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Service Contracts: Part 2

1 Oct, 2001 By: Jim Intravia imageSource

Service Contracts: Part 2

In Service Contracts, Part I, we talked about the possibility of issuing
contracts, who to issue them to, when to issue them, why issue them, etc. Once
you've made the decision to offer the contract, you will be obligated to honor
it and be compensated for that obligation. However, money in your pocket does
not guarantee success. You need to be very careful regarding pricing, coverage,
and so on. It is very easy to lose money or work too hard (or both) in a
contract situation.


Pricing is a really tough subject. First, think one year ahead. Calculate what
parts you expect to use, and about how many service calls you expect to do. How
do you know what to expect to use? A crystal ball, of course, experience, and
past performance of similar or identical machines are important factors in
determining this. Figure out how much it would cost the customer if they were
paying retail on a chargeable basis. Figure out what it would cost you.
Somewhere between those numbers is a starting point, probably closer to the
retail cost. Consider that the customer will also have the advantage of being
assured that even an extremely expensive circuit board, or similar item, will be
replaced at no charge to them. That would be very painful for you, but of
course, you know that the odds of that are very low.

How To Determine What Parts Will Be Used

It is nearly impossible to determine the parts to be used. An educated guess is
the best you can do. Sit down with pencil and paper and maybe some history
cards. Look at what has been used over a period for as many machines as you are
willing to go through. Lets say five machines, one year, one lamp, one set of
feed tires, three wiper blades, 300,000 copies total. Average that out to your
contract request customer, along with the typical amount of service calls. One
60K per year machine will use 1/5th of a lamp, 1/5th of a set of feed tires and
about 1/2 wiper blade. That is only about $30 in parts, plus a few cleaning
service calls. Sounds pretty good. Of course this does not take into account
customer idiosyncrasies. They may cry wolf, or they may be very careful. They
might be very particular, calling you for very minor copy quality complaints, or
they might wait until the copies are practically black. These are some of the
reasons that contracts are usually offered only one year at a time!

If You Have No History

It stands to reason that you probably won't have a history on any given machine.
If you did, you would probably already have a figure in mind. If you don’t have
a history then the guesswork has to be sloppier. You have to treat the machine
generically, as if it were the same as other machines. Maybe it is and maybe it
isn't. It's an adventure.

Cost Per Copy

There is an old formula of a penny per copy. This is outdated. Some people still
do it, but they tend to work too hard for their money, and take a beating when a
machine pulls some nasty surprises. Some dealers are doing all-inclusive
contracts of around three cents per copy; including everything, even toner.

When To Avoid Cost Per Copy

Quite frankly, I don’t have much experience with CPC plans. However, here are a
few words of warning. Do them only if the machine is of relatively high volume.
If a machine is very low volume, you will be sorry. Low volume machines require
a disproportionate amount of service. If a 20cpm machine is doing only 10K per
year, it will be likely to need many parts almost as often as the identical
machine doing 100K per year. True, there will be less toner spilled and dusted
about, and the machine will require less service, but not 1/10th less. Probably
only about 1/4 or 1/2.

Low Volume Traps

If a customer does low volume (say 20K) and you send them a service contract
offering lets say, 40K coverage for $500.00, they will often call up and ask for
less coverage. They will expect 20K to be half of 40K, which makes sense to
them. Because of what I said in the previous paragraph, this can't be allowed.
Just as importantly, you don’t want the customer to think they are being
overcharged. To avoid this, you have to tell a little white lie. Since you know
the customer is 20K, but would be willing to cover the machine to 40K, here is
how you avoid any problems. You send the contract, offering to cover up to 24K
(2K per month is a convenient number). The customer is not likely to question
that. If, by chance, the customer does substantially more, you let them get away
with it, since, in reality, you would have charged about the same for double the

Loyalty And Longevity

When you sell a machine new, you start out with new parts. I often include the
first year's service, with a relatively low copy maximum. If the customer renews
their contract with me, year after year, I rarely raise it. Some dealers will
raise it about 10% per year. Some will maintain the same price for 3-4 years and
then raise it substantially (e.g. 40%). I don’t claim that my method is good for
everyone. I, and some of you, tend to deal with customers who we have a long
history with. They buy my toner. They come back to me for the next machine. They
understand if I am occasionally slow in responding or if I have personal
problems. A larger company cannot have this personal touch.

