Earlier this week at the Service Council’s Executive Symposium, Will McNeil from Gartner showed an interesting chart about the correlation between service revenue and firm value. Most would hypothesize that the more revenue you gain from service, the higher your firm value.
But that’s not the case.
In fact, according to a study by Eric Fang, et al, there is a decrease in firm value for manufacturing companies that generate more than 0% and less than about 25% of their revenue from service. Take a look at the chart below:
So, companies in the study that were pure manufacturing and no service had higher firm value than those generating modest revenue from service. But the companies with a significant amount of service revenue were the ones that truly showed the highest levels of firm value.
So, what does the area between 0% and 25% represent? It shows a lack of commitment to service. It’s service “because we have to.” And that will always be a bad offering that will not create loyal customers. Also, service contracts are often recurring revenue or insurance-based service contracts where very little service ever is performed. It’s recurring money or free money, and those are both signs of high margins and a successful business.
The study states some exceptions, such as smaller companies in high-growth industries, but especially for slow growing industries, service is the key (perhaps only) way to truly differentiate and increase firm value.
A great example is John Deere, which grew firm value by 76% by increasing its percentage of service revenue from 17% to 36%. Not a bad example of the power of customer service. If you care about the value of your firm, clearly it’s time to go all-in on service.