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The Idea in Brief

In every industry, products are becoming commoditized faster than ever. To stand up out from rivals, many manufacturers take begun offer value-added services (installation, training, maintenance). When this strategy works, services get new greenbacks cows. But for every success story, failures abound: Customers aren't willing to pay. Revenues are low. Companies barely break even.

That's because manufacturers, dazzled by this strategy's hope, jump in without preparing. And they get blindsided by the complexities of providing services.

To sell coincident services profitably, start slowly, advise Reinartz and Ulaga. Kickoff, charge for unproblematic services you lot're already providing—such equally transportation or insurance. Y'all'll build enthusiasm for adding more complex services. Deliver your services efficiently to safeguard your profits. And train salespeople to pitch complex services, including helping customers sympathise these offerings' benefits.

By taking these steps, manufacturers have derived upwardly to half their sales from services. And they've accomplished margins on services up to 8 times those on product sales.

The Thought in Practice

Reinartz and Ulaga suggest four steps to selling services profitably:

Charge for Simple Services Yous Already Provide

Past switching your electric current services from "free to fee," you make managers and customers aware of their value. Example:

Gas company Air Liquide used to buy cylinders in which to send gas to industrial customers. Clients allow the cylinders pile up at their sites, forcing Air Liquide to bear more of them. The company began charging a small-scale rental fee for cylinders. This generated several hundred meg euros a twelvemonth in fees. Information technology too motivated customers to optimize their cylinder inventories. And Air Liquide could sharply reduce its floating inventory, transferring cylinders from customers that didn't demand them to those that did.

Streamline Your Back-Role Processes

To foreclose commitment costs from eating upward your service-offering margins, streamline unnecessary back-office processes. Case:

Air Liquide used to regularly mail gas-consumption reports to customers. When information technology realized some customers didn't use the information, it discontinued the reports for those customers. Information technology thus reduced its costs to serve selected customers while maintaining perceived value of the service.

Create a Service-Savvy Sales Force

Complex customer solutions require longer sales cycles, which tin spark resistance among salespeople used to closing deals (and earning commissions) faster. And purchasing decisions for these solutions are made high up in customers' hierarchy. Salespeople may be unused to discussing terms with more senior managers.

To retrain your sales forcefulness to sell services, give them financial incentive to promote your services. And educate them about how to communicate and negotiate with senior managers. Example:

Schneider Electric switched the focus of its salespeople from cost-plus pricing to value-based pricing when promoting its services. This involved educating them virtually how their customers' managers justified decisions internally, so salespeople could help the managers they dealt with take more responsibility for shaping decisions.

Focus on Customers' Processes

To provide high-margin services that customers volition value, managers throughout an organization must deeply sympathize customers' issues and blueprint offerings that will solve those issues. This means gathering data on customers' processes and structures. Example:

Forklift manufacturer Fenwick installed data-collecting sensors and radio-frequency identification engineering in its forklifts, to aggregate valuable information about how customers used its equipment. It used the resulting noesis to develop new service offerings, including remote monitoring, a customer-specific intranet, and a school for forklift drivers. Today, 50% of its €500 million in revenues comes from services adult over the past 15 years.

Manufacturers frequently believe that adding value in the grade of services will provide a competitive reward later on their products offset to become bolt. When the strategy works, the payoffs are impressive, and a company may fifty-fifty observe that its new service business makes more money than its products. But for every success story, at least v cautionary tales remind u.s.a. that manufacturing companies will most probable struggle to turn a profit from their service businesses.

Product-centered companies are pursuing service strategies for a number of reasons. Of particular interest among them are three drivers of growth in B2B services:

Outsourcing trends.

In recent years asset optimization has been a source of growing concern to many business customers. With higher returns on assets expected, production units condign more flexible, and technology steadily advancing, customers are focusing more on their core businesses and are more willing to outsource nonstrategic processes.

Saturation of an installed base.

Equipment manufacturers find information technology increasingly difficult to grow an installed base of operations. For example, in 2005 Otis, with global revenues of $ix.6 billion, sold approximately 100,000 new elevators and escalators while servicing an installed base of more than 1.v million worldwide. To maintain growth, companies like this have little choice but to make major acquisitions or develop services.

Commoditization in product markets.

Production cost erosions are exacerbated by a growing tendency toward commoditization. Most suppliers, even in emerging economies, can satisfy required product standards—so manufacturers plough to services to set themselves apart from the competition.

