Leading Author and founder of Alexander Consulting, James ‘Alex’ Alexander puts forward a series of strong arguments for the reasons why product-focused companies can and must sell services. This is essential reading for the service director struggling to get their voice heard in a product-centric organisation...

Leading field services in a product company is not for the weak of heart. You must deal with executives who feel that products are the only ingredient in the recipe to organization success and that services are a bothersome, necessary seasoning like garlic in a casserole.

Like trying to convince a toddler that vegetables are good for them, you must constantly demonstrate your value internally, while confronting a product-thinking, product-is-everything culture.

Where to begin? I suggest that the best defence is a good offence. Research and review, prepare and practice, and then request individual or group sit-downs with your executive peers to address the question, why sell services anyway? Your future may depend upon your persuasion.

Why sell services anyway? Following are the benefits to articulate and motivate.

1. Sell More Initial Deals

Here is a bit of blasphemy to a product executive: Most customers view products as commodities! Regardless of how truly unique or elegant or innovative, your products are from your perspective, in most all buying situations, customers see no meaningful difference in the top two or three products in any category, across all industries, across all geographies.

Yes, I understand this may not be 100% factual, but from the perception of the customer, it is true. Hence, the old adage comes into play: Perception is reality. Kind of a sobering thought. 

Once customers have determined their shortlist of the two or three potential products or bundles of products that they will seriously consider buying, they almost always cast their product ballot based on what they believe are the best services that surround the productOnce customers have determined their shortlist of the two or three potential products or bundles of products that they will seriously consider buying, they almost always cast their product ballot based on what they believe are the best services that surround the product—services that will best ensure the product works as promised, keeps working, and does so with a minimum of hassle and added expense.

It is important to note that, in many cases, they will pay a premium for your offering if they understand the higher value your services bring to them. In essence, they vote with their pocketbook.

Furthermore, if your salespeople were strategic and sold an assessment early in the buying process—before needs were clear and products were specified—the probability of you getting the product business, later on, is greatly improved, giving you the chance to shape the final recommendations early while building relationships with people key to the final purchase.

GIST: Selling services effectively from the get-go will land you more initial deals.

2. Handle Fewer Train Wrecks

Sadly, sometimes products are positioned to the customer with these words coming out of the salesperson’s mouth: “Our products don’t break.

You don’t need any additional services,” or “It is so easy to implement our software. Just read the manual and you can do it, no worries.” This is all a bunch of baloney, especially if you are dealing with a fairly complex situation, an important customer process, and/or the customer has little if any familiarity with the implementation.

Rare is the product that will not need some type of service in its life cycle, whether a tailored implementation, ongoing maintenance, software updates, refurbishing, and on and on. Not positioning this reality of life with the customer upfront is negligent selling.

Services appropriately sold up front greatly improves the probability that:

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• The product will work the way it is supposed to work the first time.
• Greater functionality of the product will be utilized.
• Irritated customers ringing the bell of the fire engine, escalating their concerns up your organization ladder, will be greatly minimized.

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GIST: Selling services upfront saves your organization time, hassle, and money over the long term.

3. Sell More Products and Services Later

Experience also shows that when deals are sold with services up front, more products and services are sold later on.¹ Services greatly improve the chance that installation and implementation will be done correctly the first time, and services and support improve uptime and productivity.

Delivering services means dealing personally with customer personnel and, done properly, starts to build trust-based relationships. These customers are very likely to buy more of your products (and more services, of course) and are well on the way to being loyal, highly profitable customers for life. 

Figure 1 shows a real-world example of this revenue opportunity beyond the initial product sale. By selling services correctly early on along with the product, this company had a very realistic opportunity to add 2.7 times the original product revenue through incremental services. In this example, the product sold for approximately $100,000, so the potential for more services revenue was approximately $270,000. Plus, the customer was much more likely to buy this company’s product at the end of the equipment’s life.

GIST: Want to be a true total solutions provider? Services are the key.

4. Enjoy Predictable Revenue Streams

Want to see a CFO’s eyes light up?

Watch their face the first time they grasp an understanding of the predictable, repeatable sales that come from a services business built upon service and support contracts coupled with a finely tuned professional services capability.

This is pure joy to a bean counter. The services annuity stream makes life a whole lot easier for all of management, as it helps take the guesswork out of business financials and becomes an early warning, leading indicator of organization success or failure.

