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The Idea in Brief

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

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

To sell ancillary services profitably, start slowly, propose Reinartz and Ulaga. First, charge for simple services you lot're already providing—such as transportation or insurance. You'll build enthusiasm for adding more complex services. Evangelize your services efficiently to safeguard your profits. And train salespeople to pitch circuitous services, including helping customers understand these offerings' benefits.

By taking these steps, manufacturers have derived up to half their sales from services. And they've achieved margins on services up to viii times those on production sales.

The Idea in Do

Reinartz and Ulaga suggest four steps to selling services profitably:

Accuse for Simple Services You Already Provide

By switching your current services from "costless to fee," you make managers and customers aware of their value. Instance:

Gas company Air Liquide used to buy cylinders in which to transport gas to industrial customers. Clients let the cylinders pile upward at their sites, forcing Air Liquide to behave more of them. The company began charging a modest rental fee for cylinders. This generated several hundred million euros a year in fees. Information technology also motivated customers to optimize their cylinder inventories. And Air Liquide could sharply reduce its floating inventory, transferring cylinders from customers that didn't need them to those that did.

Streamline Your Dorsum-Office Processes

To prevent delivery 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 it realized some customers didn't use the information, information technology discontinued the reports for those customers. It thus reduced its costs to serve selected customers while maintaining perceived value of the service.

Create a Service-Savvy Sales Force

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

To retrain your sales strength to sell services, requite them financial incentive to promote your services. And educate them well-nigh how to communicate and negotiate with senior managers. Case:

Schneider Electrical switched the focus of its salespeople from cost-plus pricing to value-based pricing when promoting its services. This involved educating them about 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 loftier-margin services that customers volition value, managers throughout an system must securely understand customers' bug and blueprint offerings that volition solve those problems. This means gathering information on customers' processes and structures. Example:

Forklift manufacturer Fenwick installed information-collecting sensors and radio-frequency identification engineering science in its forklifts, to amass valuable information about how customers used its equipment. Information technology used the resulting knowledge 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 developed over the past 15 years.

Manufacturers oft believe that adding value in the course of services will provide a competitive advantage later on their products offset to get commodities. When the strategy works, the payoffs are impressive, and a visitor may even observe that its new service business makes more money than its products. But for every success story, at least 5 cautionary tales remind us that manufacturing companies will most likely struggle to turn a 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 contempo years asset optimization has been a source of growing concern to many business customers. With higher returns on avails expected, production units becoming more flexible, and engineering science steadily advancing, customers are focusing more on their cadre businesses and are more willing to outsource nonstrategic processes.

Saturation of an installed base of operations.

Equipment manufacturers observe it increasingly difficult to grow an installed base. For example, in 2005 Otis, with global revenues of $9.half-dozen billion, sold approximately 100,000 new elevators and escalators while servicing an installed base of operations of more than 1.5 one thousand thousand worldwide. To maintain growth, companies similar this have little pick but to make major acquisitions or develop services.

Commoditization in product markets.

Product toll erosions are exacerbated past a growing trend toward commoditization. Nigh suppliers, even in emerging economies, can satisfy required production standards—so manufacturers turn to services to set themselves apart from the contest.

Even the best stumble. Consider one large engineering science firm we studied—a world leader in medical equipment, IT, automotive equipment, and transportation systems. Back in 2003 the visitor'due south €five billion Information technology business unit realized that the limited product-related services it offered, such as installation and training, generated twice the 3% to iv% net margins it earned on its increasingly commoditized production offerings. The unit decided, therefore, to invest heavily in developing its service capabilities for big clients. Managers estimated that such customized services would soon generate margins of 15%.

The estimate proved very broad of the mark, and the unit of measurement recorded a negative internet profit margin of more than 10% in 2005. The venture was a serious loss-maker, costing the grouping around €260 million in 2005 solitary. The losses stemmed from several singled-out causes: Beginning, the visitor found that the back-office production of complex services was much more difficult than expected. Each customer's requirements were highly customized, which meant that little learning and knowledge could be leveraged across cases. 2nd, the salespeople were used to selling products with bones service contracts attached, and their traditional contacts at target firms were too low in the hierarchy to brand decisions about multimillion-euro solutions contracts. Third, much of the noesis around the service production had to be sourced externally—which proved time- and resource-intensive. The board member responsible for services was frank about the mistakes: "We wanted too much also soon, and we just weren't ready for it."

