The FT Word
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Welcome to the July 2008 edition of the FT Word. Feel free to forward it to your colleagues. (They can get their own subscription by clicking here.)
This month’s topics:
- Support discounts: how far can they go? For all of you who think we are giving away the farm, and more.
- Promoting electronic case logging – so the team can concentrate on urgent issues
Support Discounts: How far can they go?
Thanks to Syed Asif Ijaz and several others for suggesting this topic.
Those of us with experience in startups know the answer to this question: all the way to “free”. But as companies grow discounts become less wild, both because customers don’t need to be wooed in quite the way early customers need to be, and also because there are accounting rules that (thankfully) limit the scope of discounts. What’s the typical situation for packaged enterprise software?
1. Support is priced as a percentage of the license price of the software. It’s rarely priced as a fixed fee, except when selling account management or other headcount-based offerings. In that situation the support price would be a percentage of the license price for the base support offering plus the fixed fee for the premium offering.
2. Support may be priced as a percentage of the list price or the actual (net) price.
3. A handful of vendors have a strict no-discount policy when it comes to support. This is quite rare in my experience: at least for the high end discounting is common, expected, and without undue negative consequences if properly managed.
4. Customers expect support discounts for larger deals and vendors have guidelines in place for support discounts similar to those for product discounts..
5. When support is priced as a percentage of the net license price there tends to be little discounting. (Although clearly a customer who negotiates a good discount on the product is getting an even better deal on the support!)
6. When support is priced as a percentage of the list price the floor price (maximum discount) for support is typically the same percentage of the net price, that is the same discount level as for the product. So if the list price for support is 18% of product list the actual price will be no less than 18% of product net. The advantage of this approach is to offer a relatively safe discounting technique but on the other hand having negotiated for one factor (net vs. list) may open the door for more negotiations.
7. Many vendors try to limit support discounts to the first year and to resume “normal” pricing later. This is a great idea but customers often balk at steep increases in the second year.
8. To avoid repeated haggling sessions about support pricing at renewal time some vendors define renewal pricing rules right from the start. For instance will the renewal price be determined from the then-current list price (the simplest way to administer it from the vendor’s perspective) or from the previous year’s support cost? This is a great idea.
9. Most customers now insist on yearly caps on support increases. The caps are usually defined according to a specific consumer price index.
10. Vendors need to follow accounting rules, in particular VSOE (Vendor-Specific Objective Evidence), when administering their support discounts, to be able to show that they have a fair way to determine pricing across the board. Over the past few years this has led to a regularization of discounts that has many positive consequences including: fewer wild discounting instances with more rational discounting rules and simpler renewals.
I used to campaign for pricing support as a percentage of list price with limited discounts (lower than product discounts) and I still think it’s a great idea for vendors that have a good sales administration discipline. For all others (and that means most vendors!) I now believe that a straight percentage of net with no other discounts is the best approach. It’s simple, automatically meets VSOE requirements, and not so bad for support revenue as long as product discounts are managed reasonably (a big if, to be sure…) It also makes it relatively straightforward to compute renewal prices: take the then-current list price, apply the same discount the customer got when buying the product, and take the same percentage off that.
With all that, I find that my customers in the enterprise software world have effective support rates of between 15 and 18% of net, a bit lower if they have very large customers who are more effective at pressing for discounts. Would love to hear about your experiences with support discounts.
Promoting Electronic Case Logging
Thanks to Somaraju Chilukuri for suggesting this topic.
Most companies give customers a choice to call or log their issues electronically, but almost all prefer to reserve the phone lines to the truly urgent issues. How can we incent customers to log cases electronically so we can avoid those long conversations about low-priority issues that lead to neglecting customers who have higher-priority issues?
1. Modify the support contracts to make electronic logging the default logging mechanism.
2. Promote electronic logging as the best way to log issues in your customer handbook and online instructions.
3. Simply the entitlement process. Step one for logging a case online is having a working login and password. Streamline the process, especially if your customer base is dynamic. It’s easier to pick up the phone than to struggle with a recalcitrant web site.
4. Make electronic logging pleasant and effective. This is not about having a beautiful web site (although that helps!) but more about functionality: is the site consistently available? Is the logging process as quick and painless as possible. For instance: does the electronic logging option show up before the phone number (don’t hide the phone number completely, please!)? Are customers presented with 27 products to choose from rather than the 2 they actually use? Do customers get a confirmation number immediately upon logging a case? Can customers attach logs and other details to the request?
5. Respond swiftly to electronic requests. If customers who phone in get immediate response and customers who log electronically have to wait two days, guess what customers will do?
6. Remind customers who phone in about the portal. This is an appropriate use of the welcome message on the ACD. Don’t overdo it, though! Repeating the web site address multiple times during a single wait is very tiresome.
7. Smoothly limit the length of the initial phone conversation for lower-priority issues. This is a good customer skill to work on with the support staff. After logging the issue and determining some basic facts, say “I understand your issue. Let me do some research and get back to you by tomorrow.” Or “In order to proceed, we will need to take a look at your log file. Can you please extract it and post it on the portal?” Avoid pointing out that the issue is not that serious. No one likes to be reminded there are many other customers competing for the same scarce support resources. In extreme situations, pleasantly schedule a time to touch base. “I see I have a commitment for 10 o’ clock. Will you be in the office later today so I can report back on a solution?” The commitment could be working on a P1 cases, or it could be a break – no need to elaborate.
8. Leverage the portal for updates. One of the best ways to highlight the case management portal is to refer customers to it when they need it: during the resolution of a case. Once customers are used to checking the portal for updates they are much more likely to use it for logging new cases.
9. Beef up self-service. Another way to highlight the case management portal is to drive customers to the support portal in general. If they can search a good knowledge base or use forums they are much less likely to pick up the phone.
10. Consider using callbacks for low-priority issues. This is extreme and may well alienate customers, but it can be helpful if the team is overwhelmed. Simply take a message and commit to returning the call within the target response time. This may create phone tag issues but it clears the deck for truly urgent calls.
Many of my clients report that 80% or more of their cases are logged electronically. If your experience is significantly lower you should be able to improve your performance by providing a good portal and reinforcing the benefits of using it with each customer interaction.
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