Anderson and Narus_1995_capturing the value of supplementary services.pdf

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Add-ons and giveaways maynot increase profits r marketshare; building flexibility into

your service portfolio will

Capturing the

Value of

SupplementaryServicesby James C.An derson

and James A. Narus

DR WIN GS BY M RK STEELE

Virtually all managers are keenly aware that thekey to winning in market after market today is ex-celling rn tailo ring one s offerings to th e specificneeds of each customer while still maintaining lowcosts and prices. In pursu it of those goals, suppliershave installed flexible manufacturing systems, cre-ated modular com ponents th at can be assembled ina wide variety of configurations, and designed plat-forms that can be shared hy a family of products

I But surprisingly, most man ufacture rs have focusedonly on the products themselves. They have largelyIgnored another element that plays a crucial role indifferentiating a compa ny s offerings an d has a hugeim pact on co sts and profits; services.

By services, we mean mu ch m ore than technicalproblem solving, equipment installation, trainingand maintenance. We also are talking about pro-grams that help customers to design their productsor reduce their costs as well as rebates or bonuses

that influence how customers do business with asupplier. And we also include systems sueh as lo-gistics management; electronic data interchangefor placing orders and tracking th eir status - and ex-pert systems that figure out, for example, whichmaterials can deliver desired functional perfor-mance to customers.

Instead of tailoring their packages of services tocustom ers individual needs in order to win retainor increase tbe am ou nt of their business , m anysuppliers sim ply add layer upon layer of services totheir offerings. From our research, we have found

that suppl iers typical ly provide customers wi thmore services than they want or need at prices thatoften reflect neither the value of those services tocustomers nor tbe cost of providing them. Manycompanies do not even know which services indi-vidual customers or groups of customers with simi-lar needs really want. A surprising num ber don t re-ally understand wh icb services should be offered asa standard package accompanying either a productor core service and which can be offered as optionsbecause mdividual customers value tbem so muchthat tbey will pay extra for them. Most companiesdo not even know the cost of providing many of

fames C. Anderson is ihe WillIamL/Po7 d DisVinguish^dProfessor of Marketing and W holesale Distribution anda professor of behavioral science in manag ement atNorthwestern University's f.L. Kellogg Graduate Schoolof Man agement in Evanston, Illinois, fames A. Naru s isan associate professor of manag ement and a BabcockResearch Professor at Wake Forest University's Bab-cock Graduate School of Management in Winston-Salem, North Carolina. The authors' last article in HBRwas Turn Your Industrial Distributors into Paztners(March-April 1986).



FLEXIBLE SERVICES

their services. And all too many continue to letsalespeople give away whatev er services they th inkit will tak e to land a deal, even if tho se frcebies dra-matically reduce the profitability of the business.

But a relative handful of com panies are beginningto recognize that th ey can reduce the cost of provid-

ing services an d

use services more effectively to

provided stan dard packages of produ cts and ser-

vices designed to mee t the needs of tbe average

customer in eacb segment.But companies that adopt our model can take ad-

vantage of this inevitable variation in customers'needs by building flexibility into their portfolio ofservices. Doing so entails constructing what com-

d i f C t i n havemee t custom ers -equirunents, get more ot tn ei r p solutions or naked systems. Theseeet c us to m er s r e q u i r e m e , gbusiness, and enhance profits. To understand these

Managers should analyze theirservices and decide whichm u s t b e o f f e red a s s t a n d a rd a n d - :- ;_ p ^ ,, ,, i^ services valued

which can be offered as options. - ' - - ' - - ' * ' * ^

panies such as ABB and M pdubbed naked solutions or naked systems. Tbese

are the bare-boncs-minimum num-ber of services uniformly valued byal l custo me rs in a given segmen t ,which the supplier should strive tosell at the lowest possible price thatwill yield a profit. The se nake d solu-tions should then be wrapped wit h

emerging practices better, we conducted an exten-sive study. We organized four roundtable discus-sions with managers in a wide variety of industriesin the Chicago, iUmois, and Charlotte, North Car-olina me tropo litan areas, where we are located. Wetben conducted field studies of 22 large and medi-um-size U.S., European, and Japanese companies.All of them serve business-to-business markets -in other words, they supply institutions, govern-ments, and other organizations, not the final con-sumer. Tbese companies were in various stages of

grappling with th e problem, and only a handful -i n-cluding Sonoco Products Com pany, Baxter Interna^tional, ABB Asea Brown Boveri, and AKZO - hadcome close to developing and implementing a com-plete approach. But from the best