Over the past three years we take investigated how manufacturers in concern markets can develop assisting services. Nosotros conducted in-depth studies of 20 industrial companies operating in a wide variety of production markets, including adhesives, automotive coatings and glass, bearings, cables and cabling systems, energy generation and distribution, onboard electronics for civilian and war machine aircraft, printing presses, and specialty chemicals. Every house was amongst the height three in its industry, and the managers we interviewed were all cardinal decision makers, oftentimes executive lath members. Throughout the process nosotros interviewed multiple people in different business units and land organizations. We went on to have discussions with more than 500 B2B managers in a series of executive workshops; these complemented the insights from our interviews.

Equally our research process unfolded, nosotros uncovered a wide variation in revenues and profits from service offerings. Ane group of companies derived upward to half of their sales from services, and margins up to 8 times those on product sales. A 2nd group reported a very dissimilar experience: Although those companies had made significant investments in the development of services, customers proved unwilling to pay, revenues were low, and the companies barely broke fifty-fifty. Comparing the 2 groups, we were able to identify clear differences in the means they had developed their service businesses.

Like the engineering science company in our example (which has since turned itself around in this respect), companies unsuccessful at developing service businesses accept tried to transform themselves too quickly. Successful firms begin slowly, identifying and charging for simple services they already perform and using those to build enthusiasm for adding more-circuitous ones. They then standardize their commitment processes to be as efficient as their manufacturing ones. As their services go more complex, they ensure that their sales strength capabilities keep stride. Finally, management switches its focus from the visitor'due south processes and structures to the nature of customers' problems, the opportunities that customers' processes beget for inserting new services, and the new capabilities needed to deliver those services. (See the exhibit "The Path to Profits in Industrial Services.") Let'southward take a closer wait at those 4 steps.

Each step on the path to service profitability requires that companies focus on detail questions and goals. Our research suggests that they should be sure they've accomplished each goal earlier proceeding to the next step.

#Recognize That You lot Are Already a Service Visitor#Industrializethe Back Office#Create a Service-Savvy Sales Force#Focus on Customers' ProcessesKey Questions#How do we currently sell services across business units and countries?*What are the best practices within our organization?*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 nosotros tailor services to customers' needs?#Is our sales force ready to promote services along with products?*Can we explain the benefits of our services to customers?*Are nosotros willing to move to longer sales cycles?#Are our offerings aligned with our customers' goals and processes?*Can we address their problems holistically?*What further expertise do we need?Key Goals#A list of services we currently provide to customers*Revenue from hands chargeable services*A senior executive who oversees the development of service capabilities#Standardized service processes and control mechanisms*Service platforms flexible plenty to fit individual client contexts Service-selling know-how or dissever sales forces*Incentive systems that promote service sales*Tools for documenting value and communicating it to customers#Detailed descriptions of core customer concerns and operating processes*A shift from activity-based to outcome-oriented performance indicators*A checklist of capabilities needed to compete in new service spaces

ane: Recognize That You lot Are Already a Service Visitor

Many product companies are in the business of delivering services; they just haven't realized it however. These companies are missing out on the revenues they could generate simply past charging for what they already practice. The first stride 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 product companies are already delivering services; they merely haven't realized it yet.

Take the pharmaceuticals giant Merck. In one of the company'south production categories, its French subsidiary had a long-standing tradition of including delivery in its product price for customers. Considering specialty chemicals are high in value but depression in volume, Merck had never questioned its responsibility to assume transportation and insurance costs, which stand for a tiny fraction of the amount invoiced. And considering no shipping costs were itemized, customers were unaware of the value Merck provided. A few years ago the company put this tradition to a test: Managers randomly selected 100 customers and inverse 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 10% that recognized the change, only one-half insisted on returning to the prior terms of payment. Merck re-established the original terms for those customers—but it had succeeded in managing the transition from "free to fee" for the other 95%. One time the new billing terms had been rolled out to the entire customer base in French republic, Merck's profitability in this production 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 as well took this tack. The company had traditionally purchased millions of cylinders in which to transport small quantities of gas to industrial customers. It charged customers only for the gas delivered, supplying the cylinders gratis. 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, all the same, Air Liquide charged a pocket-size rental fee of €v to €vii per cylinder per month. Non only did this plough a profit drain into a profit engine, generating several hundred million euros a year in fees, but it created client awareness. Once the gas cylinders had a price tag, customers wanted to optimize their inventories. Every bit 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 comparison billing practices beyond their operating units. Nosotros found that at Nexans, the world's leading cable manufacturer, subsidiaries in some countries were charging customers a fee for cable drums, whereas in other countries they were not. Nexans holds large inventories of loftier-voltage cable in club to ensure rapid delivery; applying the fee across the whole visitor represented a meaning opportunity to recoup its investment in working capital.

