Escalating Maintenance Agreements

Art,

We build in as much escalation as we can.  Sometimes up to 15% on bundled lease/service...sometimes 5% on service only.  On occcasion, none at all (primarily true produciton print accounts).

Ours escalate annually at 15% of the service payment.  While I understand the need for this type of clause to hedge against cost increases from the manufacturers, gas prices and the like, think it has gotten out of hand.  If a clause states that service may increase by up to 15% per year, that shouldn't mean "regardless of what the profitability is on your contract, we are going to increase it by 15% every year." My feeling is that every contract above a certain monthly payment (let's use $1,000 as a simple example) should be examined on an annual basis to determine how much of an increase, if any, is warranted for that contract.  If it were my business, I would take it a step further and be transparent to the client up front, stating that in order to deliver a high level of service, our contracts need to operate at a gross margin of x% & that if a contract is a certain % below that margin, we will escalate it by the % necessary to bring it closer in line with that margin, not to exceed 10%, 15% or whatever. Additionally, if a customer is running well above that established margin %, I would keep their contract static or even consider providing some type of rebate to be put towards other products or services we offer. 

 

The fact of the matter is that it isn't our customers' jobs to make us profitable. As long as a customer's page coverage isn't out of whack (which most contracts allow for adjustments based on this anyway), we should be able to hit our target profit margins by doing a more efficient job of resolving issues on the first call, negotiating better pricing with suppliers & resolving more basic issues remotely without dispatching a technician.  Other more common sense measures would be to just replace printers that cost more than $x to repair.  It makes no sense to spend 2 hours in labor & $500 in parts to repair a printer when a refurbished one could be purchased & deployed for a few hundred dollars. Don't turn in a sales lead for that printer to be replaced; just replace it, because it is right for us and the customer.

 

Something else to address would be staffing levels.  I'm not one to start axing jobs, but this is a business.  If you have technicians, administrative personnel, sales reps, middle managers, etc. that aren't performing as expected, get rid of them and consider eliminating the position unless that role is essential to delivering a high level of service & responsiveness to your clients. Having warm bodies for the sake of maintaining headcount is an exercise in futility that our industry has embraced for ages, & it makes even less sense now than in the past since so much can be automated using technology, something we claim to be experts in when speaking with our customers.

 

 

24,

While I agree with some of your comments, most of them are broad stroked ideas that in my opionion, would eventually lead to a failed business.  And, good luck with having a conversation with all of your customers informing them that you need 45 pts(or whatever you think you need to survive) of profitability and that if thier account does not lend that percentage, you'll increase their expendature...whenever. 

Just an opinion.

 

I think having a business conversation with a customer or prospective customer is a better way of going about things than burying a clause in a contract, hoping they don't notice it & then fielding phone calls & emails from upset customers every year when their costs unexpectedly increase. The younger generation of decision-makers are looking for business partners, not vendors, & partnerships are a two way street.  Some buyers may not appreciate this way of thinking, but I would argue that it is better to have a smaller number of clients that value relationship & thought alignment versus a larger number of customers that do not. If you are going to have an escalation clause, the right thing to do is evaluate whether escalations are necessary on a case-by-case basis, & inform your client what escalation they will receive so they can plan & budget for it. The easy way to do things is to make escalation percentages the same (and maximum) across the board by checking a box in your ERP system, but that doesn't make it the right thing to do for your clients.

 

Maybe I'm an idealist, contrarian or some other misnomer, but business owners & executives today appreciate transparency which is something our industry, by and large, is hesitant to deliver. I'm having a hard time seeing which of my ideas would lead to a failed business.  If it costs $700 in parts & labor to fix a printer, & we put in a $200 refurbished printer with the same features, CPI, etc, that makes complete sense.  Likewise, if you have under-performing staff that aren't contributing to delivering a better customer experience, it makes sense to part ways with them, & if you can't find someone with a proven track record to replace them, & their position isn't a dire need don't replace them until you find a good fit.  There's no reason to fill a position with a sub-par employee just to essentially have an empty shirt & tie sucking away company resources.