GIST: Strong services help you manage your business more effectively

5. Differentiate Yourself

Depending on the maturity of your industry, your competitor’s strategy, and your competitor’s dealings with distribution, services can differentiate you in a really big way. The more complex your products, the more they cost the customer; and the more mission critical they are to your customer’s business, the more the value-packing promise of services. Leading services researchers note from their studies that more and more companies in tough competitive markets are looking at services to yield competitive advantage.²

If your competitors don’t have full portfolios of strong service offerings, or if they don’t know how to sell them, this is a huge opportunity for you if you embrace the challenge. Give your customers what they need, want, and will pay for while locking out everyone else.

GIST: Services are the drivers of market dominance.

6. Create New Markets

Business consultants like to talk about adjacency strategy,³ the strategy of building upon an organization’s core competencies in one market to transport those capabilities to an adjacent, but different market space.

For example, a company with specialized battery technology designed for the automotive industry could potentially attempt to build upon that battery expertise to develop and sell to the marine market. The same possibilities hold true with services. For example, an energy utilization assessment developed for the automotive industry could be adapted for the marine market.

Taking advantage of your past experience and expertise can crack new markets and expand profitable revenue.

GIST: Services adjacency strategy can be a powerful component of any growth blueprint.

To summarize, services have proven themselves to be able to contribute significant value to many, many product companies through profitable growth of both products and services. Properly executed, strong services capabilities can increase customer satisfaction and generate customer loyalty. In addition, for some companies, having the right portfolio of services helps smooth the entry into new markets. Finally, in some cases, having an arsenal of new or better services can create competitive differentiation.

Question: But aren’t services less profitable?

Answer: Normally not.

Here are the core elements of a conversation I had with the CEO of a software company that I was interviewing as part of a services assessment for his company.

• Alexander: Tell me what role you’d like services to play in helping your company be successful.
• CEO: Frankly, I wish services was a much smaller part of the business. They negatively impact our overall profitability. Every time I talk to financial analysts, they beat me up on this issue. If you can tell me how to eliminate services altogether, I’d be extremely happy.

This perception is fairly common among executives at companies with high product profit margins. However, in most cases it is not entirely correct. 

On average, my research shows that there is no difference between the profit margins of products and those of services.⁴ In general, product profit margins have decreased as industries have matured, and services profit margins have increased as services management has learned how to optimize their organizations. For example, professional services organizations within product companies have improved their profitability by seven points over the last decade. In fact, top-performing services organizations have profit margins double that of their products. 

Adding a portfolio of services, even at lower margins than products, will increase the overall value to the customer.There are exceptions, of course. New products in new industries could have higher profit margins initially. However, experience shows that product margins will consistently drop. A few products, due to their innovation or patents or special circumstances, may be able to maintain very high product margins over time.

Yet, recalling the high value that customers place on services, adding a portfolio of services, even at lower margins than products, will increase the overall value to the customer. Hence, looking at blended margins is probably a much more realistic way to view and understand overall profitability. 

Finally, examining the financials of many services businesses inside product companies raises a few eyebrows, if not a few questions, about how profitability is calculated and the fairness of the calculations. Here are some issues to consider:

• Place your list items here

• If services consultants are spending 30% of their time in a pre-sales role, why isn’t that expense charged to sales?
• If you are a VAR (value-adding reseller) and your partner agreements require you to have a number of certified experts on staff, shouldn’t some of the costs of having these low-billable people on board be charged elsewhere?
• If a big customer has a blow-up, and company execs require a busload of top technical talent from the services business to do whatever it takes to fix the problem at no charge to the customer, should that cost be eaten by the services business?

My own biased experience says that if you sell the right services to the right customers in the right way, they will be very profitable and make the rest of your products look much better as well.

 

GIST: Re-look and re-think cost allocation, pricing strategies, and margin expectations versus customer value. There is a good chance that you don’t readily have this information, and it will take time to get the quality data you need.

 

So, there you have it—proactively communicate the value that your services deliver, help build a more profitable organization, and gain the respect you and your people deserve.

Endnotes

This article was adapted from Seriously Selling Services: How to Build a Profitable Services Business in Any Industry, by James “Alex” Alexander, and can be purchased from Amazon.com or the Alexander Consulting website.

References

1. Hahn, Al. 2007. The True Strategic Value of Services. Sandy, OR: Hahn Consulting.
2. Brown, Stephen W., Anders Gustafsson and Lars Witell. 2009. “Beyond Products.” New York, NY.: The Wall Street Journal.
3. Zook, Christopher. 2004. Beyond the Core: Expand Your Market without Abandoning Your Roots. Boston, MA: Harvard Business School Press.
4. Note that services margins are declining on average in some industries as more and more services appear alike to customers, are hence seen as commodities, and thus seem to have less value.

 

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Alex Alexander, founder of Alexander Consulting discusses one of the most important yet challenging transitions field service companies must make...

Alexander: What does it take to transition from free to fee?
Research Respondent: Kevlar vests and iron underwear.

