Could Your Customers Survive Without a Maintenance Agreement?

In a recent workshop focused on Defending Maintenance & Support Pricing we had a great discussion about the value of the maintenance agreement for technology services. The consensus was that customers are putting pressure on technology suppliers to lower their service prices and are threatening to drop their maintenance agreements all together. If this happened it would have a major impact to the finances of all tech companies. But, will it ever happen? Will customers decide to “self insure” and not pay the service fees just to reduce their total operating expenses? I don’t think so! If they do it could have catastrophic results!
“Airline’s Computers Crash”, “United Flights Latest Hit By Computer Woes!”, Five Hour Computer Outage Strands Passengers”. These are all headlines from a recent IT disaster that hit United Airlines as their reservation system crashed and the company stopped operating for a few HOURS. Can you imagine the confusion that this must have caused? Thousands of stalled passengers, 36 canceled flights, and 100 delayed flights worldwide was the result of United’s computer system crashing all across the nation. What a travel nightmare! Did I mention that this all happened on “Fathers Day”?
But, the story gets even worse. There is a history of airlines and the computer outages that have crippled their business and done some major reputation damage. Alaska Airlines cancelled 140 flights affecting 11,700 customers in March due to a flight plan system that lost power. Southwest Airlines delayed 300 flights after a 90-minute telecommunication outage also in March. Last August in Europe 1,000 flights were delayed when air-traffic-control computers went down in the Netherlands. Are you starting to see a trend here? The scenario is pretty simple; Rely heavily on IT to run your business, lose the IT and you lose your business.

Can you image what the results of all of these IT disasters would have been if the airlines mentioned above did not have technical support contracts with their suppliers? How long would it take them to get back up and running if they simply had Time & Materials service agreements with service provided on a “best effort” basis. There are several reasons that customers need to continue to have contracted services in place for all of their major systems and just one of them is the ability to get immediate service for mission critical service requests. Remember that this is not a story about the airlines industry; this is a story about all businesses that are questioning the value of the services provided by their IT suppliers. They are asking the question “What am I getting for my maintenance dollars?”.

Your Service Revenues are at Risk!
If you are in the enterprise software/hardware business you know all about the maintenance contract for services and just how profitable it is to your company. In fact, profit margins from maintenance typically range from 75% to 95% and have been extremely stable over the past 20 years. During this time, customers just paid the annual renewal fees and life was good. Today, things are changing! Your customers are pressing hard to understand exactly what they are paying for in a maintenance agreement and want the price to be lowered.
A typical maintenance agreement has 3 components; upgrades, bug fixes, and tech support. These are all rolled together so that the customer never really knows the exact portion of money allocated to any one component. Hey, most times even we don’t know! Over the years we just created maintenance invoices and customers blindly sent us money that fell straight to the bottom line. Not a bad gig if you can get it. In the past few years we have seen more customers applying all types of pressure to reduce their overall IT costs. They have reduced headcount and curtailed new systems spending but the large amount of money that the CIO is paying for maintenance fees is really sticking out. It is one of the few places left where your customers are questioning the value they receive for the price paid. If you are not being asked to discount your annual maintenance fees, then you soon will be.
When this pressure from customers comes you have 2 choices. First you can roll over and give them a discount (that will probably last forever) or you can stand strong and defend the prices that you are charging. You are either a “fee defender” or a “fee discounter”. So, which one are you? What position has your company taken on the value of the services you offer customers and the fees associated with them? You need to make a decision pretty quickly because it will have a major impact on your overall company financials and your overall customer satisfaction (CSAT). Surprisingly, Fee Defenders have higher CSAT than those companies that simply give a discount when asked.
By now you probably get the message that you are going to have to take a pro-active approach to defending your maintenance pricing strategy. You are going to have to show “true value” to your customers so they see what they are getting and feel that it is worth every penny they pay. Actually, I don’t think that you should take a defensive posture at all. Be aggressive and establish the value proposition for all of your services for each customer BEFORE they come to you. This offensive approach has plenty of benefits that include allowing you to prepare responses to common questions before a customer pressures you. For example, how would you respond if a customer says “I am not using tech support so why do I have to pay for it?” What if they question the need to upgrade so frequently and would rather stay back 3 or 4 versions? How would you handle a customer telling you that your competitors are discounting their maintenance fees and you should too? All of these questions need to be answered with well-developed responses that support the value of the services you provide.

To really understand all of the complexities of this entire maintenance pressure issue I am taking my show on the road for a series of 1-day workshops. Together with the Kotler Marketing Group, we have developed a series of tools to help you defend your maintenance pricing. Over the next couple of months we will be in Chicago, Toronto, and Boston working with dozens of companies that are all trying to figure out the best approach to defend their maintenance dollars. These sessions are highly interactive, reasonably priced, and full of practical concepts that really work. If you are responsible for maintenance revenues then you really need to attend one of these workshops. If you don’t have responsibility for maintenance revenues, service marketing, or service sales please pass this link on to the person in your company who does. If you want to discuss anything about the maintenance pressure issue, just email me at BillRose@BillRoseINC.com
Want more info about the workshops?
http://www.kotlermarketing.com/service_dptraining_inc.shtml
If you have any questions, please contact the Kotler Marketing office at +1 202-331-0555 or via e-mail at seminars@kotler-announce.com

Download the Brochure here!

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2 Responses to “Could Your Customers Survive Without a Maintenance Agreement?”

  1. Haim Toeg Says:

    Bill – well written post, thanks. The connection between the ability to defend maintenance rates and customer satisfaction is intriguing. To me it seems a lot more plausible that companies with high customer satisfaction can defend their maintenance rates better than companies with poor scores instead of the other way round, where defense of maintenance rates drives higher customer satisfaction.

    Haim

  2. Monica Lynne Bower Says:

    Great article, but let me play devil’s advocate for a moment: Don’t the disaster examples suggest that you’re just as vulnerable to disaster with a costly OEM service agreement as you are with a third party or self-servicing? I suspect these catastrophes were at least partially related to a network failure, which can be caused more often than solved by an errant iOS patch. Networking hardware ‘maintenance’ is getting a part shipped next day from the OEM at best. Businesses that need constant uptime should know to go through an OEM VAR or a third party maintenance company that offers SLA based maintenance for the network, so they can get network monitoring and/or a technician onsite with the part within X hours, neither of which is available from the OEM. Failures still occur, but at least in those cases there’s an SLA and accountability.

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