T^ Tl^cC^oZZ Z^Z Creating naked solut ons for eachwhat we call flexible service offer-

ings. Th is mod el, we believe, will en-able a wide range of manufacturingand service companies to figure outhow to reduce the number and cost

of services they use to augmen t theircore products, how to charge more for those ser-vices on average, and how to provide greater valueto customers.

segment . Redeploying services in

t h i s m a n n e r w i l l g i v e s u p p l i e r sgreater latitude in pricing.

This approach enabled Sonoco's Industrial Prod-ucts Division to customize its packages of productsand services to meet more precisely tbe require-ments of its spectrum of customers. Creating na-ked solutions for each customer segment from ser-vice modules allowed Apple Computer to achievegreater economies of scale and lower costs. ABBfound t hat n aked so lutions enah led it to charge lessfor power equipment and heavy industrial equip-ment than it could for the standard package de-signed for the average customer. This approach

helped it gain the business of companies that hadspurned its products for lower-priced Japanese of-ferings. And once ABB won those companies and

customer segment allowedApple Computer to lower costs.

explained the value of its various optional services,many of these new customers then agreed to trade

up by buying those services.Perhaps the most important benefit of flexible

service offerings is that they can provide supphersf l f t i i n g a nd e xp an di ng

No matter how painstakingly a company seg-

size will not fit all. Each customer will lr

segment. Our research found that most either are not aware of this fact or have avoideddealing with its implications. Rather, they have

subsidiary of Baxter Interna tiona l, tried to do. It di-vided its hospital customers into two categories:strategic (those that have com mitted themselves in

HARVARD BUSINESS REVIEW lanuary -Feb ruary 1995



contracts to building a broad, long-term relation-ship witb Baxter) and transactional (those that dobusiness witb Baxter on an order-by-order basis).Then Baxter focused its services on helping its stra-tegic customers to improve th ir medical servicesand financial performance. Even tbe services of-fered only as options to strategic customers reflect

this priority: they are carefully designed to providevalue or savings tba t far exceed their cost.

etting Started

A first step that a company should take to turnits services into flexible offerings is to inventory itssupplementary services. Although that may seemobvious, many managers do not know all the ser-vices in their portfolios, which ones are being pro-vided to which customers, and on wbat basis they

• are being provided. (A number of companies seg-

I me nt their markets but still offer much the sam e-ifnot exactly tbe sam e-services to most or even all ofthe segments.) Why is such ignorance so common?

I Because managers tend to spend the bulk of tbeir^ time on their products or core services and too little

on understanding or keeping track of their supple-, mentary services. Tb is habit also helps explain the

lack of rhyme or reason in tbe way many compa-nies we studied charged customersfor supplementary services.

All too often, salespeople areguilty of "fourth-quarter habits";giving away optional services atthe end of tbe year to meet theirsales quotas. Moreover, because sales-people tend to focus on the trans-action and often don't know how orwhy to say no to demands for free services, tbeyconfuse customers' expectations about which ser-vices sbould be standard and which optional. Somesalespeople make certain options de facto standardby always waiving the charges. For example, onetextile company in our study offered TQM-basedcost-reduction studies as an optional service. com-pany review, however, showed that its principal

customer repeatedly received tbe service for free.After compiling a complete inventory of supple-mentary services, a company sbould assess the val-ue of eacfi service and the cost of providing it. Al-tbough it is virtually impossible to manage one'sservices strategically without tbis information, re-markably few businesses try to obtain it.

