26. June 2009 by Aidan.

In many companies that are purely product manufacturers, the service of those products is seen as a cost centre. In tough business environments the imperative becomes to lower the cost and strip as much out of the service as possible.

However, by taking a path towards product servitization this cost centre can be transformed into a profit centre and can have many other valuable side effects, including improved customer retention and additional product sales.

Here are the 5 main steps on the transformation from cost centre to profit centre:

1. The starting point is with a product only offering. The only service provided is a warranty and “reluctant” product support. These services are seen as costs that will be incurred after the product sale. (It is also very clear to the customer that this is how you see it and low customer satisfaction is common). There is no planning or effort put into marketing these services and usually they deliver no revenue. They are funded from product sales.

2. The next step is offering your product with certain services available when the customer comes looking. The product is still the main component of your business but you pick up random service business as the opportunity arises. Services are still a small part of your business and it is difficult to profit from the services you offer.

3. You start to realise that in order to differentiate your product from your competitors you can offer services along with the product and provide a package for the customer. Your focus is still on product sales but the additional professional services you can offer with the product are seen as a key ingredient in your offerings. Now you can start to make some money from these services both in increased product sales and service revenue.

4. The next step is when the services that you offer start to lead the product sales. You are seen as a solution provider and one of the solutions you provide is your product but your expertise and professional services are highly valued by customers. This is a transformational step.

5.  Finally you reach the stage where you are seen as a service provider and you operate as such. Customers see you as a professional service provider and these services are now your main profit generator. Essentially, services are your new product.

As you progress down this path of servitization you will develop enhanced customer relationships that will have an extremely positive impact on your business. You may also identify new markets for your services and products that did not exist before.  

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22. June 2009 by Aidan.

You wouldn’t launch a product without knowing how you are going to pay for it. However all too often companies start to offer services without giving a lot of thought to the funding mechanism.

Here are 5 ways to fund the services that you offer:

1. Bundle the cost of the service in with the product. This is one of the most common methods for product manufacturers and is essentially the warranty that you offer. However you need to know what the warranty is going to cost you so that you can ensure the product price covers this additional cost. If you don’t have a product sale to fund the service then you need to consider one of the following:
2. Charge customers for the service. This is the direct revenue model, you provide the service and the customer pays for it. Sounds easy, however it can be difficult to determine the right price for the service. To remain in business for the long term you need to sell your services for a price that is fair and palatable for your customers. You can rip them off once but they won’t give you a second chance. Benchmark yourself against what is a reasonable price for the market you are in and what your competitors charge. You don’t have to charge the same, it can be more or less, but you do need to be able to tell people why it is different.
3. Service delivery is a two way street and relies on interaction and effort from both the service provider and the customer. Since the effort required from each side will influence the cost why not see if the customer can take over more of the work from you. It will allow you to reduce the cost of providing the service, which is one way to fund it! If you are really good, you can charge the customer for training them on how to serve themselves…:)
4. Review your process for service delivery to determine where you can remove steps from it. This can have two big benefits. Every step you can remove from the service delivery process will reduce your operating costs and get the service to the customer quicker…a winner for both sides.
5. Look at the long term. Are there investments (hardware, software, staff training, etc.) that you can make now that will reduce your costs in delivering the service in the long term. Spend now to save later.

  These tips give you some ideas to look at when you are designing your service offerings, and that is the time when you should be examining how to fund your service. Service excellence is not cheap and someone has to pay for it.

There is of course a 6th tip, but that’s called Charity…..

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15. June 2009 by Aidan.

Passing through Dublin Airport this morning, I saw a lovely new shopping area on the way down to the A departure gates. It was beautifully designed and nicely laid out.

As I walked through it however I started to notice a problem.

In this new shopping area there were two shops that in particular stood out from the others, for the wrong reasons. One is a shop specialising in selling bottled water from around the world. The other is one of those seafood and caviar bars that you see in Heathrow and other international airports. What was striking about these two shops was that they were empty.

The problem, as I see it, is that these were planned and designed some time ago, when these types of high end luxury shops were cashing in on the wealth in Ireland and of her visitors. So they seemed like a good idea at the time. However the market has changed dramatically since these shops were planned and it no longer seems like a good idea to anyone to pay €124 for a bottle of still water (even if it is Fillico King water from Japan) or splash out on beluga caviar while you are waiting for your Ryanair flight to Luton.

It shows the risks of planning too far in advance and ignoring the changing market between planning and implementation times.  

How long will it be before they are replaced with a water font and a fish and ship shop?

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