Why Sell Services Anyway?

Get serious about selling services or else lose product sales
by James “Alex” Alexander, Ed.D.

This is the first article of an ongoing series on Seriously Selling Services.

Most customers view your products as commodities! Blasphemous, I know! Regardless of how unique or elegant or innovative your products are, 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 percent factual, but it’s true from the customer’s perception. Hence, perception is reality. Your products are more vulnerable than you think. Sobering thought indeed.

Research confirms that once customers have determined their short list of the two or three potential products or bundles they seriously consider buying, they often cast their product ballot based on what they believe are the best services surrounding the product. These services will best ensure the product works as promised, keeps working and does so with minimal hassle and added expense. It’s important to note that, in many cases, they will pay a premium for your offering if they understand the higher value your services offer them. In essence, they vote with their pocketbook.

Furthermore, if your salespeople are strategic and sell an assessment early in the buying process — before needs are clear and products are specified — the probability of you getting the product business later on is greatly improved. This gives 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 protect your products and land you more initial deals.

Handle fewer train wrecks

Sadly, sometimes companies position products with these words coming out of the salesperson’s mouth: “Our products don’t break. You don’t need any additional services,” or “It’s so easy to implement our software. Just read the manual and you can do it, no worries.” This is a bunch of baloney, especially if you are dealing with a complex situation, an important customer process, the customer has little if any familiarity with the implementation, or all of the above.

It’s rare for a product not to 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 sold up front greatly improve the probability that:

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

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

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 (Hahn, 2007). Services greatly improve the chances 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. Done properly, it’ll start building 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 more likely to buy this company’s product at the end of the equipment’s life.

Figure 1

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

Enjoy predictable revenue streams

Want to see a CFO’s eyes light up? Watch her face the first time she grasps 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 to 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.

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 big way. The more complex your products, the more they cost the
customer. 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 (Brown, Gustafsson and Witell, 2009). 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 should 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.

Create new markets

Business consultants like to talk about adjacency strategy (Zook, 2004), 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 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 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, having the right portfolio of services helps some companies make a smooth entry into new markets. Finally, in some cases, having an arsenal of new or better services can create competitive differentiation.

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 were 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 been extremely happy.

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

My research shows that, on average, there’s no difference between the profit margins of products and those of services.* 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.

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, 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:

• If services consultants are spending 30 percent of their time in a pre-sales role, why isn’t that expense charged to sales?
• If you are a value-added reseller (VAR) and your partner agreements require you to have a number of certified experts on staff, shouldn’t some of the costs of these low-billable people be charged elsewhere?
• If a big customer has a blow-up, and company execs require a busload of the services business’ top technical talent 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 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’s a good chance that you don’t readily have this information, and it will take time to get the quality data you need.

Best practices for selling services with products

High quality information is required to make the best business decision regarding the strategic role of services in your organization. Here are some proven best practices to objectively determine if seriously selling services is right for you:

1. You have current, high quality research on your existing customers regarding what services they use and value today and what they want and will pay for tomorrow.
2. You have current, high quality research on your services competitors, their breadth, focus and customer acceptance.
3. You have recent findings from an internal readiness review, determining your organization’s willingness and ability to get serious about services.

Boldly build, powerfully promote and seriously sell services

Managing the transition to seriously selling services has an immense upside for most companies. Protecting the product, creating new and profitable revenue streams, generating more sales of products, reaching higher levels of customer satisfaction and building competitive differentiation are all probable outcomes of a well-executed shift to services. Know that the path to services success is clear and the obstacles are known.

Having the information gleaned from these three best practices will let you know:

• The strategic value of services.
• A realistic services potential.
• The probability of success if transitioning to services is attempted.
• How far and how fast you can go.

In the next article, I’ll answer, “With all the potential benefits described here, why don’t more product companies sell more services?”

*Note that services margins are declining on average in some industries as more and more services appear similar to customers, thus they see them as commodities, and therefore seem to have less value and worth less.

Seriously Selling Services series

Read the other articles in the Seriously Selling Services series:

1. Why Sell Services Anyway?
2. The Executive Role in Selling Services
3. Turning Box Pushers into Sellers of the Invisible
4. Everybody Sells Services

Alexander, James A. 2004. The State of Professional Services II: An Industry Comes of Age. St. James City, FL: Alexander Consulting.

Brown, Stephen W., Gustafsson, Anders and Witell, Lars. 2009. Beyond products. New York, NY: The Wall Street Journal.

Hahn, Al. 2007. The True Strategic Value of Services. Sandy, OR: Hahn Consulting.

Zook, Christopher. 2004. Beyond the Core: Expand Your Market Without Abandoning Your Roots. Boston, MA: Harvard Business School Press.

About James “Alex” Alexander

Alexander is founder of Alexander Consulting, a management consultancy that helps companies create and implement professional services strategies for product companies. Contact him at 239-671-0740, alex@alexanderstrategists.com or visit www.alexanderstrategists.com.

© Alexander Consulting