Service Contracts

Many years ago, when I was working for a computer dealer, a customer came to me and wished to buy a service contract on his computers.  I suggested against it.  He was quite surprised at my recommendation.  I don't recall all the numbers, but I remember a few.  He had four low-cost monochrome monitors.  The service contract on each one of them was about $35.  The cost of a whole new monitor was $120.  I suggested instead that he buy a spare monitor, rather than the service contract on the four, and pocket the extra money.

I think he still bought the service contract.  He didn't know why, but he knew they were "good", and I was the first person he had seen who advised against them, so he figured I was off my rocker.

Here are some facts about service contracts:

Here are some thoughts people have about them
  Now, let's think about this, not from your normal perspective, but from the dealer's perspective...

You are a dealer.  You are in business why?  Answer: To make MONEY!  You are setting the price of your service contract...are you going to set it BELOW your cost of doing the expected level of repairs?  Of course not!  You will make a profit on it, and a fair chunk of the cost of the contract will be paid out as comission, so you will make a healthy profit.  So much for the service contract saving you money.

You are a dealer.  You have one technician available.  Two service calls have come in.  One is from a customer who purchased a service contract from you nine months ago.  Another is a prospective customer who has a problem right now.  Who do you send your tech to first?  The customer with the service contract, of course, you probably think.  Think again.  When the tech goes out to the customer with the service contract, what impact is there on the bottom line of your business?  Zero...or less.  All cost, zero income.  Ah, but you have their money already...  YES, THAT'S THE POINT!  You HAVE their money...rapid response to the call isn't going to help you at all right now.  You will send the tech out to the customer who is paying good solid cash first, in hope of impressing them with the service provided and selling them a service contract. The service contract customer will be taken care of, but later.

What happens if this one tech who really impressed you and inspired you to buy the service contract quits?  The assumption is that your dealer is the source of the quality, and they will go out and get another really good tech right away.  Great thought, and I'm sure they would love to, but few dealers have the money to pay techs well, which is why your favorite tech quit in the first place.  They will hunt for a while, and finally grab some guy who thinks computers are Really Cool, but has zero understanding of how important they are to your business (but he probably plays a mean game of Doom).  Mean while, you have a service contract with this company, and Tech Doom is all they got to fufill that contract.  When you got a problem, he'll be out to fix it, or at least stare at the problem for you.  He might even feel sorry for you.  But you won't be getting fixed rapidly.  Good technicians have an incredible turn-over rate.  They are poorly paid, they are abused by salespeople and customers alike, and big customers tend to snap up the good ones for internal support staff.

Service contracts lock you in.  You WILL get your service from the provider you purchased the contract from, or you will pay someone else, but you won't get a refund on your contract.  So, in effect, you may end up paying for service TWICE.  Don't think for a moment that you are tops on anyone's list just because they have your money already.  In fact, you will most likely end up on the bottom of the service list, exactly because they have your money already.

Now, there is one semi-valid reason for service contracts: To lock in repair costs.  Some organizations have trouble with unanticipated costs, namely government, non-profit organizations, and other horribly inefficient operations.  These groups have one of two choices: A more practical accounting system or service contracts.  They normally go for service contracts.

In short, service contracts are pushed hard by sales people for a reason: they make good money off their sale.  Your money.  Don't do it.

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This article (C)opyright 1998 by Nick Holland.