Leadership

How to Sell Services More Profitably

By Werner Reinartz, Wolfgang Ulaga

Updated on: May 7, 2008 / 2:10 PM EDT / MoneyWatch

The Idea in Brief

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.

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.

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.

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.

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.

Frei recommends an additional step to selling services profitably: acknowledging and dealing with the fact that customers themselves can erode the quality of your services merely by using them, and thus jeopardize profitability. For example, a customer dithering at a service counter slows things down for everyone behind him, introducing frustration that can lead to lost business. How to consistently deliver service excellence despite customers' potential to muck things up? Strategies include articulating which behaviors customers must demonstrate to get the most value from your service, then designing services specifically to foster those behaviors. For instance, to get customers using new self-check-in kiosks, airlines ensured that travelers could complete transactions with far fewer keystrokes than check-in personnel used to need.

Silo Busting: How to Execute on the Promise of Customer Focus

Harvard Business Review

May 2007

by Ranjay Gulati

Gulati affirms that if you decide to augment your products with services, you'll need to be prepared to manage customers in new ways. This may mean reorganizing internally to support your new offerings. Why? Knowledge and expertise reside in organizational silos, and many companies find it difficult to harness their resources across those boundaries in ways that customers value and want to pay for. This article presents suggestions for internal reorganization--including replacing traditional silos with customer-focused ones, developing new customer-satisfaction metrics and incentives, and giving people who are closest to customers authority to act on their behalf.

The Customer-Centered Innovation Map

Harvard Business Review

May 2008

by Lance A. Bettencourt and Anthony W. Ulwick

To refocus managers on customers' problems, break down the objective that customers are trying to accomplish when using your products and services into eight steps: planning, gathering resources, setting up the environment, verifying readiness, executing, assessing execution, making changes to improve execution, and concluding the process. Then look for ways to make one or more of these steps easier, faster, or unnecessary. For example, U-Haul makes the "gathering resources" step easier by providing customers with prepackaged moving kits containing the right number and types of boxes required for a particular move.