Service contracts have been a long-standing option for technology service small- to medium-sized businesses (SMBs) to create a steady stream of revenue and maximize ROI. But how does that work?
Let’s start at the beginning. A service contract is an agreement to provide a specific level of service and support in exchange for a fixed fee. Instead of guessing when a customer is going to call for service or new parts and sending an invoice after each separate occurrence, you can anticipate how many hours you will dedicate to a customer and how much revenue that will generate over a set period of time.
Contracts also allow your dispatch and field technicians to prioritize service tickets and make it easy to track the profitability and ROI of each contract. The goal, of course, is to generate a consistent profit while providing your customers with the same great service they’ve come to expect at a standard rate.
Here is how you can set up service contracts to maximize ROI in five easy steps:
The best practice is to gather at least six months (but longer is better) of data to calculate what you should charge to ensure profitability. The easiest way to gather data is to use a service ticketing and IT help desk software.
Be sure to include all the necessary costs, such as:
- Number of service tickets
- Total technician time spent resolving issues
- Travel time and other necessary downtime
- Overtime and on-call rates
Once you have collected all of that data for each customer, add up the costs and compare that to how much you were paid. Set the contract rate above your costs to ensure ROI.
Set the priority level
All customers are not created equal and neither should your contracts. Give your top clients the attention they demand by providing faster guaranteed response and resolution times in exchange for paying a higher rate.
Create your own internal identifiers for levels of accounts, such as different colors of a fire like Yellow, Orange or Red or something more fun like Spark, Burning, Blazing, Molting and Inferno.
Ensure your service ticketing and IT help desk software can track response times by priority and allow you to create a report, analyze and make sure you’re hitting your metrics. The priorities should mean something and not just be a label.
Determine what is covered
Service contracts can cover everything or any number of individual items or services and a dizzying amount of combinations. For example, it can include labor at no charge or at a discounted rate, it can limit coverage to specific products or services or it can be pure preventative maintenance.
If a contract covers specific items, you will want to get into the habit of creating service orders in your service ticketing and IT help desk software that are tied to your customer assets to make sure the correct contract is applied and time and cost is accurately logged.
Select the proper basis to track and rate
The contract basis is a contract’s heart or core metric you wish to track while this contract is in force. What is the design or the contract? What is its purpose?
Standard options for IT services companies are:
- Time period: No matter what is done under the contract, it is covered. Typically, people will match this basis with specific items, but occasionally it will cover everything.
- Hourly: Specific amount of hours
- Hourly usage: Specific amount of hours refreshed per period
- Prepaid: Specific dollar amount
- Metered: Specific metric, such as copies, prints, gigabytes
- Metered usage: Specific metric, such as copies, prints, gigabytes, etc. refreshed per period
- Incidents: Specific number of service requests per contract term
- Units: Custom metric created by the service provider that is deducted based on hours. This is different than an hourly rate because different activities may have a different per hour unit rate.
Don’t worry too much about which option will help you generate the most revenue. Instead, focus on the option that makes the most sense for what you want to offer the customer.
Choose contract billing cycle
Expected revenue then comes into play when you set the contract billing cycle.
Parameters in most service ticketing and IT help desk software can be set to one of a couple different cycles:
- Annually (calendar or fiscal year)
- Prepaid (one-time and up front)
At the end of each year, it is important to go back to Step 1 and use your service ticketing and IT help desk software to help you recalculate your ROI for each contract and make adjustments accordingly. This will allow you to keep track of which accounts have good ROI and which ones are costing you money on an ongoing basis.
The first step to setting up service contracts that maximize ROI is to implement a complete service ticketing and IT help desk automation solution, such as a PSA software or ERP platform. Download our PSA Checklist for Technology Service SMBs to start your search for the best solution for your company.