s11-5.capturing value of supplementary svcs.pdf

DO

NO

T COPY

Capturing the Value ofSupplementary Services

Harvard Business Review

James C. Anderson and James A. Narus

Reprint 95101

DO

NO

T COPY

JANUARY-FEBRUARY 1995

Reprint Number

JOSEPH L. BOWER DISRUPTIVE TECHNOLOGIES: CATCHING THE WAVE 95103AND CLAYTON M. CHRISTENSEN

LAWRENCE R. ROTHSTEIN HBR CASE STUDYTHE EMPOWERMENT EFFORT THAT CAME UNDONE 95111

PERSPECTIVESUSING DERIVATIVES 95110

PETER F. DRUCKER THE INFORMATION EXECUTIVES TRULY NEED 95104

CHRISTOPHER W.L. HART THE POWER OF INTERNAL GUARANTEES 95106

JAMES C. ANDERSON CAPTURING THE VALUE OF SUPPLEMENTARY SERVICES 95101AND JAMES A. NARUS

SUMANTRA GHOSHAL CHANGING THE ROLE OF TOP MANAGEMENT: 95105AND CHRISTOPHER A. BARTLETT BEYOND STRUCTURE TO PROCESSES

JOEL BLEEKE AND DAVID ERNST IS YOUR STRATEGIC ALLIANCE REALLY A SALE? 95102

JAY W. LORSCH EMPOWERING THE BOARD 95107

KENICHI OHMAE WORLD VIEWPUTTING GLOBAL LOGIC FIRST 95109

DAVID C. McCLELLAND HBR CLASSICAND DAVID H. BURNHAM POWER IS THE GREAT MOTIVATOR 95108

HarvardBusinessReview

DO

NO

T COPY

DRAWINGS BY MARK STEELE Copyright © 1994 by the President and Fellows of Harvard College. All rights reserved.

Virtually all managers are keenly aware that thekey to winning in market after market today is ex-celling in tailoring one’s offerings to the specificneeds of each customer while still maintaining lowcosts and prices. In pursuit of those goals, suppliershave installed flexible manufacturing systems, cre-ated modular components that can be assembled ina wide variety of configurations, and designed plat-forms that can be shared by a family of products.But surprisingly, most manufacturers have focusedonly on the products themselves. They have largelyignored another element that plays a crucial role indifferentiating a company’s offerings and has a hugeimpact on costs and profits: services.

By services, we mean much more than technicalproblem solving, equipment installation, training,and maintenance. We also are talking about pro-grams that help customers to design their productsor reduce their costs as well as rebates or bonusesthat influence how customers do business with asupplier. And we also include systems such as lo-gistics management; electronic data interchangefor placing orders and tracking their 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 tocustomers’ individual needs in order to win, retain,or increase the amount of their business, many sup-pliers simply add layer upon layer of services totheir offerings. From our research, we have foundthat suppliers typically provide customers withmore services than they want or need at prices thatoften reflect neither the value of those services tocustomers nor the 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 number don’t re-ally understand which services should be offered asa standard package accompanying either a productor a core service and which can be offered as optionsbecause individual customers value them so muchthat they will pay extra for them. Most companiesdo not even know the cost of providing many of

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

your service portfolio will.

Capturing theValue of

SupplementaryServicesby James C. Anderson

and James A. Narus

James C. Anderson is the William L. Ford DistinguishedProfessor of Marketing and Wholesale Distribution anda professor of behavioral science in management atNorthwestern University’s J.L. Kellogg Graduate Schoolof Management in Evanston, Illinois. James A. Narus isan associate professor of management 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 Partners”(March-April 1986).

DO

NO

T COPY

FLEXIBLE SERVICES

76 HARVARD BUSINESS REVIEW January-February 1995

their services. And all too many continue to letsalespeople give away whatever services they thinkit will take to land a deal, even if those freebies dra-matically reduce the profitability of the business.

