WHEN IT’S TIME TO GROW, EXPANDING YOUR PRODUCT R&D BUDGET MAY NOT BE THE BEST STRATEGY. COMPANIES IN EVERY SECTOR ARE EXPERIMENTING WITH ADDING SERVICES INSTEAD, AND FINDING THE PAYOFF IN HIGHER SALES, LARGER CUSTOMER BASES, AND ANNUITY INCOME.
For the woman who wants to dress to impress but doesn’t have the requisite trust fund, there’s nothing quite like Rent the Runway. She can rent a US$800 Badgley Mischka gown for $80, add a US$300 Kate Spade clutch for US$50, and stride into a wedding reception feeling like a million bucks.
Rent the Runway and the luxury brands behind it have turned products that are unattainable for most folks into affordable (if temporary) flights of fancy for the common folk. The trick, of course, is turning an erstwhile product into a service.
Consumer goods isn’t the only sector experimenting with novel services. From industrial equipment and construction to food and beverage and software, product-focused companies are entering the service economy.
Not long ago, service economy described phone and car technicians, waiters, hotel employees, personal assistants, house cleaners, and business consultants. Now the term has expanded dramatically into tactics for turning customers and data into new, repeatable sources of revenue.
Companies want to keep customers captive, monetizing them again and again, whether that’s year over year or month over month.
Companies are adding services to their product lines for a few reasons: rapid commoditization, lower cost of enabling technologies, customers’ increasing desire to use and share rather than own products, and an awareness that services are needed for competitive differentiation, says Soren Kaplan, innovation consultant and author of the best-selling book Leapfrogging. “It’s much easier to copy great products and it’s increasingly difficult to differentiate yourself through products or technology anymore,” he says. “If you have a service, you are immediately creating a relationship with your customer to reinforce your brand while opening up opportunities to deliver additional value.”
Models for Service Delivery
Based on our research and interviews with experts, these are some of the top business models for services today.
- Bundled Companies can embed a service into the product that helps customers use it better or get more value from it. Ingersoll Rand, maker of industrial products such as construction tools and air compressors, now has data-collecting sensors in its Trane brand AC units, says Kaplan, who wrote an extensive report on services-based models. The resulting analysis is being used to create service offerings for customers, such as alerts for maintenance issues and temperature control guidance.
Bundling is becoming more common with companies in the engine and power business, such as Rolls-Royce and General Electric. Such companies deliver services for uptime commitments or aftermarket support for their products, even charging for “power by the hour” instead of selling a machine or engine, says Dave Sievers, principal, Strategy and Operations Practice, The Hackett Group.
Mexican cement company CEMEX solved the business problem of getting cement to customers exactly when they need it.1 Since the cement turns to useless chunks after 90 minutes, CEMEX successfully predicted that customers would pay a premium price for on-time delivery – in this case, within 20 minutes.
- Data as a With Web apps, cloud infrastructure, and industrial-strength analytics software widely available, companies can gather customer and machine data to provide valuable services. This might mean
an aircraft or engine manufacturer delivering data that is continuously collected from engines to predict failure and maintenance needs.
The model extends to construction equipment, fleet services, or any product that’s expensive enough for a customer to need uptime data and regular maintenance, says Sievers. The value also returns to the manufacturer. “You can better fine-tune the services and parts that you’re going to deliver to improve the performance of the unit,” he says.
Then there’s Mint, now owned by software maker Intuit. According to Kaplan, Mint analyzes the data collected about its users’ personal buying habits and then shows them special offers based on those habits. When users accept an offer, Mint makes money from the referral.
- Experience as a service. These days, customers will pay more for a memorable or pleasant experience, says Joseph Pine, a Fortune 500 management consultant/advisor and coauthor of The Experience Economy: Work Is Theatre and Every Business a Stage. Take the coffee industry, a low-margin business in which growers get a few cents per cup and the basic deli or vending machine receives perhaps US$1 per According to Pine, Starbucks changed the game with its creation of “a three-dimensional space where people want to spend a bit of their precious time.” Starbucks customers, of course, pay a premium for it – up to US$5 per cup.
Apple is another success story. The computer company was heavily chided when it first launched its stores, but those naysayers aren’t laughing anymore. According to Pine, “Apple has the highest-grossing retail experience in the world based on sales per square foot. It has all these services, such as the Apple Genius Bar, the one-to-one consultations, the classes you can take, and so forth.” LEGOLAND and American Girl Place are two more top retail experiences created from products, Pine adds.
