Pricing service contracts used to be straightforward for OEMs. Most would offer simple planned maintenance agreements with pre-prescribed parts and labor and everyone was happy.
But, as customers seek greater flexibility around coverage, usage, and contract terms, what’s easy for the manufacturer no longer meets their needs. It’s also the reason manufacturers leave money on the table — pricing profitable business too high to win, and charging too little for contracts carrying real risk.
To capture more profitable service business, manufacturers need to understand what each agreement is likely to cost, where the margin is, and how much room they have to move on price — while still being able to respond quickly when the customer wants a custom package.
A more granular view of expected cost gives manufacturers a stronger basis for differentiated pricing. At the individual agreement level, that means reflecting the specific factors that materially affect cost and risk, from usage and geography to labor rates, asset age, coverage, and service requirements.
The same thinking can also be applied at a broader segment level. Customer type, usage profile, market, and contract structure can all influence both the economics of an agreement and how it should be priced.
When those differences are flattened into broad pricing assumptions, some agreements will be priced too high and others too low. In the first case, the manufacturer risks losing business it could have won profitably. In the second, it takes on more financial exposure than the price justifies. Over time, that can distort the mix of business: the more profitable contracts become harder to sell, while the less profitable ones continue to win, steadily eroding the economics of the portfolio.
Pricing also has to keep pace with changes in the cost base. Parts, labor, and service costs move over time, yet standard prices may only be revisited once or twice a year. If costs change materially between reviews, the business can spend months selling against an outdated view of the economics.
A more responsive pricing approach gives manufacturers a stronger basis for deciding where to protect margin, where to price more aggressively to improve competitiveness, and when changing costs warrant a pricing response.
Getting to the right price is only useful if sales can get it in front of the customer quickly enough. Sales needs to be able to shape an offer and get a credible price back to the customer without sending every variation through a lengthy manual process.
Defined pricing rules, margin parameters, and approved configurations make that possible. They give sales more room to adjust coverage, usage, contract terms, or other elements of the offer within clear commercial boundaries, while keeping the underlying pricing disciplined.
For one manufacturer Syncron worked with, speed to quote was a significant constraint with custom quotes taking as much as a month and only 7% being won.
In a proof of concept, cutting quote time to around a day lifted the projected custom-quote win rate from 7% to 20%, representing an estimated $10.4 million in additional revenue.
Pricing decides how much variety the business can support, how fast sales can respond, which opportunities deserve an aggressive offer, and where the economics say hold the line. It also shapes how effectively the manufacturer can keep the customer within the OEM network for parts and service business over the lifetime of the asset.
Pricing therefore becomes part of the commercial model for contracted service, with a direct bearing on sales growth, margin, and the amount of risk the business takes onto its books.
The strongest pricing organizations will be able to make those decisions consistently, with enough granularity to reflect the opportunity and enough governance to protect the business as the portfolio grows.
Every service contract price rests on assumptions about future cost, usage, service activity, and margin. Once the agreement is live, those assumptions start generating evidence.
Some contracts will perform close to plan. Others will generate higher costs, different service patterns, or margins that drift away from expectations.
Understanding those differences gives manufacturers the information they need to improve the next round of cost and pricing decisions, while also identifying live contracts that may require intervention to prevent continued cost overruns.
It also provides evidence about which customers, assets, coverage models, and contract structures perform well enough to repeat, refine, or rethink when the next offer is designed.
That leads to the third question in this series: how do you know whether the service contracts you have sold are actually performing as expected?