Even the best stumble. Consider i large technology business firm we studied—a world leader in medical equipment, Information technology, automotive equipment, and transportation systems. Back in 2003 the visitor's €5 billion IT business unit realized that the express product-related services it offered, such as installation and training, generated twice the iii% to iv% cyberspace margins it earned on its increasingly commoditized product offerings. The unit decided, therefore, to invest heavily in developing its service capabilities for large clients. Managers estimated that such customized services would soon generate margins of 15%.

The gauge proved very wide of the marker, and the unit of measurement recorded a negative net profit margin of more than 10% in 2005. The venture was a serious loss-maker, costing the grouping around €260 million in 2005 alone. The losses stemmed from several distinct causes: First, the company institute that the back-office product of complex services was much more difficult than expected. Each customer's requirements were highly customized, which meant that little learning and cognition could be leveraged across cases. Second, the salespeople were used to selling products with basic service contracts fastened, and their traditional contacts at target firms were too low in the hierarchy to make decisions about multimillion-euro solutions contracts. Third, much of the noesis effectually the service production had to be sourced externally—which proved fourth dimension- and resource-intensive. The board fellow member responsible for services was frank about the mistakes: "We wanted also much as well soon, and we simply weren't ready for information technology."

Over the past iii years we have investigated how manufacturers in business markets can develop profitable services. Nosotros conducted in-depth studies of 20 industrial companies operating in a broad diversity of product markets, including adhesives, automotive coatings and glass, bearings, cables and cabling systems, energy generation and distribution, onboard electronics for civilian and military machine aircraft, printing presses, and specialty chemicals. Every firm was amid the tiptop three in its industry, and the managers we interviewed were all central determination makers, ofttimes executive board members. Throughout the process we interviewed multiple people in different business organization units and country organizations. Nosotros went on to take discussions with more than than 500 B2B managers in a series of executive workshops; these complemented the insights from our interviews.

As our research process unfolded, we uncovered a broad variation in revenues and profits from service offerings. Ane group of companies derived upwardly to half of their sales from services, and margins up to viii times those on product sales. A 2d group reported a very dissimilar experience: Although those companies had fabricated significant investments in the development of services, customers proved unwilling to pay, revenues were low, and the companies barely bankrupt even. Comparing the ii groups, we were able to identify clear differences in the means they had developed their service businesses.

Like the technology company in our example (which has since turned itself around in this respect), companies unsuccessful at developing service businesses take tried to transform themselves too apace. Successful firms begin slowly, identifying and charging for simple services they already perform and using those to build enthusiasm for calculation more-circuitous ones. They then standardize their commitment processes to exist as efficient as their manufacturing ones. As their services become more than circuitous, they ensure that their sales force capabilities keep pace. Finally, direction switches its focus from the company'southward processes and structures to the nature of customers' issues, the opportunities that customers' processes afford for inserting new services, and the new capabilities needed to deliver those services. (Come across the exhibit "The Path to Profits in Industrial Services.") Let'due south take a closer look at those iv steps.

Each step on the path to service profitability requires that companies focus on detail questions and goals. Our inquiry suggests that they should exist sure they've achieved each goal before proceeding to the side by side stride.

#Recognize That You lot Are Already a Service Company#Industrializethe Back Office#Create a Service-Savvy Sales Forcefulness#Focus on Customers' ProcessesKey Questions#How do we currently sell services across concern units and countries?*What are the best practices inside our organisation?*Which services tin be moved from complimentary to fee?#Which services are profit drains or moneymakers?*How can we ensure cost-efficient service processes?*How can we tailor services to customers' needs?#Is our sales force ready to promote services along with products?*Can nosotros explain the benefits of our services to customers?*Are we willing to move to longer sales cycles?#Are our offerings aligned with our customers' goals and processes?*Can we address their problems holistically?*What farther expertise do we need?Fundamental Goals#A list of services we currently provide to customers*Revenue from easily chargeable services*A senior executive who oversees the evolution of service capabilities#Standardized service processes and control mechanisms*Service platforms flexible enough to fit individual customer contexts Service-selling know-how or separate sales forces*Incentive systems that promote service sales*Tools for documenting value and communicating it to customers#Detailed descriptions of core client concerns and operating processes*A shift from activity-based to event-oriented operation indicators*A checklist of capabilities needed to compete in new service spaces

ane: Recognize That You lot Are Already a Service Company

Many product companies are in the concern of delivering services; they just haven't realized it all the same. These companies are missing out on the revenues they could generate simply past charging for what they already do. The offset step in expanding a service capability is to make both the company's managers and its customers enlightened of the value provided by existing services.