Personally, I would rather be upfront with the customer (in many cases I am), rather than "hiding the cheese".  I will admit that there are many occasions where I do not address the escalating cost of the service agreement, if it is brought up, I will then address it.

 

I just see our industry as a whole "hiding the cheese" in many places.  I will strive to tell more clients about the escalating increase, because I don't want to have a irate customer call me after the first year has expired.  Even, if you do make it right for that customer, in the long run they will remember the rate hike a lot longer than the discount you offered them after the fact.

 

When I started, maintenance agreements were an insurance contract for the customer and a revenue stream for the dealer.  With many contracts you ate the bear and with a few contracts the bear ate you.  Of course, when the bear ate you, you increased their contract.  Over time, the mentality has changed that you have to pull a profit on every agreement.

 

I am not against profit, however, I'm against hiding the cheese.  For one, I will be forth coming with explain the escalating costs and if it means that I lose business, then so be it.

 

 

tx, you are contrarian, and there's nothing wrong with that!!

24,

All great points.  Good selling.

Here's a different take and I'm going to use leasing to illustrate my point. 30 years ago the rate factor we used to calculate a monthly payment represented the leases's "true cost". Then our industry demanded lower rate factors without any concern for the terms of the contract. Over time, lower rate factors were offset by alternative forms of revenue for the leasing company...evergreen clauses, exaggerated property tax bills, forced insurance, etc. and the list continues to climb with the more unscrupulous lessors. Who's to blame? We are by not caring about anything but getting the highest funding for the lowest payment, contract terms be damned! We aren't signing the contract, what do we care? The monster is of our own creation.

What does this have to do with escalation clauses? If the customer is going to pay attention to nothing but the maintenance rate, we, in order to survive, have to give it to them and come up with "alternative forms of revenue" to make it up. The sad part is this is not the reason for the escalations. If it were, I could more easily support them. Give me 20% lower cpc's 1st year with the intent of making it up over the next 5 years and we could rule the world. Unfortunately, what would have been a great idea before the advent of escalations, is now impossible because the powers that be have embraced the clause and have already made it an integral part of their profit structure.

here, here

But now even, those "low" rate factors are now bumped to the sales person. Thus, the customer gets no advantage.

The same goes for the "points" or "ticks" dealers add on to the rates they receive from their leasing partners.  At a certain point, if dealers truly want to transition to a services business model, they are going to have to choose to make their money on services & forego some of the markup they put in lease rates, equipment, etc. in order to remain competitive while growing profit in the most important piece of the business.

 

For that to happen, they would also have to share a little bit of the golden calf (service) with sales reps in order to give them a vested interest in supporting a profitable service-led model.

We have the clause in the contract in bold on the first page.  Always have.  We have rarely raised any contracts though.  Now we find customers with 8-10+ year old equipment where today they are still paying the same cpc as they were on day one.  Our old software never had a means to efficiently track it.  Our new software lets us very precisely monitor and manage these things.  We have begun increasing the contracts on the oldest garbage we have in the field.  Believe it or not we are now getting complaints from customers with ancient equipment when they are getting their first cpc increase EVER!!!!!  One customer has been flaming us over their first increase EVER on a 9 year old mid volume B/W.  All told the increase amounts to $5 a month additional on their bill.  Have mercy!!!!  We are also having difficulty going back and upgrading customers with these dinosaurs without being able to have the benefit of offering a savings on their cpc with the new gear.  I've got to say our fleet in the field performs very well and our techs do a good job but UNCLE!!!!  Damned if you do damned if you don't.

Our dealership increases the service portion of an agreement 12% per year or if we lock in the rate (up to 5 years on a new machine) then we take a 5% hit on the machine and a 3% hit on the maintenance agreement. I do not see a problem with a 4-6% increase per year ...that is easy to explain but 12% kills us on getting new business.

Jredmon:

 

got it, are you having problems with existing accounts also when they are close to end of term?