Assessing Value. Most companies rely solely onmeasures of customer satisfaction instead of assess-ing the value of their services. Because tbe formeridentify customers' expectations and bow well tbe

HARVARD BUSINESS REVIEW January-F ebruary 1995

supplier lives up to tbem, tbey do serve a function.But tbeir findings can be misleading, and dependingexclusively on those findings, instead of measuringthe value of services, can lead to serious errors injudgment. For one thing, customers are under-standably happier when they receive services for

free tban when tbey bave to pay for tbem. Whilegiving away an ever greater number of serviceswill undoubtedly increase customer satisfaction,it will also cause costs to soar and profits to shrink

How do leading-edge companies measure value?Sonoco's Industrial Containers Division, wbichproduces fiber and plastic drums, routinely con-ducts what it calls cost-in-use studies to documentthe increme ntal cost savings and thus tbe superiorvalue a customer gains by using Sonoco productsand services. Working togetber with customermanagers, one of Sonoco's technical service man-agers performs a series of process-flow analyses out-

lining the customer's entire business operationsand estimating tbeir costs. Using those estimates,all tbe Sonoco employees involved with the ac-count tben brainstorm to come up witb system so-lutions - for instance, a complete materials-ban-dling system that includes just-in-time deliveriesand drum recycling. Sonoco tben gives the cus-tomer a variety of service alternatives together

Relying solely on m easures of

custom er satisfaction can lead toserious errors in jud gm en t.

with estimates of the cost savings tbat each is like-ly to generate. In this w ay the customer can makeinformed purchasing decisions based on the valueof the proposed system solutions.

Baxter Corporate Consulting, wbich helps BaxterHealthcare's strategic hospital customers cut costsand improve qua lity provides another w ay of mea-suring accurately how customers value servicesEacb proposal that the consulting unit submits tohospitals includes a set of mu tually defined me tricsfor determining the value of tbe study to the client.As a condition for using the consulting unit, tbeclient must agree to work witb it to apply tbosemetrics and document tbe resu lts. Armed witb tbisinformation, Baxter Corporate Consulting can tbengive other prospective clients a concrete idea of thebenefits tbey w ill reap by using its services.

Assessing Costs. Despite recen t strides in the de-velopment and implementation of activity-based



F L E X I L E S E R V I C E S

costing, we found that few companies use this toolto manage services. That is understandable. Exist-ing activity-based-costing techniques have largelyheen applied to the measurement of manufacturingand product-related costs, and little work has beendone to apply them to services. Managers at many

companies rarely define concretely what consti-tutes a particular service and its various levels. Forexample, technical prohlem solving can run thegamut from a salesperson who tells a customer overthe phone to use part A instead of part B to an engi-neering team that works for months with a cus-tomer to redesign a faulty manufacturing process.

Managers should try to limit

handled major services (like detailed technicalprohlem solving). Today the sales representativeand, in turn, a specific customer are charged foreach project. A t the beginning of each year. VanDen Bergh managers construct an armual plan forevery customer that defines financial and volumetargets and sets the levels of services. A t the end of

the year, they review those plans, examine servicecosts and account profitability, and recommendany necessary changes in service levels for the fol-lowing year.

Managers of the industrial-coatings unit ofNetherlands-hased A KZO (now A KZO Nobel) suc-

cessfully employed value assess-ment in conjunction with activity-based cost ing to make a poorlyperforming husiness solidly prof

s t a n d a r d p a c k a g e s t o t h o s e ^ ahle. The effort hegan about ten

hihl l d

t p g

services that are highly valuedby all custom ers in a segm ent.

B ecause of this fuzzy definition, managers have dif-ficulty tracking which customer got what serviceand allocating related costs.

A nother reason so few companies apply activity-based costing to services is that accounting system sat many companies allow sales forces to foist ser-vice costs on other de partments. A typical scenario:

to close a deal, a sales representative promises anextraordinary level of service in the form of designassistance. Neither the customer nor the sales repis hooked for the service. Instead, the charges arehuried in the fixed costs of the engineering depart-me nt, which does the work for the customer, mak-ing customer service costs difficult, if not impos-sible, to determine.

A final reason why activity-based costing israrely applied to services is that many companiesare organized around products rather than aroundma rket segm ents or custom ers. A s a result, they

can readily break down costs on a product-hy-prod-uct hasis but cannot aggregate produet and servicecosts on a segment-by-segment or customer-by-customer hasis.

How do exemplary organizations deal with suchproblems? Consider what Van Den Bergh FoodsCompany, a m anufacturer of food additives and sea-sonings, did. It began by more precisely defining itsservices and the levels it offered. It then gave itssales force responsibility for handling a ll minor ser-vices (like basic problem solving). Technical ex-perts from departments such as customer service

years ago. Wondering whether the

unit was providing more servicesthan customers were paying for,AKZO managers developed activity-based-costing tools to analyze eaehcustomer's contribution to profits.

