Originally published in Field Service, a quarterly print magazine from Field Service Digital and ServiceMax. Check out the full magazine in print or online.
A few years ago, a medical device manufacturer hired me to help increase its service revenue. The company’s service business was stagnant and service revenue represented less than 15 percent of revenue. In contrast, its competitors were experiencing year-over-year revenue growth and service revenue rates that accounted for as much as 35 percent of total revenue.
The manufacturer was struggling with service revenue because it had not mastered the art of service marketing. It did not have a well-defined service portfolio or value proposition. The company struggled to sell service contracts, so it primarily generated service revenue by selling parts. As one corporate executive told me, “Whenever our customers see us walking in the door they run away, because our people are always trying to sell them spare parts.”
Selling Outcomes, Not Products
This example represents an all-too-common problem manufacturers face in the after-sales service world. Let’s face it: Manufacturers are great at selling tangible products but struggle with selling intangible items like services. As a result, manufacturers tend to focus on selling what they perceive to be tangible aspects of service like spare parts, or time and material services. Companies that adopt this approach miss the larger (and more profitable) recurring revenue that can be derived from marketing value-added services. More importantly, they often fail to meet customer expectations for post-sales service and support.
For manufacturers to become successful service marketers they need to shift their focus from selling products to selling outcomes. To make this shift, manufacturers must recognize the strategic value of service to their companies in terms of generating profitable revenue and facilitating exceptional customer experiences. Indeed, we have found that service can generate 10 to 20 times more revenue over the lifecycle of a product than the actual purchase price of the product itself.
Manufacturers must recognize the strategic value of service to their companies in terms of generating profitable revenue and facilitating exceptional customer experiences.
What Does the Customer Need?
With this objective in mind, many manufacturers’ service organizations have begun to embark on a journey of service revenue maximization. “Focus on outcomes” has become the mantra, but what exactly does this mean? Basically, it means service providers must focus on the needs of their customers. These providers need to understand what customers are trying to accomplish as well as what problems they are trying to avoid by using the products, and then tailor service offerings to meet these needs.
Manufacturers gain this understanding by analyzing data on what customers want, need and value. This is the approach I used with my medical device client who wanted to grow their service revenue. Through market research, we learned that customers were concerned about keeping their equipment operating at maximum productivity during normal business hours. They wanted to avoid situations where they had to turn away or reschedule patients because machines were not working properly. If a minor issue arose, they wanted instructions on how to resolve it themselves. Most importantly, customers no longer wanted to purchase spare parts in advance just in case they experienced a problem in the future.
Customers no longer wanted to purchase spare parts in advance just in case they experienced a problem in the future.
Based on this knowledge, we created a service portfolio that better met customers’ needs. The portfolio included 5×8-hour coverage, so service was available when customers needed it; preventative and predictive maintenance so customers could eliminate and reduce equipment failures; and remote monitoring and diagnostics so problems could be resolved remotely and a two-hour response window when a field engineer was needed. In addition, parts were included with onsite services calls, so customers no longer had to inventory their own parts.
This experience demonstrates the value of outcome-based thinking in service marketing. By focusing on outcomes, the manufacturer was able to expand its perspective of what service means to its customers and provide a broader, more meaningful service offering. The net impact was that they were able to develop a predictable and recurring revenue stream and achieve a 20 percent per year growth rate.
Companies that approach service marketing from an outcome-based perspective can expect similar results. Service contract attachment and renewal rates will improve, margin revenue will rise, market share will grow, and new methods can be developed to improve customer service. Most importantly, companies can differentiate themselves on the basis of service and utilize this market position to pull through more product sales and service revenue.