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The Other Side: How did we get here?

Luckily I have been able to take advantage of the summer and take some vacation. This always helps me reset and provides the necessary time to just think about things. On one of my recent fishing trips, I was pondering how and when it became necessary, in the eyes of the manufacturer, that the purchase of a service contract is as necessary as the equipment itself. I think it is easy to take all of this for granted, because biomeds have typically fought the battle of service contract purchases on the front lines. Every day, we must consider the value, necessity and benefit of purchasing or not purchasing a service agreement. Sometimes, you are so close to the problem, you can’t see it clearly enough to ask the important questions, such as, “Why do I have to make this decision at all?” Let us step back and think about what is going on here.

I would like to start my discussion with a few premises that the industry at large has agreed upon lately. Medical equipment has become more reliable. Anyone who is been in the field any length of time should be experiencing first hand that newer equipment (in most cases) does function more reliably than the models of the past. Medical equipment has not gotten cheaper. As I look at the electronics industry as a whole, it is developing ways to make things faster and cheaper. However, these advances have not lowered the cost to the customer for medical equipment. I know there are some exceptions to theses premises, but I think that broadly, you should be able to agree with them.

I am going to try to walk you through my thought process on this subject. I will so list some of the sales pitches and tactics that OEMs use to justify purchasing a service contract. One example is calling a service contract an “extended warranty” and including it as a line item in the purchasing quote, included in the bottom line price. To get the amount removed, a new quote must be prepared, thus delaying your purchase. When you purchase the service agreement, you will be given priority for any repair calls or PMs. Only the “OEMs trained technicians” can perform the service on the equipment. Replacement parts are so expensive that a service contract is the only way to protect yourself from a major repair. The OEM will only sell parts to a trained and “certified” technician that must be re-certified (at your cost) annually to continue to get parts. They’ll say, “We will guarantee your uptime with a service agreement. A service agreement will include any service software upgrades and discounts on functional upgrades. We do not provide tech support to customers that do not have a service contract.” This list could go on and on I am sure. Ask any biomed and they will have a good story about how an OEM tried to scare them into a service agreement.

As I thought about all these different reasons and tactics, I wondered if there is any other industry that goes to these extremes to keep a customer on the hook (for fresh cash) for the life of the equipment? Imagine if one car company installed pad locks on all the hoods of their cars so only their dealers could service them. How many cars would they sell? Imagine if all of them did it – what would the consumer do? What would happen to any company, in the consumer world, that tried to bleed customers dry once they purchase their product, (like OEMs do)? The consumer would quit buying and the company would go out of business. However, if all companies do it and the product is necessary, then consumers have no choice. After discussions with a few friends and colleges who do work in the manufacturing industry, I could not find another industry that works as hard as ours at keeping customers on service contracts.

Finally I had an experience that illustrated how far the OEMs have gone to secure this revenue stream. Last week one of my patio chairs broke. The chairs were not too expensive ($80), but they were less than a year old. I took the time to examine what had broken and called the company. After a 10-minute apology, the customer service rep helped me identify the part, and they sent me the replacement – for free. This made me question how much profit they must’ve made on an $80 patio chair, if the company can provide free technical service and free replacement parts. But somehow a company that sells devices for $2 million only wants to help me if I give them another $250,000 a year?

If you think about the millions of things that are out there for purchase, what are a couple main selling points when companies are vying for your business? It is service after the sale and reliability. This contrasts the medical equipment industry sharply, especially when thinking about how service contracts are sold. It is almost expected that equipment will fail, so you need to pay now to make sure you get service.

Frankly I doubt we can reverse any of this and get to a point where medical equipment companies act a little more like their consumer industry counterparts. However, I find value in at least recognizing how silly it is that we have accepted this as the norm. I also enjoy utilizing these points on salespeople, even though it seldom helps.