“Servitize” to convert cost centre into profit centre

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.  

Posted in General | No Comments »