For a long time we did not increase an agreement and we had a lot of old equipment that was difficult to upgrade due to the low cost but on the other hand as we implemented the 12% increases we had issues with the current customer feeling that we had taken advantage of them....Mainly due to the verbage on the contract that says "we may increase the agreement up to 12%", well we definately did the increase and at the 12% rate. Customer was hoping that they would not see an increase but if they did it would be at a lower percentage.

May should not mean 100% of the time we will at the maximum percentage allowed by the contract. Not a good way to earn and keep the trust of a client.

True...Very True....Much easier to sell and get the customer's buyin to a 4-6% increase.

True, but even then a client whose contract is performing within an acceptable range shouldn't be subject to an increase & I'm sure would appreciate being notified I advance that will not face an escalation in applicable years.

I'm told that he sales department makes zero profit, when in fact, if it were not for salespeople gaining net new, and keeping new accounts, there would be no service revenue.

Thru the use of our ERP software we review each and every contract annually for profitability. The % of increase, if any, is based upon the profitability of each contract. We do not do a blanket increase for the entire base. Increases can range from 0% to what ever it takes to get the contract on track. The whatever it takes amount is typically due to new customers having an extraordinarily high usage of toner. We track this and point it out to them as justification for the increase.  

 

Lets face it, every business has a different printing/copying trends/habits. Printing habits and machine performance has to be tracked on a case by case basis and adjusted accordingly. We let our customers know up front at the time of the sale that we do track profitability on each contract and it may be adjusted accordingly. Toner usage is typically one the biggest drains on the contract revenue (but not always) and we explain up front that heavy toner usage will effect the contract rates, especially to new customers that may not understand why they had increases from the previous equipment provider.

 

If the contract is not profitable due to performance issues we try to identify the issues and get it under control. We do have unprofitable contracts (but not many) due to poor equipment performance. We try to identify weaknesses in products and let our sales department know what they are and how to avoid placing equipment in areas that do not fit the product. At the time of the sale we also educate the customer that the contract is like health insurance, the older the equipment gets the more maintenance it will take to keep it running efficiently for them.

 

As for there being "cheese in the contract", how is a dealer to grow its business if there isn't any cheese. We follow industry model benchmarks and thru proper customer and employee education you can avoid the customer shock of increases.

 

 

Perfectly said.  I think we all agree (as would most of our clients) that a business has to make profit in order to stay in business, invest in growth & deliver a high level of service & support.  What you just described, BG, is the transparency that I am certain most of our clients (at least the ones we want & have quality relationships with) would very much appreciate.  Cheese is good & essential; it's the "hidden cheese" Art referenced that comes across as shady or underhanded. Most clients understand (again, at least the ones we want) that financial dynamics may change in one way or another, but we need to allow them to be prepared & budgeted for any potential upward adjustments versus forcing them to be on the offensive when they get blindsided by an increase in their monthly payment.

So, the cheese in not the profit. I'm all about profit.  It's those agreements and or contracts that state "may raise", "is subject to" , "could have", and never go on to state what the increases are on a year over year basis.

This is what we use to differentiate us from our competition. Honesty up front and no extra hidden billings. There are a number of dealers that don't track profitability or know how to properly price a contract from the beginning. They just raise contract prices because that's what they think the industry does. They have no clue if they are making money on a contract or not. They end up giving the rest of us a bad reputation. Its a painful education process for customers but well worth it once they can see the difference in our dealerships practices. I am sure some dealers know their profits but still go for the cheese, but it is not a practice that we choose to follow. Honesty wins out over time.

 

What about lease escalators? I see more and more dealerships that are escalating the customers lease agreement by 10% to 15% every year on top of 10% on every maintenance contract and charging shipping and handling fees for every INVOICE that goes out by 5% to 7% of the invoiced amount (nothing is actually physically shipped, just an invoice for maintenance contract or monthly lease bill). Now to me these practices are underhanded and cheesy! The lease escalation to me are ridiculous. The stated selling price of the the machine that the customer thought they bought is not what they end up paying. Ten percent increase every year on a five year lease can add up to a substantial amount. 