Smart companies will put a senior executive in charge of looking at practices in other business organisation lines to uncover hidden services. He or she can so start crafting a forward-looking strategy for services on the backs of early wins. By giving the process an possessor early on, companies can ensure that their service initiatives are non just opportunistic ideas developed by individual business units just office of a strategy to capture best practices and roll them out across the organisation. Schneider Electric, a French electrical-equipment company, chose this route. Early in its move toward services it created a strategic deployment and services division whose executive vice president was charged with auditing existing services across the organization and then creating a coherent strategy for offering new services. An executive board member with twenty years of feel in the company was named to the post.

two: Industrialize the Back Office

Manufacturers are accustomed to stable and controllable product processes. But when they venture into value-added services, they may observe front end-part service customization turning into a delivery-costs nightmare. Unless they tin prevent this, their service margins volition suffer. Ane of the managers we interviewed explained, "To earn money in services, you lot demand to industrialize the back office. Companies like GE and IBM really are process freaks."

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

The German printing-equipment maker Heidelberger Druckmaschinen (Heidelberg) has experienced a dorsum-office dynamic that can occur when manufacturing companies motion into services. In France its customers currently choose one of 2 ways to maintain their press equipment: pay-every bit-you-go, in which example Heidelberg sends an invoice for parts and labor each fourth dimension a field technician responds to a customer'south 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 total-service customers call for assistance twice as often as pay-as-you-go customers. And considering those customers have no reason to monitor costs, Heidelberg's field technicians supersede spare parts on their printing presses much more readily, make on-site visits to them much more oftentimes, and are likelier to schedule those visits poorly or to forget essential equipment, necessitating yet more visits. (The technicians, for their part, tend to presume that all costs are covered by the hefty full-service fee.) All this erodes Heidelberg's margins on the total-service contracts, making them less profitable than pay-as-y'all-go.

There are three ways companies tin forbid delivery costs from eating up their service-offering margins. Starting time, they tin build flexible service platforms that meet customers' varying needs while relying on common delivery processes, much as good manufacturers create distinct product models based on standard production platforms. One of our interviewees explained, "We offer vi different types of maintenance contracts. Eighty percent of customers fit into one of these boxes. The customer tin look at these offers and see which of them all-time matches his situation."

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

3rd, successful companies are quick to exploit process innovations made possible past new technologies. The Swedish bearings manufacturer SKF helps customers extend the service life of their equipment past enabling off-site access to an electronic monitoring tool via a secure internet browser. Vibration-analysis information, for instance, can warning a client early on near potential auto failure. Such smart services allow the company to perform first-level maintenance without deploying field technicians for on-site visits.

iii: Create a Service-Savvy Sales Force

Equally long as a company considers services to be an improver to existing products, its sales strength—with some training, of grade—will probably be able to handle both production and service sales. Merely if companies are to motion abroad from straightforward production-related services into more than complex client solutions, managers must take a new look at sales management strategies. Services require longer sales cycles, and the sales procedure is often more complex and strategic, meaning that decisions are made high up in the client'due south hierarchy.

Failure to recognize this challenge got Heidelberg into trouble. In the early 2000s the company started offer its customers remote monitoring of their printing presses—to exist sold every bit an addition, because the service could save customers many hours of expensive automobile downtime. On boilerplate, one hour of reanimation in a print shop can cost several hundred euros; given that the atomic number 82 time for delivering spare parts to a client'south site is typically 24 hours, a single breakup may cost thousands. Heidelberg priced its new offering significantly below this amount, but customers did not bite. The problem was that although the visitor'south sales force and field technicians were well equipped to promote standard service contracts, they weren't upwardly to explaining more complex customer solutions—largely because they were accustomed to discussing terms with people in procurement (who tend to focus on price per part 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 cost picture.

Production salespeople are ofttimes actively inimical to change, as Air Liquide chop-chop discovered when it started offer services. Top salespeople argued that margins from the business firm's traditional product business were already high enough and that the company nonetheless had room for growth in its existing production markets. Services were labor-intensive, would necktie up considerable financial resources, and could harm product sales if the visitor failed to deliver on its promises.

