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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