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Service Contracts: Part I

4 Jun, 2001 By: Jim Intravia imageSource

Service Contracts: Part I

In the copier industry, this is one of the most questioned and discussed
topics of all time; by both service people and end users. The only question that
gets asked more, I think is “Is it better to turn the machine off, or leave it
on all day?”

Contract decisions have a major bearing on day- to-day operations, as well as
cash flow and profit (cash flow and profit, by the way, are two very different

One of the misconceptions about service contracts is that they are big
moneymakers. Sometimes yes, sometimes no.

Why Offer Contracts?

There are several reasons why service providers like contracts:

· Service contracts are paid up front; good for cash flow.

· Service contract customers are locked in for a year. They are more likely to
remain your customer.

· Service technicians can concentrate more on being technicians, rather than on
customer relations. They can do their job with less customer contact, without
needing customer approval on repairs and without negotiating prices.

Disadvantages (To You) Of Offering A Service Contract:

· If you misjudge the machine's future performance, a contract can be a profit
loss to your company, regardless of how nice the cash flow was.

· You are obligated and required to take care of that machine for a year (So.
What's the big deal? This is what we do for a living.)

· The customer may be more likely to “cry wolf” and otherwise abuse the
situation, calling for service when not necessary.

Refusing to offer contracts (because you are afraid of the above results) can
result in losing customers. However, offering contracts at the wrong price, to
the wrong customers, for the wrong machines, in the wrong situation can hurt
your company. You can lose money in parts and labor. You can also lose money in
ways that are hard to measure, such as aggravation, travel time, loaner

In some ways, a contract is like insurance. A fee is paid in advance, for
things that might happen. It is unknown exactly what will happen. There are no
actuaries or underwriters in the copier business. You do your own research, make
your own decisions and take your own risks. So does the customer.

When To Offer A Contract

In my opinion, as a technician and dealer principal, I feel I am obligated to
offer a reasonably priced service contract for any machine I sell, whether new
or used. I feel that we can and should service anything we can sell. I also feel
a dealer has a responsibility to support a machine for several years after
selling it. Of course there are exceptions; customers who move, extreme
personality conflicts, extremely heavy workloads (beyond the original plans) or
other changes in circumstance, caused by the customer.

New customers (those who you did not sell the machines to) are a different
story. You have no obligation to them. They are coming to you, probably because
they are unhappy with someone else. It may be price; it may be quality of
workmanship, or other reasons. These potential customers should be handled with
kid gloves. They can turn into very good customers, or they might be someone
else's headache, heading your way. You will find that large companies take a
very hard line with such customers. They often will insist on doing all repairs
(fully chargeable) as a condition of offering a contract. This is a very good
strategy, but it will not necessarily work well for you and me. Large companies
service departments typically are not eager to take on new work. Employees are
salaried, and customers such as this present many problems to them. They only
want them if they are, theoretically, in perfect condition. You and I, on the
other hand, often want new service customers. So, we may decide to eat a few
small repairs in order to pick up a new customer. Be very selective in these

How To Offer A Contract

If the customer is one who you want (equipment you are familiar with, convenient
location, etc.) then you might choose to inspect the machine at no charge. If
you have no enthusiasm for this machine, but would still take it on, offer to
inspect at a fee; about 1/2 to 2/3 of a standard service charge. Of course, you
would apply the fee to a contract, if offered and taken. You might choose not to
offer, and they might not want your offer. Insist on payment for the inspection
charge when you complete your inspection. Of course, there are certain customers
this might not apply to. Use business experience and discretion to decide who
they are.

When you arrive to inspect the machine, do not bring any tools. I normally
bring my invoice book, a flashlight, and a clipboard with a blank contract and a
test pattern. Without tools, I can't fix the machine. This is more important
than it sounds. Technicians like to fix things, even when we are not supposed
to! I have found myself uncontrollably drawn to do a 60 second repair on a
contract inspection. Without a screwdriver, I can't even remove the glass to
wipe a filthy mirror. Jim the businessman has to take control over Jim the
technician in these cases. I will sometimes offer to service the machine if they
wish to pay for a full service call, rather than the inspection fee. And, by
applying that fee to the contract, they will have gained a working machine, and
I will have, in effect, a deposit on a service contract, which is now more
likely to happen.

I take my test pattern, and make sample copies at various density settings
and from all feed stations. I check copy quality, registration, and of course
paper travel; checking for jams, wrinkles or strange noises. If so equipped, I
also check the performance of document feeder, finisher, duplex unit, reduction
and enlargement. I ask for service records for the previous year (I ask, but I
don’t insist. One of the reasons is to know who serviced the machine; that can
be a big factor in the equation.) If I do not receive service records, I find
some method of estimating the average monthly workload. In some cases, I just
divide the copy count by the approximate age of the machine. With the help of
the service records, I can usually see how well taken care of the machine was,
how frequently and why the customer called. These are factors in my decision
process. I then open up the machine, and inspect carefully with my flashlight. I
look for condition of coronas, exposure lamp, drum, and fuser. I also look for
stripped screws, electrical tape, and other examples of incomplete or sloppy

It is rare for me to offer a contract on a machine in very poor condition.
However, those machines usually have a long history of neglect, part of which is
the customer never spending the money for a contract in the first place, nor
being willing to spend money on an estimate. Those are the types who only want
to “put out fires.”

If The Machine Does Need Work, I Will Often Offer The Customer These

1. The work must be done, and charged for, as part of the agreement.

2. The work is not done, but it is not covered by the contract, nor is any
problems caused by this lack of work covered by the contract.

3. If these problems cause service calls, the calls will be charged for and the
work will have to be done. In reality, this rule does not have to be enforced.
One mistake service call is about the worst that ever happens. I let them get
away with it, and repeat the offer to do the repair, and let them know that we
will not respond again to that problem, unless they are willing to pay for the

This is not as unusual as it sounds. A machine might have a pinhole in the
drum, or refuse to feed from the bypass, but is otherwise perfect. The customer
may use the machine at a loading dock, or just for file copies, and may not be
terribly concerned with these problems. As long as they understand that they
have to continue to live with that, but other aspects of the machine will be
taken care of, it may be a good deal for both of you.

Existing Customers

If you sold a machine new, you have an advantage. You are the customer's only
industry contact, at the moment. You have a machine with all new parts¾no
surprises. However, this does not mean you should reduce the contract price.
Assuming this customer stays with you, the little bit of extra profit made in
the first year (by requiring less service) will subsidize the lower profits of
the succeeding years. If a customer chooses to take their chances for the first
year, and ask for a contract later on, they should not get the same price
originally offered. It should be higher. They have, in effect, taken your profit
and made it into their own cost saving, by skipping that first year or two.

What To Charge, And When To Collect?

There are many ways to answer these questions, and there is plenty more to talk
about. Remember, that collecting in advance is one of the main advantages of
selling service contracts. Next month, we will continue, including pricing,
billing dates, obligations, when to say “no,” and worst case scenarios. Wouldn’t
it be nice if we could plan on best-case scenarios?

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