Product-Service Business Model Best Practices
I had occasion this week to look through a number of business-to-business manufacturers’ websites and noted the growing role of services in company offerings. Some services link directly to the products (e.g., financing or warranty services). Others are complementary – e.g., “buy our power generation products and our service team will help you minimize your carbon footprint.” The additions of services to products make sense in a world where products are increasingly commoditized by excess global supply, growing customer power and a flood of copycat offerings.
More and more of these services are must-have additions to a product line because customers have come to expect them. And that means product manufacturers best not remain stuck in product-centric business models. Furthermore, because its getting harder to differentiate individual services, product manufacturers best be savvy in how they add services.
There are two myths associated with services. Economic principles can easily dispel them, demonstrating product manufacturers best be savvy in how they add services to their business models
Myth One: Services are harder to copy than products
False: If someone can copy your service — creating a good enough alternative — your service gets commoditized. Today’s communication tools and outsourced business process resources make it as easy for companies to copy your services as your products.
Myth Two: Services are higher profit than products
False: Services may or may not be higher profit than products. Profit stems from the willingness of customers to pay a premium over your costs. Premiums reflect the value and uniqueness of the benefits your services provide. But no one will pay a premium for your inefficiencies, so if you are unable to efficiently provide a service—even one that is highly beneficial and unique — you will have a hard time being profitable. The most efficient services are those that leverage fixed costs. Fed Ex and UPS for example built leadership positions as service organizations by leveraging costs while providing exceptional customer service through strong cultures, information systems and processes. Manufacturers adding services need to do the same thing.
The biggest mistake I see manufacturers make with services is to view them as a value-add sideline to their products. By maintaining their “product business model” lens, the services become add-ons, often given away for free in contracts and more easily commoditized. Services offered in this way add complexity to operating models and sales representatives’ schedules without commensurate profits. The overall offering lacks any compelling and hard-to-copy value promise. At some point, a CEO may ask, “Why again are we doing this?”
When you adopt the lens of a business model innovator, on the other hand, services play a very different role. You start seeing them as equal partners to the product line. By focusing on solving a thorny problem for your target customers, you integrate products and services to deliver solutions that benefit your business customer’s bottom line. Diversey’s cleaning solutions for food manufacturers, hospitality chains and other industries is one example. GE Aviation’s approach to supporting airline fleets is another example.
Business model innovators know the following about combining services and products:
- You must integrate products and services seamlessly to solve important and unresolved customer problems, problems that demand integration of products and services
- You customize the solution for each customer, while creating processes and solution platforms that enable you to do so efficiently
- As a result of this customization, you need a smart, consultative sales force to sell the integrated offering
- New revenue models often accompany the new business model (e.g., an airplane engine can be leased versus sold with payment based on fuel reduction from services)
- You stop thinking about your business as a manufacturer, a device maker, an engineering driven company, etc. You think about your business as a problem solver and align your culture accordingly.
If you’re a manufacturer, how are you adding services to your business model?