WOW, this topic is blowing up!  Don't want to get off track of the main topic here, however, under many cpc leases there is a clause that the entire monthly cost can increase by 10-15% each year.  So, that's hardware and service, woweeee!!!

The competitors who have clauses in their contract that allow the total payment to be escalated by a certain amount are the easiest to sell against if you know they're in the deal early enough in the process to expose it as an issue.

Germane to the question, haven't seen those kind of escalations. We do increase maintenance reasonably after 5 years.

 

An underlying question comes to mind though; why is it some dealers feel they need to escalate exorbitantly, if they do? Is it related to our industry's 'race to the bottom' pricing-wise and a dealership's desire to make an account profitable after-the-fact? It might not be pure greed. That, combined with the deterioration of customer loyalty and the 'commoditization' attitude of end-users towards MFPs, I believe, leads dealers to feel they'd better 'grab it while they can,' since there's a likelihood they might not retain that customer anyway. So, is that what drives this escalation? Perhaps it's a two-way street. There's plenty of guilt to go around, in other words.

I quipped about the possible comparison between maintenance contract escalations and the alternative forms of revenue embedded in most lease contracts. With all the talk about how important it is to be honest and open with customers, I can't help but wonder how many of you are honest and open about the lease contract you ask them to sign. Do you explain to them that they will be getting an extra invoice every year presumably to pay the lease company's property tax? How they will need to jump through hoops to avoid insurance charges? How if they don't communicate with the lease company well in advance of the expiration that the lease will automatically renew, and at the end of the lease they will be responsible for shipping the equipment back, repairing anything that may have broken in transit and pay a restocking charge? What about the pre-pay penalty for paying the lease off early? Your lease might not have all of these but I bet it has some.

I'm just saying you might want to analyze just how truly open and honest you are before criticizing the lack of communication in others. What you see in others I might possibly be able to see in you.

This is the highest level of integrity in our business. Every account has to stay profitable, and if it's not, then you either cancel service or increase the rates. But if you have to increase your rates by 15% or 20% to stay profitable on service, then you are quoting service rates far too low.

 

As a sales person, I understand that we have to be competitive on the cost per copy. But you also have to SELL the service. When customers ask me for fixed rates, I tell them that we can fix it for 7 years if they want. But then we'll have to cancel their service after 60 days! Service must cover the cost of parts, toner and labour (time to fix + gas). We're in this business to make money.

 

Old equipment will naturally have spikes in the cost per copy because they become more expensive to fix over time. And if a customer has a 10 year old machine and doesn't want to replace it, who cares? Find other business opportunities. Eventually that machine will die and you will be the first person they call.

 

What bothers me is:

 

a) Sales agencies that fix the rates for 5 years at $0.007 on an A4 printer doing 1500 per month.

 

b) Companies that build the cost of the equipment into the service agreement with a minimum and don't lower the cost per copy at the end of the lease term.

 

c) Sales reps who sell a colour machine at $0.06 per page when the customer is only doing 20 colour prints per month.

 

d) Companies who under-quote on the cost per copy just to win the business knowing that they can jack the rates 12 months later to make up for the loss.

 

Just my $0.02.

I'm sure others in the room with a number of years in this business & had to deal with questions regarding return shipping, insurance, auto renewal, property tax and the like learned early on that it's best to bring all of the above to the attention of their clients early in the process versus getting put on the offensive when a customer gets upset.  I for one address each of these on the front end virtually every time I take on a new client.  Occasionally questions still come up, because not everyone remembers everything all the time, but this approach at least minimizes
the likelihood of issues arising.

When it comes to leasing, I address everything, the insurance, the doc fee, no property tax here in NJ. I also have the discussion about all of the  end of lease options. With some companies I even prepare a SOW and make then sign it.

 

What I don't discuss is bumped rates, now that crap really PO's me.