Many production companies are already delivering services; they just oasis't realized it notwithstanding.

Have the pharmaceuticals behemothic Merck. In one of the visitor's product categories, its French subsidiary had a long-standing tradition of including delivery in its product price for customers. Because specialty chemicals are high in value merely low in book, Merck had never questioned its responsibleness to assume transportation and insurance costs, which correspond a tiny fraction of the corporeality invoiced. And because no aircraft costs were itemized, customers were unaware of the value Merck provided. A few years agone the company put this tradition to a test: Managers randomly selected 100 customers and changed the terms of delivery from "shipping and insurance paid" to "ex works," though the lesser line barely changed. Ninety pct of those customers readily paid the additional charges, seemingly without noticing. Of the ten% that recognized the change, just half insisted on returning to the prior terms of payment. Merck re-established the original terms for those customers—simply it had succeeded in managing the transition from "free to fee" for the other 95%. In one case the new billing terms had been rolled out to the entire customer base in France, Merck's profitability in this product category improved significantly, even though the price to customers was minor.

Switching services from free to fee clarifies the value of the assets involved for both managers and customers. The French gas provider Air Liquide too took this tack. The company had traditionally purchased millions of cylinders in which to ship small quantities of gas to industrial customers. Information technology charged customers merely for the gas delivered, supplying the cylinders gratuitous. Consequently, customers took no special notice of how many cylinders they had accumulated, and the visitor was stuck with considerable floating inventory. Starting in the mid-1990s, however, Air Liquide charged a small rental fee of €5 to €vii per cylinder per month. Non merely did this turn a profit bleed into a profit engine, generating several hundred million euros a year in fees, only it created customer sensation. Once the gas cylinders had a price tag, customers wanted to optimize their inventories. As a result, Air Liquide was able to sharply reduce its floating inventory, transferring cylinders from customers that didn't need them to customers that did.

Large companies can uncover profitable existing service offerings simply by comparing billing practices beyond their operating units. We establish that at Nexans, the world'southward leading cablevision manufacturer, subsidiaries in some countries were charging customers a fee for cable drums, whereas in other countries they were non. Nexans holds large inventories of high-voltage cable in club to ensure rapid commitment; applying the fee across the whole company represented a significant opportunity to recoup its investment in working upper-case letter.

Smart companies volition put a senior executive in charge of looking at practices in other business lines to uncover hidden services. He or she can and then get-go crafting a forrad-looking strategy for services on the backs of early wins. By giving the process an owner early, companies can ensure that their service initiatives are not merely opportunistic ideas developed by individual business units only part of a strategy to capture best practices and gyre them out across the organization. Schneider Electric, a French electrical-equipment company, chose this road. Early in its motility toward services it created a strategic deployment and services sectionalization whose executive vice president was charged with auditing existing services across the organization and so creating a coherent strategy for offer new services. An executive board member with 20 years of experience in the visitor was named to the post.

2: Industrialize the Back Role

Manufacturers are accustomed to stable and controllable product processes. But when they venture into value-added services, they may find front-office service customization turning into a delivery-costs nightmare. Unless they can forestall this, their service margins will suffer. One of the managers we interviewed explained, "To earn coin in services, you need to industrialize the back role. Companies like GE and IBM really are process freaks."

Value-added services can plow front end-function service customization into a delivery-costs nightmare.

The German language printing-equipment maker Heidelberger Druckmaschinen (Heidelberg) has experienced a back-part dynamic that can occur when manufacturing companies motility into services. In France its customers currently choose one of ii ways to maintain their printing equipment: pay-every bit-you-go, in which case Heidelberg sends an invoice for parts and labor each fourth dimension a field technician responds to a customer'southward call; or a full-service contract, in which case customers have access to a help desk, remote monitoring, and preventive maintenance. The trouble is that full-service customers call for assistance twice equally oft every bit pay-equally-y'all-become customers. And considering those customers have no reason to monitor costs, Heidelberg's field technicians replace spare parts on their printing presses much more than readily, make on-site visits to them much more often, and are likelier to schedule those visits poorly or to forget essential equipment, necessitating still more visits. (The technicians, for their part, tend to presume that all costs are covered past the hefty full-service fee.) All this erodes Heidelberg's margins on the full-service contracts, making them less profitable than pay-as-y'all-become.

There are three ways companies can prevent delivery costs from eating upwards their service-offer margins. First, they can build flexible service platforms that see customers' varying needs while relying on mutual delivery processes, much as proficient manufacturers create distinct product models based on standard product platforms. Ane of our interviewees explained, "We offer six different types of maintenance contracts. Eighty pct of customers fit into one of these boxes. The customer tin can expect at these offers and see which of them best matches his state of affairs."