Transitioning from free to fee has a nice ring to it, but how in the world do you do it without alienating your customers, de-motivating your sales force, and creating havoc in your organisation? What is the correct strategy for your organisation to start getting paid for the services you have been giving away?

By reading this article you will learn that your task is more difficult compared to those who have little history providing services because you have trained your customers and your salespeople that services are free, and since they are free they can’t be worth much! You’ll discover the need to be prepared for the inevitable pushback to this change and what you must do to be ready to deal with it. You’ll learn the five strategies for making this transition from free to fee and which strategy is most viable in most situations.

NOTE: Many readers of Field Service News have already made this difficult but vital transition. If that describes you and you are short of time, move on. However, this is also a chance to help your field service colleagues learn from your experiences. If you have lessons learned or tips to ease the pain, please pass them on by commenting.

The Five Strategies in Transitioning from Free to Fee

Strategy One: Don’t Do It!

Just kidding. But when you realise all the potential grief you may get for leading this change, you may wish you hadn’t started. More seriously, unless you are willing to rigorously do the steps outlined a little later, you may want to wait.

Ponder Point: If it is worth doing, it takes effort—lots of effort.

If there is any question at all in moving from free to fee, I suggest that you do a quick readiness review that looks at your customer issues, competitive position, internal capabilities, and executive priorities. There is no sense attempting this transition unless there is enough rational reason and emotional impetus to justify this effort.

In leading workshops on building profitable services organisations over the last decade, one of the first exercises that I ask the executive participants to do is to complete a high-level, free-to-fee readiness review of their organisation. It is a simple but powerful task that can be executed in less than 30 minutes. As the name implies, the readiness review helps determine how ready an organisation is to make this transition. It helps executives determine the factors in place today that will either help or hinder the future goal of selling services. The focus is on the biggest, most important factors that will impact this transition.

Figure 1 provides an example of an executive’s readiness review from one of my workshops. On the positive side, there were several helping factors in place that ideally could be leveraged to make the transition from free to fee successful.

Having a large installed base meant lots of prospects for selling services. Customers who buy high-priced, complex products are more likely to spend money on services such as an insurance policy to improve uptime. Strong consultants and technical support personnel probably have a level of customer trust already established, hence if they recommend to customers that they buy services, the customer is likely to do so.

Depending upon the new sales management’s background and mindset, sales leadership may be open to selling the value of services. Finally, competitors selling services might serve as a lever to get senior management feeling the need to meet this potential challenge. Again, if the decision is made to move ahead with the free-to-fee strategy, the task is to leverage these helping factors to either eliminate or minimise the hindering factors.

 

On the hindering side, there were some significant factors to consider. The organisation in this example had been giving services away forever, and customers expected it. The organisation had a strong product culture, and as I’ve already emphasised, this is a big deal when trying to introduce change. Furthermore, sellers that don’t want to sell services, don’t know how to sell services, and have no negative consequences if they don’t sell services are strong deterrents to getting customers to pay for services.

In this case, the services executive learned that his task of transitioning from free to fee was a huge challenge, and after completing the readiness review, one that he doubted could be accomplished at all. After some consultation with me and his workshop peers, he decided that he needed to approach his boss with his assessment that the move from free to fee was not doable at this time. However, he was first going to get some fact-based information to back-up his thinking and make a stronger business case. This 30-minute readiness review may have saved him months of toil and frustration.

How realistic is making the move from free to fee in your organisation today?

GIST: If the possibilities of success are small, wait for things to change—they always do.

Strategy Two: Flip the Switch

Ponder Point: If it seems easy, it probably won’t work.

If you feel that free to fee can work in your organisation, first consider flipping the switch.

This strategy is based on picking a date in the future and letting everyone know that from that day forward, all services have fees attached to them. The positive side is that it is simple, it is fair from the standpoint of treating everyone the same, and if successful, it will quickly add a new revenue stream.

However, this is a difficult strategy to implement and manage. Within minutes of the announcement, the phones will start to ring as sellers call sales management, sales management calls your executives, and the execs call you (the services troublemaker, as you are beginning to be called), all saying the same thing: “Yes, we understand the need to charge for services, and as a rule I totally support it, but in this case, it is not a good idea, because ‘blah, blah, blah.’” The “blah, blah, blah” includes “we will lose a big pending sale because of our higher price,” “the competition gives it away, and this will give them a wedge inside the company,” or “the customer’s policy is not to pay for any services,” and similar-sounding reasons.

