Executing on the Services Opportunities in Product-Centric Companies¹

Services represent the single largest opportunity for revenue – and profit – growth for many companies. Yet many organizations view activities such as product support and after-sales services as unavoidable overhead and, worse yet, approach new, potentially high-growth service opportunities with the same mental-set. Offering viable and creative services is not only crucial to the future of many product companies, but also requires a different organizational approach and mindset, and new supporting technology. Creating the right organization to offer a service is as important as choosing the right service.

The demand is increasingly there, but nailing it isn’t always easy

Consumers want to save time in every facet of their lives. So when they buy a product, they often want their local retailer to offer complete solutions that include services ranging from product installation to no-questions-asked return departments with short lines. Consumers are looking for a comprehensive purchase, use and support experience that is pleasant and meets a need or solves a problem quickly and efficiently. And in many cases, they are willing to pay handsomely for such value-added services – they just have to be asked to do so.

But companies do face the challenge of matching the appropriate service to their customers’ needs, accurately determining the value of the service to customers and assessing their willingness to pay. This can be difficult, especially because the service needs of consumers often remain unarticulated, making it hard to identify the services desired, let alone establish how much people are willing to pay for them. Focus groups and careful observation of buying habits can help companies decide which services to implement.

It is easier to identify and quantify the value of needs in business-to-business services because these affect the bottom line of corporate customers and are typically tracked as cost items in a budget. Increasingly, corporations seek to buy full solutions, not just products, as they trim staff and outsource work that is not their core competency. This trend affords an opportunity for product-centric companies to offer each other services also, often based on competencies developed in specific business processes.

Services can help move from customer satisfaction to customer loyalty

Services give companies the opportunity to increase margins, offsetting the commoditization of products and offering a chance to differentiate their product in the marketplace by adding a value-added service to it. Providing or even anticipating desired services also helps move customers along the curve from customer satisfaction to the coveted terrain of customer loyalty.

Studies have shown that loyalty requires an emotional connection. Enjoyable, rewarding service experiences deliver just that. When a consumer purchases a car off a dealer’s lot, no services are involved other than perhaps a free oil change that the customer returns for once. The customer may be satisfied in that they received what they came for, but no emotional connection takes place. However, if someone came into a GM dealership and has the opportunity to help configure their car on the web and the car is then delivered in a timely manner, that service represents an ideal opportunity to make an emotional connection with the customer that will translate into increased loyalty (and likely increased willingness-to-pay). Offer that same customer the opportunity to try out OnStar’s integrated information, safety and communications system in a package deal and you’ve made a real connection. If the customer later makes use of OnStar just once in a crisis, you have a customer for life.

Experiences are much more likely to translate into loyalty than transactions. Loyalty not only translates into repeat purchases but also recommendations to others based on the experience.

Organizing for service success

Once a company decides to offer a service, it must then decide where to launch the service in the organization. Choosing the right home is critical to successfully offering a service. Product-centric organizations that are accustomed to a cost-reduction approach must carefully answer the following questions in order to successfully launch and grow a revenue-generating service:

• What type of service do we want to offer?
• What is the relationship of the service to my existing products (and services)?
• Are the new services likely to be a revenue opportunity or a cost center?
• How will the service fit with my current organizational structure and culture?

Determining the nature of the service first allows you to better answer the remaining questions. For example, do you need a service merely to provide failure recovery – that is, assisting customers that receive a bad product or service? Do you need a product augmentation service – a pull-through strategy that enables you to add associated services to a product? Or do you need an entirely new business, perhaps based on some process expertise your corporation already has?

One approach product-centric companies take is to move beyond services specifically tied to a product to offer services in the space adjacent to an existing product. The farther afield from existing products the proposed service, the more likely that an organization separate from the product organization should offer the service. A service that is closely related to a product is harder to separate from it, making it more likely to stay in the same business unit. The same may be true of a service that is fairly tangible and, therefore, in some ways thought of as a product.

Assessing whether the service is a revenue opportunity or a cost center will also help determine where it should go in the organization. It’s unlikely that individuals who have spent years cutting costs from an after-sales service will successfully shift into a sales mode and turn their service into a profit-growth engine. A revenue opportunity often requires its own organization.