Then, relying on an industrial engineering ap-proach, they determined the value of each serviceoffered. For example, managers quantified the valueof sending an investigating engineer to analyze dustin a custom er's paint line.

A s a result of the study, the m anagers of theA KZO unit found tha t they were indeed providingmore services than many eustomers were payingfor. They also discovered tha t som e of the ir serviceswere of little value to customers. These findingshelped the managers to target those industries andmarket segments where their products and servicesprovided the greatest value to customers and thusheld the greatest poten tial for profit. A nd usingeustomer-contrihution-to-profit measures to guidethem , they then revamped th e services they offeredas well as their prices.

Estimating the value and eost of services is notalways easy; the A KZO effort, for example, tooktwo years. However, armed with such information,

suppliers can move the focus of discussions withcustomers away from price to performance andmeeting customers' requirements.

ormulating lexible Service Offerings

In trying to make their companies' service offer-ings more flexible, managers might find it helpfulto divide their services into three categories: exist-ing standard services, existing optional services,and new services.

HA RVA RD B USINESS REVIEW January-February 1995



eevaluating Standard Services. In constructingflexible service offerings, the overriding goal shouldbe to limit the standard package to just those ser-vices that are highly valued by all the customers ina segment. How rudiinentary this package shouldbe will vary by market segment. Obviously, those vanilla services that most industry players sup-

ply in their standard packages must be retained.The challenge then becomes to reduce the cost ofproviding them to a level below the competition'swithout underm ining their perceived value to cus-tomers. When companies reassess their standardpackages, they inevitably will decide to eliminate

' some services (in other words, not offer them even, as options) and recast o thers as options. Of course,

they also may decide to add services to the standardpackage tha t were not mcluded before.

In our study, we found that suppliers were far, more reluctant to eliminate existing services than

to add new ones. In particular, engineers and cus-' tomer service employees who had designed andimplemented services often fought attempts toehminate them. Tbeir pride of ownership or theirobsession witb the elegance rather than tbe practi-cahty of the delivered service frequently thwarted

, pruning efforts. Salespeople used to throwmg inservices at the last minute to win bids also protest-ed, fearing the c uts w ould burt their ability to closedeals and me et sales quotas.

For their part, managers universally insist thatrecasting a standard service as an option is one ofthe most difficult actions to take. What customer

they point out, wants to pay for something thatonce w s free? And it is even harder, tbey say, whencompe titors continue to market the service as stan-dard. Nowhere is this a more serious problem tbanin industries witb high fixed costs, like commod-ity industrial chem icals and integrated steelmaking.In such industries, senior executives often hesitateto implement any scheme tbat may reduce salesfor fear that such a drop will jeopardize their abili-ty to operate their plants at a high enough rate tobreak even or make a profit. As a result, they rou-tinely add services to maintain v olum e-a nd rarelyeliminate tbem.

We found tha t su ppliers used a variety of ap-proaches when recasting standard services as op-tions that add value. Many looked first to infre-quently performed services that deliver value onoccasion - like training, installation, and retro-fitting. By marketing them as value-added optionsrather than simply dropping them, they retainedbusiness with customers that still valued themThis approach is also a litmus test for services thatcustomers value but won't admit that tbey value

HARVARD BUSINESS REVIEW January-F ebruary 1995

By recasting infrequently performedservices such as installationas valu e-ad ded op tions supplierscan increase profits.



FLEXIBLE SERVICES

because tbey want to continue getting them for

free. Depending on the market response, those ser-

vices can be retained as options or discontinued.

One specialty chemical company devised a clever

way to make tbe overhaul of its standard package

more palatable to customers. Along with specialty

organic chemicals, it offered a variety of costly ser-

vices, including laboratory support, field consult-

ing, on-site testing, and educational seminars. It

con'tinued to offer the same variety of services but

simply cbanged the level of those services available

d d k If ustomer buys a mini

services (as well as new services) into the standard

package. They should resist. Instead, they migbt,

for example, offer a bare-bones-minimum standard

package of services, cut tbe price for tbe product

and tbe standard services, and then let customers

buy the options they want.