But a relative handful of companies are beginningto recognize that they can reduce the cost of provid-ing services and use services more effectively tomeet customers’ requirements, get more of theirbusiness, and enhance profits. To understand these

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, Illinois, and Charlotte, North Car-olina, metropolitan areas, where we are located. Wethen 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. These companies were in various stages ofgrappling with the problem, and only a handful –in-cluding Sonoco Products Company, Baxter Interna-tional, ABB Asea Brown Boveri, and AKZO – hadcome close to developing and implementing a com-plete approach. But from the bestpractices of each company, we wereable to develop a model for providingwhat we call flexible service offer-ings. This model, we believe, will en-able a wide range of manufacturingand service companies to figure outhow to reduce the number and costof services they use to augment theircore products, how to charge more for those ser-vices on average, and how to provide greater valueto customers.

No matter how painstakingly a company seg-ments its market into groups of customers thatneed similar packages of products and services, onesize will not fit all. Each customer will inevitablyhave some requirements not shared by others in thesegment. Our research found that most supplierseither are not aware of this fact or have avoideddealing with its implications. Rather, they have

provided “standard” packages of products and ser-vices designed to meet the needs of the “average”customer in each 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-panies such as ABB and Microsoft Corporation havedubbed naked solutions or naked systems. These

are the bare-bones-minimum num-ber of services uniformly valued byall customers in a given segment,which the supplier should strive tosell at the lowest possible price thatwill yield a profit. These naked solu-tions should then be “wrapped” withoptions – particular services valuedby individual customers within thesegment. Redeploying services inthis manner will give suppliers

greater latitude in pricing.This approach enabled Sonoco’s Industrial Prod-

ucts Division to customize its packages of productsand services to meet more precisely the 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 that naked solutions enabled 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 approachhelped it gain the business of companies that hadspurned its products for lower-priced Japanese of-ferings. And once ABB won those companies and

explained the value of its various optional services,many of these new customers then agreed to tradeup by buying those services.

Perhaps the most important benefit of flexibleservice offerings is that they can provide supplierswith a powerful means of retaining and expandingbusiness with their most valuable customers. Thatis exactly what Baxter Healthcare Corporation, asubsidiary of Baxter International, tried to do. It di-vided its hospital customers into two categories:strategic (those that have committed themselves in

Managers should analyze theirservices and decide which must be offered as standard andwhich can be offered as options.

Creating naked solutions for eachcustomer segment allowed

Apple Computer to lower costs.

DO

NO

T COPY

HARVARD BUSINESS REVIEW January-February 1995 77

contracts to building a broad, long-term relation-ship with Baxter) and transactional (those that dobusiness with Baxter on an order-by-order basis).Then Baxter focused its services on helping its stra-tegic customers to improve their medical servicesand financial performance. Even the services of-fered only as options to strategic customers reflectthis priority: they are carefully designed to providevalue or savings that far exceed their cost.

Getting StartedA first step that a company should take to turn

its 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 what basis theyare being provided. (A number of companies seg-ment their markets but still offer much the same–ifnot exactly the same–services to most or even all ofthe segments.) Why is such ignorance so common?Because managers tend to spend the bulk of theirtime on their products or core services and too littleon understanding or keeping track of their supple-mentary services. This habit also helps explain thelack of rhyme or reason in the way many compa-nies we studied charged customersfor supplementary services.

All too often, salespeople areguilty of “fourth-quarter habits”:giving away optional services at the end of the year to meet their sales 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, theyconfuse customers’ expectations about which ser-vices should 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. A com-pany review, however, showed that its principalcustomer repeatedly received the service for free.

After compiling a complete inventory of supple-mentary services, a company should assess the val-ue of each service and the cost of providing it. Al-though it is virtually impossible to manage one’sservices strategically without this 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 the formeridentify customers’ expectations and how well the

supplier lives up to them, they do serve a function.But their 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 forfree than when they have to pay for them. Whilegiving away an ever greater number of services will 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, whichproduces fiber and plastic drums, routinely con-ducts what it calls cost-in-use studies to documentthe incremental cost savings and thus the superiorvalue a customer gains by using Sonoco productsand services. Working together 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 their costs. Using those estimates,all the Sonoco employees involved with the ac-count then brainstorm to come up with system so-lutions – for instance, a complete materials-han-dling system that includes just-in-time deliveriesand drum recycling. Sonoco then gives the cus-tomer a variety of service alternatives together