Finally, companies must understand their own organization and culture and make rational judgements about the degree of independence required to run a successful service business. Many ventures fail because they lack this insight. The organizational norms and metrics of a product company can kill a service organization. Many experts believe that it is foolish to even attempt to run a service business from an existing product organization, at least for some initial period.

Creating a service culture

Regardless of where you house your service, to create a culture in which it can thrive you must consider these points:

• Providing a vision for the service; a common objective established by the group but articulated by the leader
• Establishing a common service terminology
• Creating a mechanism for sharing stories (newsletters, “town hall” meetings and so on)
• Embedding incentive metrics that reward service initiatives and encourage learning
• Making it safe to experiment and try new approaches – unlearning the established ways of the parent company can be critical
• Insisting on daily customer contact from appropriate senior executives.

A common mistake product-centric organizations make is to rush into the technical details of providing the service without first reflecting on the softer dimensions of establishing a service environment for the organization.

Service interactions are different – customers affect them more

Unlike interactions associated with the sale of a product, customers can directly affect the quality and cost of a service through their actions. Customers cannot affect the time it takes to manufacture a product but they can easily affect the length of a service interaction. If a customer, for example, purchases a computer with a service contract and calls the support technician several times in the first few weeks, the profit margin will erode rapidly. In addition, besides affecting cost, a customer’s words or actions could affect the perceived or actual quality of the service. However, cost and quality are not affected when a customer simply buys a product off the shelf.

As a caveat, product-centric companies looking to add services should keep in mind that seeking more touch points with customers is not always the most desirable or cost-effective approach in the services arena for the reason just noted. Traditional service-centric companies, such as financial institutions, are now seeking to limit the number of touch points with their customers while product-centric companies, which have less end-user contact, are seeking to increase touch points.

Ensuring a positive experience

Corporate leaders and employees can take the following steps to affect customer perceptions of their interactions:

• Offer the customer choices in which the cost of the choice is low to you and the outcome is relatively unimportant to you (for example, a choice of mobile-phone plans with different features but equal in total cost)
• Employ normative control mechanisms rather than instrumental (carrot and stick) ones
• Frame the positive snapshot; find a way to bring attention to the most enjoyed, desired or valued parts of the service interaction, framing them in the mind of the customer
• In a service recovery situation, respond in a way that corresponds to the failure (for example, if the customer has a product failure, replace the product; if they have a bad interaction with an employee, apologize don’t just offer a free product)
• Ensure each experience finishes strongly; a strong ending can greatly affect the overall perception.

Service is largely about experiences: how they are perceived and how they are remembered. Your service organization must understand and act on this fact.

Thinking about the future – value chain partnering to deliver services

Corporations should consider partnering with their value chain to offer services in the same way they partner with their value chain to manufacture a product and bring it to market. Information technology allows a diverse mix of companies to combine their competencies to deliver services in a timely, cost-effective manner. Web services, in particular, will make this ever more viable. A product-centric company’s understanding of value chains makes this approach especially relevant and attractive.

With careful planning, companies can create services that complement their current products and broaden and build their expertise. In today’s economy, value-added services are one of the most viable opportunities for growing revenues and profits, expanding your client base, and creating loyal customers. But delivering them well requires a thoughtful approach to more than just the market for and pricing of the service.

This article is based on conclusions from a recent Thought Leadership Summit on Digital Strategies, an executive roundtable series for Fortune 500 CIOs and functional vice-presidents focused on the business issues they jointly face and the enabling role of information technology. The summit was co-founded by the Center for Digital Strategies at Dartmouth’s Tuck School of Business and Cisco Systems, Inc.

This recent roundtable, which examined how companies, especially product-centric organizations, can rethink current service offerings and approach new service opportunities as revenue generators, included senior executives from 3M, Cargill, Cisco, Eaton Corp., General Motors, Lowe’s and Whirlpool. They were joined by the author and select academics, including Richard B. Chase from the Marshall School of Business at the University of Southern California, Frances X. Frei of the Harvard Business School, and M. Eric Johnson from the Tuck School of Business.

End Notes

¹ An earlier version of this paper appeared this summer in London Business School’s Business Strategy Review and before that in IQ magazine.

² Professor Brechbühl is the executive director of the Center for Digital Strategies, Tuck School of Business at Dartmouth, and an adjunct associate professor at Tuck.