Increase Sales by Switching from Free to Fee

Many companies have a simple business model where they manufacture products as their lifeline to profits. Unless you have a super brand, there is always a chance that your products will become commoditized over time. Products become a commodity when there is demand but no differentiation across the market. A growing trend in commoditization will erode product price resulting in fewer dollars per unit sold. To increase revenues, manufacturers are trying to react to this situation by adding product services to differentiate their products.

This is a viable strategy if your company has a strong understanding of their current capabilities. Providing back office services can be more difficult than expected while salespersons are accustomed to attaching services to the product contract without additional charges. This may create a situation where existing customers refuse to pay for additional services and the expenses associated with providing the service is greater than the additional revenues. There are a number of strategies that can increase the likelihood of being successful at monetizing services as added value to the customer.

First, you must recognize that you are already in the service industry even though you make and sale products. For example, airlines now charge customers additional fees for additional luggage and for bags that exceed a specified weight limit. This is not a new service that airlines have recently added to their capabilities. This is the airlines creating new revenues by charging for existing services. This is switching services from free to fee. A smart company will carefully review their billing practices to identify opportunities to charge for existing services.

You can look for service items such as shipping of your product, insurance and warranties on your product, and other existing services you provide for customers but do not charge for them. To be successful with this process, your sales force must be updated on how to sale your product so new charges are established for identified services.

As you add value by providing a higher level of service in the back office, you must be vigilant at monitoring the cost of providing these services. This is where many companies fail as they add services at a much greater expense than revenues generated by the service. You must evaluate your processes to identify any profit drains. If you are performing a service function that customers do not use, then discontinue that function. For example, your back office may be sending product schedules or confirmations to customers that do not want or need this information. By reducing these unwanted service functions, you are saving costs for the company.

As companies move into a more service oriented business model, your sales force must transition to not only focus on product sales but to add service contracts to your company offering. It can be difficult when product sales are higher than service sales as commissions will be different and all good salespersons will try to maximize their incomes. Some companies actually have different sales teams for products and services. Other companies do business the traditional way and just add a service contract onto their existing products. The key point is to align incentives so the added service is generating additional revenues.

Once services are identified as new revenue generators, the company should look for ways to communicate the value of these services to the customer. This can be accomplished through white papers, case studies and other media forums. Once completed, the company can turn its focus on the processes of the customer. This will present an opportunity for the company to identify new solutions to customer processes that may result in new services.

To summarize, this process is an ongoing cycle that creates a circle of activity. The steps to the process are:

1. Evaluate what services you are currently providing to customers;

2. Identify a method to charge for the existing service in item 1;

3. Determine what company capabilities will be required to sale the service as added value;

4. Communicate the added value to your customers;

5. Re-evaluate the customer processes to identify new service offerings as a customer solution, (this begins the cycle all over again as steps 1-5).