Billing Contracts

Some large companies bill quarterly or even monthly. I see no reason why I
should take the same amount of income and increase the amount of paperwork, hurt
my cash flow, and increase the chance of not collecting. As long as I can have
customers pay the contract up front, that is what I stick to. In some cases, I
will accept a request to split a contract into two installments. When I do that,
it is not the same price, but is increased a bit. I have also encountered
situations where a machine is due for replacement, but the customer cannot
afford to at this moment. I will sometimes offer a three month or six month
contract for that period, but at a higher rate than 1/4 or 1/2 of their full
year contract. For example, I recently accepted two separate 6-month contracts
of $325 each, instead of the one year contract of $550. It cost them an extra
$100 for their indecision. Guess what happened? They bought their new machine
from a competitor. Not because of the $100, but for the usual reasons, which
made me extremely glad that I got that extra $100 out of them. I “worked with
them” as the saying goes, but it did not guarantee a sale.

What To Cover And What Not To Cover

I remember a dealer whose service contract read something like this, “All parts
are covered except rollers, belts, lamps, drums, solenoids, circuit boards,
switches, relays, plastic items, glass items, frames, clutches, electrical
components, and hardware.” He was a rather sleazy guy whose contract really
covered only labor. Of course the customer knew that if they read the contract,
but most did not. Some of us have a conscience and some do not.

Honesty Is The Best Policy

I like it when customers respect my company and me. I hate it when people feel
they were ripped off because the service contract doesn’t cover something.
Traditionally, service contracts have not covered drums or PMs. Many dealers in
the past did not cover lamps or fuser rollers, because these are “consumable
items.” You make your own rules. You do not have to live by what others have
done. In some cases, especially with low-end equipment, you might offer a
contract that does not cover drum, PM or fuser rollers, for a relatively low
cost (e.g. $350 for up to 20K). Typically, such a customer will ask how much it
would be if those items were covered. Do not try to add the retail cost of the
items to the contract. You will insult the customer's intelligence and they will
know it. You would have to show them a savings of at least 10% or so, to expect
them to be willing to pay for it in advance, rather than waiting until needed.
However, you have an advantage. If you cover drum, fuser rollers, etc., you can
replace them when they are needed, which is often later than the recommended
rating. You can also refurb where applicable.

As long as the machine is running well and they are not being hit with lots
of other machine bills, customers do not care what parts are in their machine.
If this particular (20K; $350) customer wanted an all-inclusive (except toner)
contract, I would probably offer it for $500. 30K drum costing me about $110,
meaning about $75 the first year (even though not used yet). Fuser and PM
dollars are only a few for the first year, so I wind up with about $150 up
front, although only about $50 is profit. However, I still have next year's
contract to collect before the work gets done; by that time other things might
change as well. If they go elsewhere next year, they will have already paid me
for part of the work that I won’t be doing. It sounds kind of weird, but that's
the business.

My Bonus Fuser Rollers

This is a little ace up my sleeve that I have used in the past. In many of my
contracts, fuser rollers are not being shown as covered. However, I have covered
them (and usually let the customer know verbally that I decided to). For some
customers, I have not covered them; especially customers who pay slowly, cause
many problems, and buy toner elsewhere. In effect, I calculate the contract with
rollers included, but the customer expects to pay for them. By being a good
customer, they are rewarded with a free set of fuser rollers as needed. By not
being so nice, they never know what they missed. Is that sneaky or fair? I don’t
know, but I think it is appropriate.

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