Pick up just about any Product Management book, thumb through it, and you’ll quickly come to realize that most thinking about how to be a successful product manger is based on real products. Things that you can touch and feel. Things that people somewhere in the world manufacture. Even if you are responsible for a software product, there is almost always a set of CDs/DVDs that you deliver to the customer. It’s a bit weak, but you can still touch this product. So what’s a product manger to do when you CAN’T touch the product – because it’s a service. How does this change the product management game?
Before we dive in to this discussion too far, let’s take just a moment and ask the question “why sell services in the first place?” If you work for a company that has traditionally sold “hard goods” – things that you can touch, then one of your biggest product manger worries is that your product will eventually become a commodity. When that happens, the only thing that will matter to the customer is your price and I’m going to bet that you probably don’t have the lowest price out there. Most firms see selling services as a way to make their hard products unique – provide them with a competitive advantage. The challenge here is that all too often, companies that enter the service space end up struggling to make money – it’s not as easy as it looks.
So why is it so hard to start selling services instead of hard goods? A couple of researchers from Europe, Dr. Werner Reinartz and Dr. Wolfgang Ulaga spent some time looking into this and wrote up their findings in the Harvard Business Review. One of the interesting things that they found was that the back-office automation of services that are complex turned out to be much more difficult than anyone though that they would be. The tendency of customers to want service offerings to be customized for them meant that there really was very little knowledge that could be leveraged across customers.
Another big problem was with the sales teams. They had spent years developing relationships with low-level purchasing staff who were authorized to buy small quantities of hard goods. Once you started talking about selling a service that the whole company could use, the price tag went up dramatically and the sales teams needed to be talking with purchasers who were much higher in the food chain.
Finally, actual knowledge about the new service always seemed to come from “outside” – contractors, consultants, etc. This meant that it was both difficult and time consuming to answer customer’s questions. Clearly all of these challenges made it look like the move to selling services is a real pain in the neck. So why even bother?
The answer to that question is simple: once you get beyond the product differentiation issue, it’s all about the money. As an example, one group of companies that the good Dr.’s studied was able to get 50% of their sales from services and on those sales they were able to get 8x margins over their hard product sales. That’s just too much money to walk away from.
It turns out that there are four steps that hold the key to successfully transforming your product line from a hard goods product line to a services product line. Of course, we’ll cover each of those four steps, in detail, next time.
Are you currently a product manager who is responsible for “hard” products or services or both? How do you feel about your current sales teams: could they sell services if they had to or would a lot of retraining be called for? Do you know what you would have to differently if you were responsible for services instead of “hard” goods? Leave a comment and let me know what you are thinking.