Companies that have been manufacturing and selling products for years or even decades are now realizing the reality of diminishing returns. It’s too easy for a competitor to copy what you do and quickly distribute it to the world. Rapid commoditization is on the rise.
At the same time, product ownership isn’t what it used to be in some industries. Renting a product, without the commitment and hassle of maintaining it, is gaining value. Consider the popularity of car-sharing services such as Zipcar and Uber in urban areas or the notion of renting software, now commonplace in the business community.
Launching services is also a way to grow sales of stagnating products and create more loyalty among existing customers. Soda was a tired product until Coca-Cola began delivering its colorful and fun Freestyle machines to restaurants everywhere. The Freestyle machines, which are rented, not owned, allow users to mix over 100 soda combinations. Coke also has mobile apps with games and offers, transforming soda into a consumer experience.
However, adding services to a product-company culture is no easy feat.
Our experts talk about the risks, potential roadblocks, and opportunities that companies face when they add services to their product portfolio.
Why are services becoming more strategic right now?
David Landsman: Companies, especially private companies, have to change their focus from selling goods to selling services. That’s very challenging for a lot of companies. But when it’s done successfully, it can be very interesting and open up a much larger market than originally anticipated.
I think about it in terms of high-end products being socialized across economic strata. There’s a company called Borrowed Time Watch Company, which lends extremely high-end watches. A $10,000 watch is out of reach for most people, but if you just want to wear one for a special event, you can rent it for $300 for a weekend. Therefore, the company’s revenues should be much higher over time because it will be able to get money out of the same watch over and over again. Look at Zipcar. It’s turning car ownership into a service: you just use a car when you need it and pay a subscription fee. Turning your customer into an annuity source of revenue for your company is hugely valuable. When people talk about the service economy now, what they’re really talking about is annuity revenue.
Dante Ricci: These days, you can offer services at the point of transaction through online technologies and a smartphone. When I’m on vacation, I check mobile apps like TripAdvisor and Yelp to find the best restaurants. I was entering a restaurant once and opened the Yelp app to see the reviews. It turned out the restaurant had a 10% discount that day.
Services are also growing from the need for consumer simplicity. You want to simplify your portfolio of products and services. Consumers don’t want to go to multiple providers to do their banking, shopping, and on and on. Amazon Prime is a good example: You can buy an array of items online and get quick, free shipping to your doorstep. Included in that membership price is instant streaming of video and music.
Dave Sievers: This is a continuous trend that’s accelerating with economic growth. Companies are trying to add more value for customers; often that includes a service component. A consumer goods company can provide inventory management and replenishment services to their retail customers. Nabisco, which is a Kraft brand, or Frito-Lay, which is a Pepsi operating unit, has merchandisers who go into stores and merchandise the product so it looks pleasing and is structured properly on the shelf.
How can new services complement an existing product line?
Joseph Pine: My favorite example is Case Construction, which created the Tomahawk Experience in the Northwoods of Wisconsin at the Tomahawk Customer Center. The company brings customers up to the center, where they can play with equipment and participate in contests, such as who can remove the most amount of dirt in the shortest amount of time. It might sound a little silly, but the company did a study and found that a typical customer who goes through a dealer has about a 20% conversion rate. At Tomahawk, that goes up to 80%.
Landsman: Rolls-Royce is a 100-year-old company that has been working on how to transform its aircraft engine sales into a service. It’s now selling the engines based on outcomes – charging for uptime instead of selling them outright. Rolls-Royce has determined that this is better for customers.
Airlines don’t necessarily want to pay for the engine and then maintain it, too. The trick here is giving customers the ability to use your products or services however they want instead of requiring
them to use your offerings in a certain way. Companies need to adapt. The more flexible your business model can be, the more successful the company is going to be.
What are the risks and the challenges?
Pine: Whereas the manufacturing mindset is more about push, the services model is all about pull. There’s an intense focus on understanding customer requirements and on getting feedback from them all the time. You can’t take a cookie-cutter approach with services like you can with products. You can’t deliver one monolithic service and then mass-produce it. It’s also difficult to figure out how to charge for services. You need to charge in a way that captures all of the value that you’re providing and maybe even introduce dynamic pricing and customized pricing. You may need different types of salespeople to do that. It’s a matter of focusing on service as a business, not an adjunct offering.
Sievers: One of the biggest challenges companies have when they move into the service environment is that they can’t inventory the service. You have to be able to deliver it, forego the opportunity, or schedule it in some capacity.
You often need an entrepreneurial bent. Recruiting is also totally different, and that doesn’t necessarily mean hiring MBAs. The company might be looking for highly trained technicians who have the equivalent of MBAs in their field. It requires a continuous development of people to maintain their interest in working for your organization and to keep up the quality of the service. There’s also a need for a collaborative environment, where people with different skills are working together. A company must be creative enough to bring all those people together, productive enough to make them deliver, and competent enough to manage the service effectively.
Ricci: If you can’t align your corporate strategy and your core competency to the service, you’ll fall flat. You see this with acquisitions time and time again. Take HP, when it acquired EDS. HP had to take a loss on the acquisition and eventually pivoted its organization to better compete. In contrast, IBM launched a services unit many years ago that also helps drive more hardware sales. Ultimately, services became the bigger business for IBM. It aligned with its core competency and was a first mover.
TO LEARN MORE ABOUT HOW TO BUILD A COMPLEMENTARY SERVICES STRATEGY INSIDE A PRODUCT COMPANY, DOWNLOAD THE IN-DEPTH REPORT YOUR NEW PRODUCT STRATEGY: SERVICES.
The SAP Center for Business Insight program supports the discovery and development of new research-based thinking to address the challenges of business and technology executives.