Another alternative - one tbat Baxter Healthcare

adopted-is to let customers buy the optional ser-vices wholly or in part with bonus dollars. The

more the customer concentrates its purchases with

tbe supplier, the more bonus dollars it earns and the

h N t ly does this

mu m a mo u nt of the compan y's prod-

annual product purchases to a

specified amount or pay extra.

As a p re lude to r ecas t ing somepreviously standard field services as

value-added options, a large computercompany began listing a charge for

tbem, which it then su btracted from the customer's i

invoice w ith the notation Do not pay tbis." A let-

ter accompanying tbe invoice stated that tbe com-

pany was pleased to have provided tbe services and

gave an estimate of what tbey were worth-bas ed on

the rates charged by independent industry consul-tants. Positioning the services as extras gave the

company the opt ion of charging secondary cus-

tomers in the future.Reevaluating Optional Services After reevaiuat-

ing their companies ' standard services, managerssbould turn their attention to existing optional ser-

vices If the cost of an optional service exceeds cus-

tomers ' will ingness to pay for it, the service sbou ldbe discontinued. Cbanges in technology, requiredexpertise, or insurance risks can greatly reduce or

even eliminate the value of optional services that at

one time gave companies a competitive edge. Sup-

pliers can som etimes help tbe handful of customerstbat still need those services [or discontinued stan-dard services, for that m atter) to obtain tbem from

other companies.As we men t ioned , the re are c i r cums tances in

which a supplier migh t wa nt to add a previously op-tional service to its standard package-for example,wh e n tbe product itself is a commodity tbat can be

differentiated only by packaging it with servicesnot offered by the com pet i tion . But it is easy to go

overboard. Believing that the suppl ier wi tb tbe

most extensive set of services often gets the busi-ness, managers m such highly competit ive m arketsare continually tempted to fold existing optional

Customers of Baxter Healthcareeam "bonus do llars," which they

^ge to buy optional servicesthat fit their individual needs.

approach allow customers to tailor tbe supplier'sservices to their particular needs, it also reinforcestbe message that they do not have to pay for ser-

vices tbey do not want, w hich they have to do w itba totally bundled package. And to underscore tbe

value of the services it offers, a supplier can prom-ise to give customers cash for any unused bonusdollars at tbe end of tbeir agreement - somethingBaxter Healthcare does.

We found that some exemplary companies cboseto retain services as options and had interesting rea-sons for doing so. For example, although Sonoco'sIndustr ia l Products Divis ion manufactures and

markets fiber cores, around which such products as

newsprint , yarns , and plastic fi lms are wrapped,management considers the group to be a servicebusiness. The division's managers try to offer cus-

tomers as many options as possible. Custom ers re-

ceive an extensive menu of services - ranging fromwarehousing to analyzing how efficiently or effec-tively they are using packaging - from which each

can create the set of services it will receive. Eachservice is priced according to its value and all the

' costs associated w itb providing it. Sonoco man-

agers say the opportunity to select service optionshas delighted custom ers.

Adding New Services Of course , making the

most of one's supplementary services is not just a

m a t t e r of r e t b i n k i n g bow exis t ing services are

packaged and priced. It also involves the way new

services are added to tbe mix. Eacb addition can

serve a variety of strategic ends.

HARVARD BUSINESS REVIEW |a iiuary-February 1995



tion. The Industrial Division of Baxter ScientificProducts deliberately seeks out new services thatcustomers value and that Baxter can deliver betterthan the competition or at lower costs. By includ-mg a new service in the standard package, Baxter

forces competitors to choose from two unpleasantalternatives: If they do not offer the service, Baxtercan tout its unique service as an extra benefit of do-ing business with the company. If competitors tryto match Baxter and offer the same service, theyhave to endure the trials and tribulations and'high-er cos ts of learnin g how to deliver it effectively.

Offering new services as options has its own stra-tegic advantage: it enables suppliers to gauge mar-

I ket interest. For example, although the traditionalbusiness of R.R. Do nnelley Sons Com pany isprinting, management believes that future growth

lies in innovative services such as datahase man-' agement , consul t ing and t ra ining, three-dimen-sional pop-up ads, talking ads (print ads with amicrochip that plays a message), di-rect marketing, layout systems, andmapping serviees . To tes t the de-mand for those services, Donnelleyis offering them as options.

