings. Also, insurance is fundamentally about paying when you don’t need coverage so that you have coverage when you do need it. If a customer stops with support and then re-starts, there needs to be some ‘back to support’ fee in order to discourage such on-off-on behavior. For software, I recommend to charge the full price back to the point that support was stopped, for hardware it can be a one time fee. When a customer calls for fee-based service, offer to put him on a support contract and treat the call as if he has coverage so long as the customer commits to pay this week.

Next, sell you product with bundled support– even if that means discounting the product-never discount the support part for reason previously discussed. This means the customer ‘loses something’ when he does not renew the support. This is far better than trying to sell ‘additional costs’ after the warranty has expired. Secondly, people understand reasonable limits and have rational expectations from support contracts while warranty expectations, disputes regarding support vs warranty, and draconian regional default warranty laws all conspire to make warranty delivery (without support) expensive and dissatisfying for both side.

All of this, by the way, is really just the basics. Once this is generating good margin, it is time to do high value added service. Insurance is also about actuarial tables and the house placing bets in its favor– high value add service usually comes from knowing the probabilities and making smart bets that the customer perceives and zero risk for them. …. but that is for another article and my friend first needs to get the basics up and working.

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