Second, the successful firms in our written report continually monitored the costs of their processes to identify profit drains. Air Liquide appointed an executive with specific responsibility for trying to standardize services in the organization. Backed past tiptop direction and supported by an internal job force, this executive taught managers and frontline employees in operational units how to systematically accept costs out of service production and delivery processes while making sure that customers withal got what they expected. For example, Air Liquide regularly mailed gas-consumption reports to its customers. But when the standardization team reviewed this practice, they constitute that some customers made no employ of the information. By discontinuing that function of the service packet for those customers, Air Liquide was able to reduce its costs to serve selected customers while maintaining the perceived value of the service provided.

Third, successful companies are quick to exploit procedure innovations made possible by new technologies. The Swedish bearings manufacturer SKF helps customers extend the service life of their equipment by enabling off-site access to an electronic monitoring tool via a secure internet browser. Vibration-assay data, for instance, can warning a customer early about potential automobile failure. Such smart services allow the company to perform starting time-level maintenance without deploying field technicians for on-site visits.

3: Create a Service-Savvy Sales Force

As long every bit a company considers services to be an add together-on to existing products, its sales force—with some training, of course—will probably be able to handle both product and service sales. But if companies are to move abroad from straightforward product-related services into more complex customer solutions, managers must have a new look at sales direction strategies. Services crave longer sales cycles, and the sales process is often more circuitous and strategic, pregnant that decisions are made high up in the client'due south hierarchy.

Failure to recognize this challenge got Heidelberg into trouble. In the early on 2000s the company started offer its customers remote monitoring of their press presses—to be sold as an add-on, because the service could save customers many hours of expensive machine downtime. On average, one hour of reanimation in a print shop can cost several hundred euros; given that the lead time for delivering spare parts to a customer'south site is typically 24 hours, a single breakdown may cost thousands. Heidelberg priced its new offer significantly beneath this corporeality, merely customers did not seize with teeth. The problem was that although the visitor'southward sales force and field technicians were well equipped to promote standard service contracts, they weren't up to explaining more circuitous customer solutions—largely because they were accustomed to discussing terms with people in procurement (who tend to focus on cost per office or per service) or people in charge of in-house maintenance (who might view a service offering as a threat to their jobs). What Heidelberg needed was a sales force that felt comfortable talking to production managers—people who would see the implications of the new service for the total price picture.

Product salespeople are often actively inimical to change, equally Air Liquide quickly discovered when it started offering services. Acme salespeople argued that margins from the firm's traditional product business were already high enough and that the visitor still had room for growth in its existing product markets. Services were labor-intensive, would tie upward considerable financial resources, and could impairment product sales if the company failed to deliver on its promises.

The successful manufacturers nosotros studied all took pains to retrain their sales forces. In a major overhaul of its sales organization, Schneider Electric switched the focus of its salespeople from cost-plus pricing to value-based pricing when promoting its services. This involved educating them well-nigh how their customers' managers justified decisions internally, so that the salespeople could help the managers they dealt with take more responsibility for shaping decisions. But even afterward extensive training, companies may find that they accept petty selection but to fire and rent; a few in our study replaced 80% of their existing sales forces. Even those that managed to retain a significant proportion of their people still needed some specialized newcomers. Air Liquide hired several agri-nutrient engineers to develop sales expertise for services in food-processing industries across Europe. The French forklift manufacturer Fenwick recruited specialists at the corporate level and in each of its regional sales offices to promote services fastened to tri-directional forklift trucks. A good place to find this talent internally is among service-support staff members.

Most of the successful companies we studied made some kind of distinction between product and service salespeople. At GE Medical Services, for case, production salespeople are "hunters," expected to get out and get orders for new equipment. Service salespeople are called "farmers"; GE expects them to abound their relationships with customers and sell services over time. Splitting the sales force is not always a perfect solution, however. Xerox has been very successful in establishing a solutions business organisation in which the focus is not on providing office equipment only, rather, on helping clients manage their document catamenia. The organization withal continues to do considerable business the old manner, by selling printers and copiers and slapping simple service contracts on them. The two units end up competing for midsize customers: Whichever unit is outset to get a lead pursues the opportunity vigorously, not wanting the other to get involved—even if it might exist more suitable from a companywide perspective.

