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How to Sell Services More Profitably

Have you ever noticed how value tends to migrate from products to services over time?  Product costs tend to get pushed lower and lower and manufacturing goes offshore in search of the lowest-cost region of the world.  Successful companies mitigate this normal trend by adding services.  IBM is one of the most successful examples I know of a company that over time migrated from a product company selling mainly computer hardware to a services company where services now comprise the vast majority of its revenue mix.  The article excerpt below from Harvard Business Review lays out some excellent points and cautions on how product companies can successfully add services revenue.

The Idea

In every industry, products are becoming commoditized faster than ever. To stand out from rivals, many manufacturers have begun offering value-added services (installation, training, maintenance). When this strategy works, services become new cash cows. But for every success story, failures abound: Customers aren’t willing to pay. Revenues are low. Companies barely break even.

That’s because manufacturers, dazzled by this strategy’s promise, jump in without preparing. And they get blindsided by the complexities of providing services.

To sell ancillary services profitably, start slowly, advise Reinartz and Ulaga. First, charge for simple services you’re already providing—such as transportation or insurance. You’ll build enthusiasm for adding more complex services. Deliver your services efficiently to safeguard your profits. And train salespeople to pitch complex services, including helping customers understand these offerings’ benefits.

By taking these steps, manufacturers have derived up to half their sales from services. And they’ve achieved margins on services up to eight times those on product sales.

The Idea in Practice

Reinartz and Ulaga suggest four steps to selling services profitably:

Charge for Simple Services You Already Provide

By switching your current services from “free to fee,” you make managers and customers aware of their value.

Example: Gas company Air Liquide used to buy cylinders in which to transport gas to industrial customers. Clients let the cylinders pile up at their sites, forcing Air Liquide to carry more of them. The company began charging a small rental fee for cylinders. This generated several hundred million euros a year in fees. It also motivated customers to optimize their cylinder inventories. And Air Liquide could sharply reduce its floating inventory, transferring cylinders from customers that didn’t need them to those that did.

Streamline Your Back-Office Processes

To prevent delivery costs from eating up your service-offering margins, streamline unnecessary back-office processes.

Example: Air Liquide used to regularly mail gas-consumption reports to customers. When it realized some customers didn’t use the information, it discontinued the reports for those customers. It thus reduced its costs to serve selected customers while maintaining perceived value of the service.

Create a Service-Savvy Sales Force

Complex customer solutions require longer sales cycles, which can spark resistance among salespeople used to closing deals (and earning commissions) faster. And purchasing decisions for these solutions are made high up in customers’ hierarchy. Salespeople may be unused to discussing terms with more senior managers.

To retrain your sales force to sell services, give them financial incentive to promote your services. And educate them about how to communicate and negotiate with senior managers.

Example: Schneider Electric switched the focus of its salespeople from cost-plus pricing to value-based pricing when promoting its services. This involved educating them about how their customers’ managers justified decisions internally, so salespeople could help the managers they dealt with take more responsibility for shaping decisions.

Focus on Customers’ Processes

To provide high-margin services that customers will value, managers throughout an organization must deeply understand customers’ problems and design offerings that will solve those problems. This means gathering information on customers’ processes and structures.

Example: Forklift manufacturer Fenwick installed data-collecting sensors and radio-frequency identification technology in its forklifts, to amass valuable information about how customers used its equipment. It used the resulting knowledge to develop new service offerings, including remote monitoring, a customer-specific intranet, and a school for forklift drivers. Today, 50% of its €500 million in revenues comes from services developed over the past fifteen years.

By: Werner Reinartz and Wolfgang Ulaga

Source: Harvard Business Review

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