Coca-Cola Freestyle soda blending machines are often cited both for design innovation and a new way of consuming soft drinks. The beverage giant’s business model of charging restaurants a monthly rental fee rather than per-unit pricing is novel as well. Coke’s success convinced archrival Pepsi to get into the game.2
- Transformational Observers often point to IBM as an early pioneer not only in moving from products to services but also in delivering business transformation services. Consumer goods companies, as well, have opportunities here, says Pine, referring to PepsiCo’s Frito-Lay division, which offers display and merchandising expertise as a service to help grocery customers sell more. He calls transformational offerings the ultimate form of value for services. “This is where companies become consultants to their customers, and they’re focused on the aspirations of customers and how they can help them become a better business,” he says.
How to Achieve Success
Adding services to a business that has focused solely on making, distributing, and selling goods can require a dramatic shift in strategy, operations, measurement, and talent. Don’t expect rapid returns, either. It can take time to create a profitable service business, says Kaplan. “You’ll need to be prepared for this and be able to ride through the early investment until it pays off,” he says.
Companies will need to price service offerings differently from the way they price products and will need to be ready for continual experimentation. Constant change is necessary to keep service customers happy, but the good news is that it’s much easier to change a service than a product.
A new organizational approach is also key, says Cynthia Nevels, a management consultant with Integrality Consulting and founder of Think.Crowd. Fund! Nevels worked in the HR division at a large software company when it entered into services in 2001. “It intentionally separated the [services] group from products,” she explains. “It needed a different business model, such as for human capital resources, because the typical software engineer couldn’t make the transition to customer handholding.”
A new service can bring a needed boost to a mature product line, but if executed poorly, it can also hurt the business.
Here are 11 ways to succeed with services:
Plan ahead. With a new service launch, timing is everything. For a large enterprise that’s been in business for decades, the switch can be difficult and protracted, even with a progressive culture and senior executive team. The optimal time to introduce a service might be when launching a new product. A start-up company has the advantage of being small and nimble enough to do that; however, even these companies can slip up. Take Fitbit, maker of the popular wireless activity trackers. It limits its addressable market by selling its hardware only once, but it could have developed a services model based on subscribing to data generated from the device. If it had included a subscription service, it could have monetized its customers every month, indefinitely.
Market conditions can also dictate a good or bad time to launch a service. Infosys Management Consulting launched its services in the early 2000s. Says Eric Rich, the company’s vice president and unit head, “With our ability to execute consulting services in a global delivery model, we were a more cost-effective option than big competitors when the global economy was not great.”
Align with products and expertise. When a company tries to create a service around something that isn’t a core expertise or that doesn’t complement or support the product portfolio, the effort can backfire. HP’s splashy foray into services with the 2008 acquisition of EDS misfired, as witnessed by massive layoffs beginning in 2012 and a US$8 billion write-down that same year – events attributed to the EDS deal.3, 4 Today, HP has created a services business that is more compatible with its offerings and that is more successful.
Conversely, IBM launched its highly successful management consulting business in 1992, a smart response to pressures from product commoditization yet also a move to help drive more product purchases, according to various analyses. Today services is the company’s bread and butter, making up 57% of its US$99 billion revenue in 2013.5
IF FITBIT HAD INCLUDED A SUBSCRIPTION SERVICE WITH THE PRODUCT, IT COULD HAVE MONETIZED ITS CUSTOMERS EVERY MONTH, INDEFINITELY.
Make life easier for buyers. When launching services, you have a big opportunity to find a way to delight customers and thereby make them more loyal to your business. Costco used to sell goods only, but now it offers a host of services, including insurance, payment processing, water delivery, car buying, travel, and mortgages. The company is successful at selling additional services because of convenience, great prices, and a historical track record as a trustworthy vendor. Customers know Costco will back up its products and services partners. As well, home improvement retailers such as Lowe’s and Home Depot provide services for installing the products that they sell.
Run it like a start-up. Launching a service within the existing company structure can be restrictive, complex, and expensive; and it can slow progress. With an entrepreneurial approach, even structured as a spinoff for a short time, a services unit has time and space to develop quickly and effectively and recruit the best people to lead the charge. Infosys’s decision to launch its management consulting business in 2004 as a separate subsidiary instead of as an integrated business unit was astute. “We went this route because we knew that management consulting was going to be a big shift for Infosys,” says Rich. “We would need new resources and time to incubate and grow the business.” If the company had attempted
to integrate the consulting arm at the get-go, it would have had to hire a lot more people, retrain its sales force, and deal with internal conflicts and new processes. In essence, it would have had to spend a lot more effort and investment to launch the new offering, he says.
Hire service experts. The team in charge needs experience managing business services and delivering services in a related area, says Chris Trimble, adjunct professor with Dartmouth College and business innovation author and consultant. Infosys focused on training and educating its workforce, building the services brand through industry certification programs and hiring a leader of the new division who had background in both engineering and business services, says Nevels.
