Does Offering a Service Contract Make Sense for Your Business?

Service contracts can be powerful tools for increasing revenue and customer loyalty. If you sell a product, you have almost certainly considered what type of warranty to offer. But, have you also thought about whether to also give customers the option of purchasing an additional service contract? Here are five things to consider: 

1.       Increase Revenue Generation – Unlike a warranty which is built into the price of your product, a service contract is generally sold separately. This creates an additional revenue source for your business. Consider offering employees an incentive to encourage customers to choose to purchase this additional coverage. 

2.       Create Perception of Longevity – Customers have come to expect their products to come with a standard warranty which is roughly proportional to the expected useful life and cost of the product. However, offering an optional service contract which provides coverage beyond the warranty term implies to the consumer that you expect the product to last.  

3.       Offer Customers Options – Some of your customers are more than willing to take a risk and forgo the additional coverage you might offer through a Service Contract. But  some are going to be risk averse, specifically seeking out coverage to ensure their purchase is protected. Having a service contract allows you to offer that protection to those willing to pay for peace of mind, while keeping costs lower for your price-sensitive, risk-taking customers. 

4.       Focus on Prevention – A service contract need not be limited to covering defects in material or workmanship. It is also possible, and perhaps advisable, for a service contract to include pre-purchased, scheduled maintenance to keep the product or equipment in good repair. Services might include setup, routine inspections, operator training, scheduled maintenance, or priority support. Services offered as part of preventative service agreements can be scheduled during slow times to keep employees on the job. 

5.       Encourage Brand Loyalty – Because Service Contracts don’t have to be sold at the initial point of purchase, it is possible to use them as a mechanism for reconnecting with past customers. Even if that customer is not looking to purchase a service contract, it encourages them to recall the purchase and may spark a decision to replace or upgrade. Service Agreements that focus on preventative maintenance can also encourage customer loyalty by allowing your company to develop a reputation for service. 

Once you decide to offer a service contract, the way you structure that contract will depend on your goals. Is your focus generating immediate revenue, customer satisfaction, product longevity, brand loyalty, or something else? It might be better for short term revenue to design a service agreement with many exclusions and at a high cost, but that may result in customer dissatisfaction. After all, service contracts are one of the things customers most frequently regret purchasing. On the other hand, avoiding exclusions and not over-charging for a service contract or agreement may ultimately result in more sales and a better reputation as a company that stands behind its products. It’s all about tradeoffs.

Have you implemented a Service Contract at your company? If so, what were your goals and has your Service Contract helped you reach those goals? Tell us in the comments below. 

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