Sometimes adding new opt ionalservices entails no more than offer-ing new levels of an existing stan-dard service. Managers should ana-lyze each se rv ice the i r companyoffers only at a single level to deter-mine whether they ean define alternate levels thatwould have different values for different customersFor example, even though their utihty customerst rad i t iona l ly had equ ipment -main tenance con-tracts, the managers of ABB's power transformersbusiness recognized that no t all of them w anted thesame level of maintenance service or valued theservice the same way. So the managers decided tooffer both a basic package and an extraordinarypackage. In addition, the utilities do not have tobuy either package for all their transformers Some

of the m sim ply tell ABB wh ich transfo rmer s tocheek and th en ask how mu ch ABB will charge forproviding just that service. Each service contract'sprice IS based on ABB's experience in providing thedifferent levels of service to customers.

Obviously, what a company ehooses to do withIts prices when it trims services from its standardpackage depends on the competitive conditions itfaces in a given market segment. In a cutthroat

ma rket, for example, a supplier m ight lower itsprices by the full amount of the cost of the dis-continued services. In a less competitive marketwhere the players have more flexibility m theirpricing decisions, a supplier migh t mai nta in itsprices or lower them by less than the cost of theeliminated services.

When enhancing the standard offering with addi-tional services, managers have several choices: theycan raise the price by an am oun t equ al to the eost ofproviding the service, raise it less than the costof providing the service, or perhaps even raise itslightly higher to camouflage a price increase. Sev-eral supphers in our study that were competing inrelatively stable markets and whose priority wasgaming market share chose not to change their

Introducing new services as

p pa nieS SUch

n .R . j Jonnel ley to asse ss how

much customers value them.

Pricing the fferings

As several of these ex am ples sugge st, flexible ser-vice offerings enable managers to be more adaptiveand responsive in their pricing. This approach also

HARVARD BUSINESS REVIEW January-Fe bruary 1995

prices; they w anted to use the added options to gain, new business. Others, which were competing in

markets where price-cutting was rife, added op-tions to avoid having to c ut prices. Still others opt-ed to try to gain market share by lowering priceseven as they expanded the standard package.

Offering services as options gives a manager awider choice of pricing tactics. One is to show thecharge for the option on an invoice and then sub-tract It for a specific reason (for example, initial-use

discount). This approach makes it easier to keeptrack of service giveaw ays. Yet it gives the com pan ythe flexibility to respond quickly to specific situa-tio ns -h ke the need to blunt a comp etitive inroad orto attract business in targeted new segm ents Mit-subishi E lectric Industrial C ontrols offers a propri-etary software d evelopm ent too] as an option that itsometimes provides at no charge to win a new ac-count. Mitsubishi also may initially offer a newcustomer a separate option-consulting services onhow to use the tool -fre e of charge. But it charges forsubsequent consulting.



FLEXIBLE SERVICES

To hold down costs and increosecustomer sup po rt Microsoftintroduced o menu of servicesranging from simple tipsto specialized help for which it

charges a variety of prices.

what we are suggesting is that flexible pricing isa particularly desirable consequence of flexible ser-vice offerings. One company that certainly under-stands this connection is Microsoft. Faced withcustomers' requests for greater choice on the onehand and its own rising costs on the other, Micro-soft created a number of flexible service offerings.

Now customers can select from among four basictypes of increasingly sophisticated technical sup-port. They range from Fast Tips & Electronic Ser-vices (a 24-hour automated system) to PremierSupport (custom consulting on highly specializedapplications). Depending on the type of softwarepurchased, which ranges from Desktop Applica-tions (for example. Word or Excel) to AdvancedSystems (for example, Windows NT), these servicesare either no t offered, marketed as standard, or mar-keted as optional "for fee." Particularly interestingis Microsoft's practice of giving customers a choiceof payment plans for each for-fee optional service.They can buy an annual contract. They can pur-chase "incident packs" that en title them to receivetechnical support on a specific number of occa-sions. They can pay by the incident. Or they evencan choose to be billed by the minute

reating Value Merchants

Few traditional sales forces know how to sell val-ue . Recognizing this fact, several companies thathave adopted the flexible approach to services re-vamped their sales-force philosophies and prac ticesbefore introducing their updated service packages^

One that we men tioned already is an Den BerghFoods Another is Allen-Bradley Company. Its Auto-mation Group requires the costs of key servicessuch as training, support, and application assis-tance to come out of someone's pocket: they m usteither be charged against sales or he reflected in theprice the salesperson gets for the package. Thegroup also charges customers for problem-solvingassistance if it can show that they misused theproduct or did not m ainta in it properly. In addition,various functional areas within the Automation

Group are charged for services. For instance, engi-neering is charged if a poorly designed product gen-erates suhstantial warranty work.