At the end of the day, I believe the industry as a whole needs to be more transparent.  Probably will not happen, but that's my opinion. 

 

I will have the come to Jesus talk with my customers about escalated maintenance rates, just because I don't need the hassle down the road or to lose a customer, they are just to darn hard to get nowadays.  I'm sure, I won't get as many deals because there will be other salespeople that will lie about their maintenance costs or they are so new and naive that they just don't know or don't care.

 

I will ask the customer if they are comparison shopping to make sure they ask the question about escalating clauses and that they get the increases in writing if they decide to move forward with someone else. I will also suggest that if they can't get it in writing then they need back away. 

 

Art, how often do you explain it and then get people who call back upset because they weren't listening.

 

I just had that instance the other day. A guy bought two small machines all over email, wanted me to compete with Canon Solutions America, so on so forth. I quoted him a price for the units and he said it was too expensive. I told him to go buy it from Canon as we weren't a non profit and he was paying less that we could buy it for. He bought it from us at a higher price, I went over all the terms with him, and now every time something comes up his response is "no one ever told me about that." - Insurance, Sales Tax, Networking fees down the road, service increases...The list goes on and on. I really didn't want his business and told him several times that he should buy it from canon direct but he kept coming back, and now I know 100% my gut feeling about walking away was correct on the front end.

Our contracts say 10% annually on the service. We don't increase the lease payment portion. We will negotiate as it seems the Directs will give someone a 2% increase and point out everyone else is 10%. I have customers who are as low as 4% but the majority are at 10% annual increase.

 

My favorite is when a customer doesn't send in proof of insurance then gets mad at me when the realize they've been paying for insurance all along at the end of term.  I give the same speech on every lease advising them to send it in.  Sometimes I even do it for them.

There will always be an animosity between Sales & Service. Currently this is the most thorny issue (as long as your Service Dept provides good service).

 

This stems, in part, from the Manufacturers getting into Direct Sales. To be fair to the Manufacturer's Direct Sales the trend was already heading this way, they just escalated it and made it significantly worse. Click charges getting lower and lower killing the golden goose of the Dealerships = Service & supplies billing! We can discuss how CPC contracts exasperated the problem on another thread.

 

How many of you remember when a color click charge was 25 - 45 Cents or higher? In those days when we would sell a $100K Canon CLC \ Fiery combo we would install and configure a network at no charge because there was so much margin in the deal. But as our industry matured margins shrunk.

 

Then add in the _BS organizations (RBS, CBS, TABS, KMBS, etc) where there sales model is to move as many boxes as possible, and the profit be damned. They add significant downward pressure on service click charges to win deals (Dumping in my opinion). This all adds up to to Service Departments not making anywhere near the margins they use to.

 

Some independent sales folks do play a hand in this issue when they don't try to get list price for service when they can but always sell at the lowest possible click charge they can get away with. The truth is good service costs money. And ridiculously low service click charge make it difficult to provide quality service.

 

Let me say that there is nothing wrong with making an honest profit. I tell customers up front that we will NOT be the cheapest price. If they are looking for the cheapest we won't be it. We provide value, good service & support after the sale, and a high level of MFD integration. If you try to be the cheapest you will go broke. And you didn't go into sales to go broke. It's not wrong or evil to make a profit, for you or your service department.

 

On a more positive note service cost escalation makes it easier for you to sell new equipment because as the total monthly cost of keeping their current equipment rises your cost of replacing it with new equipment becomes more attractive.

 

Half the issue can be resolved by the tone and attitude that you take when you address the issue of escalation with a customer. If you start out by being apologetic you have put yourself at a severe disadvantage. If you are more objective and start with the understanding that the older equipment gets the more expensive it is to provide good service. Review the Service History and see if they are getting a lot more service, or if their Color supplies are higher because they do a lot high color coverage single click 11x17.  Or maybe they need some additional training on how to clear a paper jam or clean the slit glass.

 

I am going to get off my soap box now. Thanks for indulging my nostalgic ramblings! :-)

 

That's my $0.02,

Vince