If you are initially able to fend off your people internally who are trying to twist your arm, the salespeople will collude and plot with customers, and soon the customers will start calling you, either pleading or threatening, or both. If you don’t meet their demands, they will call senior management and senior management will cave. Therefore, the rule of everyone paying for all services very quickly becomes the exception as more and more customers are waived from having to pay. You spend all your time in defensive mode, making it hard for you to get the real work done.

GIST: Just don’t do it. You will be hated, non-productive, and not much fun to be around.

Strategy Three: Grandfather Existing Customers

Ponder Point: You can fool some of the people some of the time, but not for long.

Under this strategy, all old customers are “grandfathered” and will continue to get services for free, however, all new customers are tagged to pay. The strength of this is that you don’t rock the boat with the installed base, and new customers don’t have a past history to compare what was and what is. Sold correctly, many new customers will pay, providing you with new revenue. The problem here, of course, is that customers talk, and new customers who find out about their second-class status will not be happy. They will see this approach as unfair and view themselves as victims. They will complain, and if they do it long enough and loud enough, they will probably get services for free as well. It will take a percentage of management time to deal with a problem that never goes away. Once again, you will be seen as “not a team player” and a “troublemaker.”

GIST: Don’t attempt this strategy either.

Strategy Four: Launch in New Markets

This strategy is a variation of Strategy Three, where all old customers are grandfathered in. However, if you are opening up new geographies or new market segments, this strategy can work, as customers in these spaces probably will be less likely to be in contact with your old customers. Plus, you can make the case with some credibility that their situation is different and justifies that you charge for services. This approach is more feasible than Strategy Two or Strategy Three, but it is still a challenge to manage.

Again, in most cases I do not recommend it, but it can work adequately in some situations.

Strategy Five: Productise the Old and Sell the New

Ponder Point: People will fight to keep what they have, so don’t try to take away something they feel they deserve.

The problem with the strategies outlined above is that they trigger a powerful, negative psychological response—no one likes to have things taken away from them or not be treated the same as others. Think of your reaction to small personal takeaways, such as when your bank starts charging you for checks that used to be free, or your airline makes you pay for blankets.

Hence, this is the strategy I recommend almost always: Productise the old and sell the new. The beauty of this is that it takes nothing away from your customers or your sellers.

In this scenario, all the services that have been given away continue to be given away, but in a cheaper, more manageable fashion. In addition, a new portfolio of value-adding services is developed, marketed, and sold. The other very positive psychology here is that it gives people an additional choice, and people like choices because it puts them more in control. The challenge is that this takes quite a bit of work in two areas:

 

1. Productise the old. Here the focus is to standardise the types of services that have been given away in the past to minimise the cost of these services and create a comparison that will make the new, fee-based, value-added services seem very desirable. For example, when hoping to land a deal, in the past, sales may have given away assessments that had no definition of time or quality. In other words, sales would have had a pre-sales specialist do the assessment or maybe they would even do the assessment themselves. It was based upon the availability of qualified people and the internal persuasion skills of the seller. Depending on the situation, it may have lasted anywhere from two days to five days at the customer’s site. The quality of the assessment was totally dependent on the person performing it. In this situation, the goal of delivering an assessment may have been accomplished, but it was probably done in a haphazard, non-standardised manner—one that was not repeatable and one of questionable quality.

So, the recommended shift is from an ill-defined, get-it-done-when-we-can, at-the-quality-level-of-whomever-we-can-get-to-do-it, on-average five-day assessment, to a one-day virtual assessment covering the 10 most important areas, delivered in a standardised, professional document, conducted by a qualified, trained professional. This new service and the other productised services (e.g., Quick Start installation for a software product, online core training for a product implementation) are developed by services and marketing but are categorised as a cost of sales and owned by the sales function.

2. Sell the new. Building a high-value portfolio of services offerings that customers want and will pay for and one you will make good money on takes considerable effort. Plus, correctly defining, packaging, and pricing these services may take skills not currently available in your organisation. However, if you want to successfully make the transition, find the time and the talent.

GIST: This is a lot of work and will take a few months of effort to accomplish. However, this approach is far superior to the other strategies, as it gives more to the customer and to sales without taking anything away.

 

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Author’s Note

Old pros: Please share your transitioning from free to fee lessons learned. Thank you.

Endnotes

This article was adapted from Seriously Selling Services: How to Build a Profitable Services Business in Any Industry, by James “Alex” Alexander, and can be purchased from Amazon.com or the Alexander Consulting website.

About the Author

James “Alex” Alexander is founder of Alexander Consulting, a management consultancy that helps product companies build brilliant service businesses. Contact him at 239-671-0740, alex@alexanderstrategists.com, or visit www.alexanderstrategists.com. Sign-up for Alex’s monthly newsletter, Alexander Insights, here.

 

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