Moving from products to services: The six big challenges

Product companies are looking to services as a way of increasing profitability and leveling out the revenue cycle. But marketing Professor Stephen Brown with the W. P. Carey Scho0ol’s Center for Services Leadership, says that companies who attempt the shift must navigate through a continuum. Developing the service solution that generates major revenue is a complex process. Brown and colleagues have examined the challenges.

Stephen Brown tells a story about the education of his dog, Dini, a graduate of PetSmart's Pet Academy. During class, "pet parents" and their puppy pupils would practice new behavior skills by walking around the store. After school, Brown says, more than half purchased something before heading out to their cars.

PetSmart's story of regaining profitability through the development of services is often held up as an example of the trend that's seeing more and more companies grow through services infusions. IBM is another. In the past 20 years Big Blue has transformed itself to the extent that services now constitute 60 percent of its business.

Brown, professor of marketing and distinguished faculty with the W. P. Carey School's Center for Services Leadership, says that companies who attempt the shift must navigate through a continuum. At the start, most offer what he calls "entitlement services" such as warrantees that support the product and which are often free. At the finish line, companies have developed "service solutions," which focus on the needs of the customer — and are a major source of revenue.

But the shift from a product focus to services is a complex process, and it's not an easy move for many companies.

It's a big deal

For PetSmart, the move from big box products retailer to home of the Pet Academy and other services started with the realization that competing with the likes of Wal-Mart on price would mean doom. At the same time, conversations with customers revealed that pet owners had many more needs than just kibble. Satisfying those needs and interests turned out to be high margin and immune to commoditization. And, happily, the services helped push product sales as well.

Product companies are feeling pressure from outside to offer services, Brown says. Like PetSmart of old, many companies are struggling as products become commodities and differentiation becomes an ever-falling price. In this environment, they are seeing the competition offering services. Customers are demanding a wider service offerings as well.

Internally, services are being recognized as a means of leveling out the revenue cycle. For example, General Electric manufactures locomotives. After that one-time big ticket sale, GE makes many times more in services on the machinery, spread out over a number of years.

The six big challenges

Recently, Brown was part of a research team that investigated the challenges that companies face when transitioning to a services focus. The team also included Center for Services Leadership Executive Director Mary Jo Bitner, University of North Carolina Professor Valarie Zeithaml and W. P. Carey doctoral student Jim Salas. At five Fortune 100 companies they conducted four to six in-depth interviews with executives and high level managers leading the services initiative. The companies represented the following sectors: heavy equipment, health care supplies, building supplies, aerospace supplies and diverse manufacturing.

The interviews yielded a list of six areas where change needs to occur if the company is to successfully navigate the services continuum. The areas are: customization, capabilities, organizational structure, culture, collaboration with customers, and more. Here's what the research interviews uncovered about challenges and best practices.

Customization:Companies that move toward services find that customers want customized solutions, which creates tension between meeting the customer's expectations and doing so in such a way that the firm makes money. The key is striking a balance, Brown says, between customization and standardization.

"The interesting result is that companies who are doing it right are doing both," he says. "When they are interfacing with the customer there is a high level of customization, but behind the scenes the companies have created modules that allow them to deliver unique solutions to customer needs." One firm, Brown said, has 25 service modules.

Capabilities:Brown explained as companies move their service offering from legacy to service solution, the person representing the customer is often higher up in the company, even a C-suite executive. This puts strain on the sales department, which is now charged with handling high level collaborations and monitoring service delivery end-to-end.

Brown says that many companies find that about a third of their sales people can handle these higher level contacts, a third can be trained for it, but another third cannot or will not make the transition. "You may need to recruit higher caliber sales people," Brown comments, specifically people with collaborative expertise.

Some companies have resolved this issue by forming partnerships to carry out service delivery. Since one of the reasons companies move through the service infusion process is to develop closer relationships with customers, this kind of arrangement may raise concerns about "who owns the customer," Brown adds.

Organizational structure: Where should the services and solutions business live within a company? This is an issue that companies struggle with, Brown said. Some firms try piggybacking services onto their existing products divisions. This puts the new services business at a potential disadvantage as it competes for resources, he says. In addition, developing a metric for measuring success can be tricky, because the two units are so different.

Other firms have created free-standing business units for the service offerings. This can work, Brown said, but those new units need adequate access to the C-suite for support and resources, and the metrics question does not go away.

Culture: This one is the biggest stumbling block for product companies, Brown says. By their nature, product companies are engineering and technology-focused: "They are infatuated with their products," he said. But service companies are pre-occupied with the customer. "They're infatuated with how to help customers reach their key performance indicators."

In this area as well as organizational structure, the C-suite must display strong support for the services business. In addition to advocacy, however, the C-suite needs to provide a "line of sight" for the services entity. In order to retain talented people the company needs to lay out a career path for services that includes advancement.

Collaboration with customers: Lots of companies have VOC (voice of the customer) covered, Brown says. That includes customer satisfaction measurement, focus groups, advisory boards, user groups, and the like. "But," he stresses, "there must also be 'co' — co-design, co-development, co-production, co-delivery with customers." There's lots of opportunity in this space because so little is being done now, he says.

An example of a company that collaborates with the customer is IKEA, Brown said. Both sides clearly understand their part in delivering the service. In the B to B arena, Volvo Fleet Services is an example of a service — in this case fuel efficiency — that rolls out using the combined efforts of both Volvo and the client company.

More: Brown and his colleagues included a catch-all category to wrap up the many details that go into a successful services infusion. Identifying the value proposition includes answering a number of questions: how do we articulate the benefit of the service; how do we price it — is pay-for-performance the only and/or best model; how will we measure success; do we want or need channel partners, and if so, what will the working arrangement look like.

Learn more

Services Infusion webinar led by Brown and Bitner

Other research resources

Making Services a Science: New Study Finds Great Interest — and Great Confusion

New Mindset: Evolving from a Product to a Services Provider