Some leading-edge companies have also workedhard to provide their salespeople with the meansto be more persuasive in explaining the value ottheir services to customers. Sonoco, which typical-ly charges a premium for its products, providesits salespeople with value in use case studies. Thesestudies help the salespeople demonstrate thatSonoco's products and services result m greater

HARVA RD BUSINESS REVIEW January-F t -bmary 1995



sales to end users and are more innovative and lesscostly than the com petition's.

The Industrial Products Division's sales repre-sentativ es also now have two ways of helping a giv-en customer select the particular packages that itthinks will deliver the greatest value. As we notedearlier, the customer can choose from a detailed

me nu of Sonoco's products and services Or if thecusto me r prefers, the sales reps can assemble sever-

Com panies that want toturn sa lespeople into valuemerchants should tie their pay toincreasing long-term profits.

al tailored packages of produ cts and services Alongwith the prices of each proposed package, the salesreps provide a summary of how much money thecustom er can expect to save if it huys that package

1 Sonoeo managers report that since they began offer-mg such extensive choices, both sales volume andmarket share have increased.

But to make this kind of pitch, sales forces needmuch more information ahout the cost and profitability of services than most companies typicallyhave entrusted to them . Only with this knowledgecan they focus effectively on the accoun ts wit h th egreatest profit potential

Compensation also has to support the missionBy and large, people d(j what they are paid to doThose m sales are no different. For this reasoncompanies that want to turn their salespeople intovalue merc hants m ust tie their compensation to in-creasing long-term profitability and not just boost-ing this qu arter's sales or profits.

That is what Sonoco's Consumer Products Divi-sion which m akes products such as fiher tubeshas done. It divided customers' accounts on a mar-ket-hy-market basis and then gave small cross-

tun ction al tea ms re spon sibility for a portfolio ofaccounts. In essence, each team manages its ownbusiness. Each develops market plans, preparesbudgets, and mi tiates impro vem ents to produc ts 'and servi^ce^. Sales managers^ can earn up to 50 % ,

and salespeople up to 25% of their sa lar ies inbonuses, which are hased on account sales and im-provements in operating profits, customer satisfac-tion, accounts receivable levels, and securing long-term single-source supply contracts.

It is especially important for senior management

to guard against compensation schemes that re-ward salespeople for selling as many services asthey can to a given custom er. While this policy may

initially boost a customer's contribu-tion to profits - a measure of sales-force performance-it tends to under-mine a supplier's credibility with itscus tomers and hur t the hus inessover the long term.

Many companies refrain from im-plementing flexible service offeringsfor fear that charging extra for op-

j t ional services that had heen stan-dard will cause certain customers towalk. O ne way to allay such fears is to conduct a pi -lot test. Either add a new service and offer it as anoption or pick one service from the standard pack-age and make it an option for which customershave to pay a surcharge. Then see what happens

But the experiences of companies such as MCIshould allay such fears. MCI managers don't worryabout all the accounts they might lose. They're toobusy exploiting their ability to do a hetter joh ofmeeting c ustom ers' individual needs at reasonable

T f ^ .' I l^f^^^ ^^' '''''^ offerings, they say, haveHelped MCI to increase husiness significantly Oth -er supphers, su ch as AKZO N obel, say they are get-ting a higher return by focusing their resources ontne customers that value them the m ost

But implementing flexihle service offerings re-quires developing tha t mo st-difficult-to-acquireskill: the ability to say no adroitly to some custom -ers. Suppliers must he willing to say no to cus-tomers that want full-service packages at no-frillsprices. Without this skill, flexible service offeringsdevolve to busine ss as usua l - giving it awayPracticed deftly, this approach will give a com pany

the repu tation of heing firm, co nsistent, and fair.

of t e Institute

Reprint 95101

HARVARD BUSINESS REVIEW fanuary-Eebruary 1995



Documents

Anderson and Narus_1995_capturing the value of supplementary services.pdf