Whether your company is a startup or an established manufacturer, ISV or VAR, revenue from maintenance and support contracts can be a highly profitable revenue stream.
While many companies are aware of the fact that their contract revenues are below target, increasing these revenues is not always as high a priority as adding new customers.
Many companies allocate almost their entire “cost of sale” budget to acquiring new clients and allocate very little if any budget to selling to their captive audience –- their customer base. It’s not uncommon for a company to have a large team of field sales reps, but literally no one assigned to selling maintenance and support contracts to its existing client base.
What are low renewal rates costing your company? Here’s a simple table based upon some basic assumptions. You can plug in your own numbers:
# Customers Eligible for Renewal Annually
1000
Average Annual Service Contract Value
$5,000
Current Renewal Rate
40%
Target Renewal Rate
75%
Delta
35%
Current Contract Revenue
$2,000,000
Target Contract Revenue
$3,750,000
Less Current Annual T&M Billing
-$200,000
Potential Increase in Annual Revenue
$1,550,000
Depending upon your numbers, the ROI on improving your renewal process and systems can be both rapid and substantial.
In this article, we’ll look at: common issues facing equipment manufacturers and ISVs; the benefits to higher renewal rates; and a general approach to gaining higher renewal rates.
Common Contract Renewal Issues
Here are the common issues that we hear when talking to people at various companies:
There’s no defined process in place for getting the word out to customer or partner contacts that a warranty or service contract is about to expire
It’s difficult to track and share upcoming warranty expiration and/or contract expiration dates
The responsibility for renewals is spread out across different job descriptions (it's not owned by one person)
It takes time and effort to log and gather time & material data and then invoice the customer
Benefits to Improved Processes and Systems for Renewals
Keep in mind that a service contract is usually a win-win. It benefits you and it benefits your customers.
Just as you want a predictable revenue stream, your customers want a predictable expenditure stream. Just as it is inefficient and expensive for you to bill on a T&M basis, it’s expensive for your customer to review and process multiple invoices throughout the year.
Here’s a summary of the benefits to increasing your warranty and service contact renewal rates:
Increased annual revenue and profitability
A more predictable revenue stream
Higher customer satisfaction levels and better customer relations
Renewal notification and even billing itself is a marketing opportunity that can lead to more non-renewal business.
Approaches
Solving the issues described above does take time, effort and money – but as illustrated in the table above, the potential ROI is significant.
While a service contract represents a purchase decision for your customer, it should be an easy decision for the customer to make and therefore an easy sale for you – once you’ve implemented the right processes.
The service contract selling system for some companies that we’ve interviewed is not really a system at all. Support techs are tasked with informing an out-of-warranty customer who happens to call in that they need to either pay for T&M or they need to renew their contract. And that’s where it often ends. The result? – low renewal rates.
In order to increase your renewal effectiveness, you need to start with the right information. There are many ways to track upcoming warranty expiration dates for your customers, ranging from a spreadsheet to a CRM or other database solution. Of course, the more organized and more centralized the information, the better.
In whichever way you capture your upcoming warranty and service contract expiration dates, you next need a system for ensuring maximum renewals. Ideally, this system will be managed by a designated “renewal specialist” –- or at least this function should be part of someone’s job description.
The renewal specialist is responsible for sending the appropriately worded and appropriately timed communications to the customer. Each communication –- letter or email -- needs to spell out the benefits of renewing a maintenance or support contract. A notification schedule should be determined -- for example, 90, 60 and 30 days before a given contract expiration.
Each of these communications presents a marketing opportunity for new products, add-ons, training, etc. -- so consider this when developing the notification content.
The timing of communication is best managed with a CRM system that can be easily customized to match your product and contract structure and that also has a rules and/or workflow engine that alerts staff or partners to perform the appropriate tasks at the right times.
Proper design and execution of this system is one of the keys to increased renewal rates.
Managing and Increasing Renewals with a CRM Database
Most CRM (Customer Relationship Management) and ERP (Enterprise Resource Planning) systems do not do a good job of tracking maintenance contracts against equipment.
First, most of these systems track “Warranty Expiration Date” as a single date field. The reality is that a purchased product may have multiple contracts over time and even concurrent contracts as is the case when a standard warranty is supplemented by some level of premium service.
Second, most CRM systems treat customer-owned software or equipment data as "second class citizens", relegating important information to a drill down window somewhere in the depths of the application. In point of fact, for manufacturers and software companies, detail about what a customer has purchased is often as important and has as many characteristics as the other standard CRM "entities" (Accounts, Contacts, Opportunities, etc.).
Fortunately, there are several CRM systems that can be easily customized to properly track warranty and contract information.
Properly designed Product and Contracts entities in a CRM system allow staff to track multiple contracts per product and filter the overall list of contracts by a variety of criteria, such as "Software Contracts Expiring Within 30 Days".
With contract data related to specific product and companies, rules and alerts can be created to automatically send notification e-mails to the renewal contact at appropriate intervals prior to expiration of the current warranty or contract. Rules can also be used to schedule calendar activities and/or email alertsfor designated staff to call customers.
Rules Definition
Using a CRM rules engine, actions can be set up to e-mail the renewal contact at a partner or customer organization with information about the upcoming expiration date as well as the benefits to renewing. The e-mail can include payment information or a link to an invoice. Multiple email templates can be created, depending on the needed message at each point in time.
Once renewal payment is received from a customer, A/R staff member or the renewal specialist can update the database and the current reminder process for that customer can be halted.
Conclusion
Higher contract renewal rates can be achieved by defining processes for timely customer communication as well as applying technology appropriately. Targeted content within these communications can also drive other revenue.
A properly designed CRM system can help your company to realize a increase in renewal rates and drive a higher ROI on a CRM deployment.