Information technology almost goes without proverb that a motion to services will fail unless salespeople are financially motivated to promote them instead of focusing solely on product sales. Such a shift is hard when product revenues are much college than service revenues. For example, if Air Liquide supplies €500,000 worth of gas to an individual customer, the related services may be invoiced at only a few thousand euros. If objectives for service and product sales are not properly coordinated, their sales forces may even compete. When Air Liquide started to promote inventory management services to assist customers in optimizing the number of gas cylinders they had on paw, the company's production sales force resisted out of fear of losing its traditional revenues. Management had to explain that although the new offer would indeed enable customers to reduce their on-site inventories, it would likewise help to lock in customers over the long run and to grow Air Liquide's share of their purchasing overall. To reduce conflict between the two sales forces, Air Liquide created a double credit system: For each closed deal, product and service salespeople would go the same commission.

Finally, selling services requires that companies develop tools to document and communicate the value those services create for customers. These tools range from customer case studies and white papers to sophisticated simulation software. A good example is Documented Solutions, a tool developed past SKF over the past 15 years. Conceived by the company's U.Southward. subsidiary, it helps SKF salespeople worldwide to identify and explain to customers how much they tin save past using the company's services. The tool is linked to a database that compares the best practices of SKF customers around the earth. It besides allows customers to summate their return on investment.

four: Focus on Customers' Processes

Once manufacturers take learned how to sell and deliver services in a cost-efficient mode, they can move toward addressing customers' issues and processes holistically. This means shifting focus from their own processes, incentives, and structures to those of the client.

Fenwick constitute a good way to do this: It installed data-collecting sensors and radio-frequency identification applied science in its forklifts, to amass valuable information well-nigh how customers used its equipment. This knowledge became the ground for developing new service offerings, including access control and remote monitoring, nugget direction, a client-specific intranet—Fenwick Online—and even a schoolhouse for forklift drivers. Today l% of the company's €500 million in revenues comes from services developed over the past 15 years.

When manufacturers move beyond coincident production-related services to complex offerings, they demand to revisit the basis for their pricing and the manner they measure success. Production-oriented companies typically focus on input-based indicators—hours of equipment use and numbers of units sold. As long as their services are detached and productlike and performance adventure is limited, that focus is entirely appropriate. In such cases, services are viewed equally products in both the back and front offices—meaning that their input costs have center stage. Just above that level they crave companies to focus on trouble solving from the customer's perspective. When a company commits to solving a customer'south problem, it assumes a much higher adventure: The goal is to accomplish a certain output, and the degree to which information technology is achieved is the footing for compensation. This was truthful for all the successful companies nosotros studied. Clearly, pricing and so becomes much more complex. The French jet-engine maintenance company Snecma Services, for case, writes service contracts that guarantee air carriers a certain number of flying hours for their jet engines, however much servicing fourth dimension that requires. Similarly, Hilti, headquartered in Liechtenstein, promotes an "all-round hassle-gratis" service package for the ability tools information technology leases to the construction manufacture. The company's customers don't accept to buy, say, a drill for their operations; they "pay past the pigsty" and are guaranteed a drill on the construction site.

When a company commits to solving a customer's trouble, it assumes a much higher risk.

Once executives accept redefined the value proposition around solving customers' problems, they may apace detect a lack of the expertise required to tackle the processes involved. The Pittsburgh-based industrial-coatings specialist PPG offered to take over the paint shop in Fiat'southward Torino automotive plant. Nether the new deal, Fiat would pay PPG according to the number of cars flawlessly painted rather than the amount of industrial paint bought. PPG had to learn how painting robots function in order to command the effect of its painting processes. Similarly, when SKF started developing services around its core product—bearings—the company studied how bearings might break downwardly in its customers' equipment so acquired the know-how to aid manage such breakdowns. Through internal development and acquisition over the past decade, SKF has become a world leader in condition monitoring, industrial sealing, lubrication systems, and vibration analysis.• • •

Services can be a powerful fashion to lock in customers and increment their switching costs. Equally i manager at Air Liquide put information technology, "The more nosotros enter into a customer'south business, the more the customer forgets how things are washed." At the same fourth dimension, services represent an excellent route for acquiring new production business organization. Fenwick managers told us, "Whenever we can't direct break into a customer account with a product, we'll offer to provide services on a competitor'south production." Finally, the relationship adult by providing services positions manufacturers to anticipate hereafter business organization. But these considerable benefits tin't exist accomplished overnight. The four steps nosotros've outlined volition assist to speed the procedure and boost companies' profits.

A version of this commodity appeared in the May 2008 outcome of Harvard Business Review.