Don’t isolate from the core business. While an entrepreneurial approach is valuable, experts warn about being too separated from the product side of the house. “There needs to be some sharing, such as moving some experts from the products business line to the services business line. Or that group of experts needs to be scaled up so that they have adequate capacity both to do their existing job and to provide support to the new service,” Trimble says.
Adopt consulting firm metrics. In many ways, products are managed differently than services. “Services can’t be inventoried,” says Sievers. “There’s no shelf life. So you’ve got to deliver it or schedule it, or you lose the opportunity altogether.” While a product manufacturer studies margins and manages costs carefully, in services it’s all about human resources. “Look at the metrics that are typical in consulting firms,” Trimble says. These include costs to hire and train a service delivery person, speed of change (refining or adding new services), the cost of selling the service, and especially today, the cost of enabling technologies such as Web sites and apps.
Partner to extend services. The successful Amazon Web Services (AWS) cloud business depends on the support of an extensive network that provides technical assistance and software tools for companies migrating applications to the cloud. That’s a smart move for AWS, which may not want to build up a technical support and consulting team but instead focus on developing and maintaining its global infrastructure hosting platform and network of data centers. Partnering may be the best way to launch and grow a services business, especially when launching into a brand new area, as AWS was for Amazon.
Don’t cannibalize your product. Adding lines of services to your product is an exciting prospect, but you need to tread with caution, especially if your company has a well-known brand. The new service should not only complement existing product lines but also match up on quality and
execution. Otherwise, failure of the service could hurt product sales and a company’s reputation. Testing the service with a few select customers is a safe way to start, according to Trimble. “Make sure that there’s a real ability to deliver services of value before you expand any further,” he says.
Another potential stumbling block is the channel. If a business does not have a direct relationship with customers and must work around the channel, there’s risk in hurting those relationships. “You’ll need to spend more time and effort to work your way around the channel. For some companies, launching services may not be the right thing to do,” Nevels says.
Acquire to gain entry. If your company has cash but scant time and expertise to launch a service, acquiring a service might be the better route. That model is playing out more and more, especially in high tech, says Kaplan, pointing to Intuit’s acquisition of Mint. “That move also avoided the possibility that Intuit’s Quicken product would be disrupted by a service like Mint,” he says.
Use the cloud (and mobile and social). This just might be the perfect time to enter services, given the affordability and easy access to powerful enabling and delivery tools: cheap cloud services, Big Data software that used to reside only in labs, mobile apps that can be developed quickly and distributed to millions of users overnight, and social media to promote and even deliver services to customers. The million-dollar technology start- up costs of several years ago can now look like a few thousand dollars per month. Plus, there’s the on-demand model so critical for any start-up operation. The advent of cloud infrastructure services from Amazon, Google, Microsoft, and others means that a business can temporarily increase its available bandwidth without much cost. A company can get 100% uptime on someone else’s infrastructure and add a process whenever needed. All of that is powerful for any new services venture.
Build Services, Build Loyalty
During the dot-com era, online converts said that there wasn’t any type of business that couldn’t succeed on the Web – a prediction that has largely come true. In the services economy, one could make a similar argument. Cars, for example, have been rapidly made into services for people who live in cities and don’t care to own one. Other companies are finding that customers will gladly pay extra for a service that makes a product run better or deliver more value, such as the self-tuning AC unit. In a few years, perhaps we will all be renting smartphones and PCs instead of owning them. That way, no one gets stuck with a lemon.
Whether you’re a business with 1 product or 50, adding complementary services to reignite staid products, create recurring revenue streams, develop more loyal customer bases, and expand markets is a forward-looking strategy for years to come.
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- The Future of Service Business Innovation (Helsinki: Tekes, 2010), http://www.innovation-point.com/FutureServiceInnovpdf
- Stephanie Strom, “Pepsi Challenges Coke in the Race to Design a More Tappable Soda Fountain,” The New York Times (May 15, 2014), http://www.nytimes.com/2014/05/16/business/pepsi-challenges- coke-in-the-race-to-design-a-more-tappable-soda-founthtml?_ r=1
- Chris Preimesberger, “Why Most of HP’s Layoffs Will Be on the Services Side,” eWeek.com (May 24, 2012), http://www.eweek. com/c/a/IT-Infrastructure/Why-Most-of-HPs-Layoffs-Will-Be-on- Services-Side-333893/
- Erika Morphy, “HP Groans Under Weight of Failed EDS Merger,”E-Commerce Times (August 8, 2012), http://www.ecommercetimes. com/story/75867.html
- What Will We Make of This Moment? (IBM, 2013), 35, http://www.ibm. com/investor/att/pdf/201pdf