The successful manufacturers we studied all took pains to retrain their sales forces. In a major overhaul of its sales arrangement, Schneider Electrical switched the focus of its salespeople from cost-plus pricing to value-based pricing when promoting its services. This involved educating them about how their customers' managers justified decisions internally, and then that the salespeople could aid the managers they dealt with take more responsibility for shaping decisions. But even after extensive preparation, companies may discover that they have lilliputian choice but to burn down and hire; a few in our study replaced 80% of their existing sales forces. Fifty-fifty those that managed to retain a significant proportion of their people still needed some specialized newcomers. Air Liquide hired several agri-food 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 attached 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 fabricated some kind of stardom betwixt production and service salespeople. At GE Medical Services, for example, product salespeople are "hunters," expected to leave and get orders for new equipment. Service salespeople are called "farmers"; GE expects them to grow their relationships with customers and sell services over fourth dimension. Splitting the sales force is non ever a perfect solution, however. Xerox has been very successful in establishing a solutions business organization in which the focus is not on providing office equipment simply, rather, on helping clients manage their document flow. The arrangement yet continues to practise considerable business organization the former way, by selling printers and copiers and slapping uncomplicated service contracts on them. The two units finish up competing for midsize customers: Whichever unit is first to get a lead pursues the opportunity vigorously, not wanting the other to go involved—even if it might be more suitable from a companywide perspective.

It most goes without saying that a move to services will fail unless salespeople are financially motivated to promote them instead of focusing solely on product sales. Such a shift is difficult when production revenues are much higher than service revenues. For instance, if Air Liquide supplies €500,000 worth of gas to an private client, the related services may be invoiced at but a few chiliad euros. If objectives for service and product sales are non 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 hand, the company'south product sales forcefulness resisted out of fear of losing its traditional revenues. Management had to explain that although the new offering would indeed enable customers to reduce their on-site inventories, it would also 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 bargain, production and service salespeople would get the aforementioned committee.

Finally, selling services requires that companies develop tools to certificate and communicate the value those services create for customers. These tools range from client case studies and white papers to sophisticated simulation software. A skillful case is Documented Solutions, a tool adult by SKF over the past 15 years. Conceived by the visitor's U.South. subsidiary, it helps SKF salespeople worldwide to identify and explicate to customers how much they can save past using the company'south services. The tool is linked to a database that compares the best practices of SKF customers effectually the globe. It also allows customers to calculate their return on investment.

4: Focus on Customers' Processes

One time manufacturers have learned how to sell and deliver services in a cost-efficient way, they tin can move toward addressing customers' problems and processes holistically. This means shifting focus from their ain processes, incentives, and structures to those of the customer.

Fenwick found a adept way to do this: It installed information-collecting sensors and radio-frequency identification engineering in its forklifts, to amass valuable information about how customers used its equipment. This knowledge became the basis for developing new service offerings, including access control and remote monitoring, asset direction, a customer-specific intranet—Fenwick Online—and even a schoolhouse for forklift drivers. Today 50% of the visitor's €500 meg in revenues comes from services adult over the past 15 years.

When manufacturers move beyond ancillary product-related services to complex offerings, they need to revisit the basis for their pricing and the way they measure success. Production-oriented companies typically focus on input-based indicators—hours of equipment use and numbers of units sold. Every bit long as their services are discrete and productlike and performance risk is express, that focus is entirely appropriate. In such cases, services are viewed as products in both the dorsum and front offices—meaning that their input costs take centre phase. But in a higher place that level they require companies to focus on problem solving from the customer's perspective. When a company commits to solving a client's trouble, it assumes a much college risk: The goal is to achieve a certain output, and the degree to which information technology is achieved is the basis for compensation. This was true for all the successful companies nosotros studied. Conspicuously, pricing then becomes much more circuitous. The French jet-engine maintenance company Snecma Services, for instance, writes service contracts that guarantee air carriers a certain number of flight hours for their jet engines, withal much servicing time that requires. Similarly, Hilti, headquartered in Liechtenstein, promotes an "all-circular hassle-gratuitous" service package for the power tools it leases to the construction manufacture. The company'south customers don't have to buy, say, a drill for their operations; they "pay past the hole" and are guaranteed a drill on the structure site.

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

Once executives take redefined the value proposition around solving customers' problems, they may apace discover 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's Torino automotive institute. Under 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 office in guild to control the outcome of its painting processes. Similarly, when SKF started developing services around its cadre product—bearings—the company studied how bearings might break downward in its customers' equipment and then acquired the know-how to help manage such breakdowns. Through internal evolution and acquisition over the past decade, SKF has become a world leader in condition monitoring, industrial sealing, lubrication systems, and vibration assay.• • •

Services tin can be a powerful way to lock in customers and increase their switching costs. Equally 1 managing director at Air Liquide put it, "The more than we enter into a client's business concern, the more than the client forgets how things are done." At the aforementioned time, services represent an first-class route for acquiring new product concern. Fenwick managers told us, "Whenever we can't directly break into a customer account with a product, we'll offering to provide services on a competitor'south product." Finally, the relationship developed past providing services positions manufacturers to anticipate future concern. But these considerable benefits tin can't exist accomplished overnight. The four steps we've outlined will help to speed the procedure and boost companies' profits.

A version of this article appeared in the May 2008 event of Harvard Business Review.