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

Baxter Corporate Consulting, which helps BaxterHealthcare’s strategic hospital customers cut costsand improve quality, provides another way of mea-suring accurately how customers value services.Each proposal that the consulting unit submits tohospitals includes a set of mutually defined metricsfor determining the value of the study to the client.As a condition for using the consulting unit, theclient must agree to work with it to apply thosemetrics and document the results. Armed with thisinformation, Baxter Corporate Consulting can thengive other prospective clients a concrete idea of thebenefits they will reap by using its services.

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

Relying solely on measures ofcustomer satisfaction can lead to

serious errors in judgment.

DO

NO

T COPY

FLEXIBLE SERVICES


costing, we found that few companies use this toolto manage services. That is understandable. Exist-ing activity-based-costing techniques have largelybeen applied to the measurement of manufacturingand product-related costs, and little work has beendone to apply them to services. Managers at manycompanies rarely define concretely what consti-tutes a particular service and its various levels. Forexample, “technical problem 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.

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

Another reason so few companies apply activity-based costing to services is that accounting systemsat many companies allow sales forces to foist ser-vice costs on other departments. 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 rep is booked for the service. Instead, the charges areburied in the fixed costs of the engineering depart-ment, 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 aroundmarket segments or customers. As a result, theycan readily break down costs on a product-by-prod-uct basis but cannot aggregate product and servicecosts on a segment-by-segment or customer-by-customer basis.

How do exemplary organizations deal with suchproblems? Consider what Van Den Bergh FoodsCompany, a manufacturer 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 all minor ser-vices (like basic problem solving). Technical ex-perts from departments such as customer service

handled major services (like detailed technicalproblem solving). Today the sales representativeand, in turn, a specific customer are charged foreach project. At the beginning of each year, VanDen Bergh managers construct an annual plan forevery customer that defines financial and volumetargets and sets the levels of services. At the end ofthe 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-based AKZO (now AKZO Nobel) suc-

cessfully employed value assess-ment in conjunction with activity-based costing to make a poorlyperforming business solidly prof-itable. The effort began about tenyears ago. Wondering whether theunit was providing more servicesthan customers were paying for, AKZO managers developed activity-based-costing tools to analyze eachcustomer’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 customer’s paint line.

As a result of the study, the managers of the AKZO unit found that they were indeed providingmore services than many customers were payingfor. They also discovered that some of their 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 potential for profit. And using customer-contribution-to-profit measures to guidethem, they then revamped the services they offeredas well as their prices.

Estimating the value and cost of services is notalways easy; the AKZO 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.

Formulating Flexible Service OfferingsIn 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.

Managers should try to limittheir standard packages to thoseservices that are highly valuedby all customers in a segment.

DO

NO

T COPY


Reevaluating 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 rudimentary 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 undermining their perceived value to cus-tomers. When companies reassess their standardpackages, they inevitably will decide to eliminatesome services (in other words, not offer them evenas options) and recast others as options. Of course,they also may decide to add services to the standardpackage that were not included before.

In our study, we found that suppliers were farmore reluctant to eliminate existing services thanto add new ones. In particular, engineers and cus-tomer service employees who had designed and implemented services often fought attempts toeliminate them. Their pride of ownership or theirobsession with the elegance rather than the practi-cality of the delivered service frequently thwartedpruning efforts. Salespeople used to throwing inservices at the last minute to win bids also protest-ed, fearing the cuts would hurt their ability to closedeals and meet 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 was free? And it is even harder, they say, whencompetitors continue to market the service as stan-dard. Nowhere is this a more serious problem thanin industries with high fixed costs, like commod-ity industrial chemicals and integrated steelmaking.In such industries, senior executives often hesitateto implement any scheme that may reduce sales for 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 volume – and rarelyeliminate them.

We found that suppliers 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 them.This approach is also a litmus test for services thatcustomers value but won’t admit that they value

By recasting infrequently performedservices such as installation as value-added options, supplierscan increase profits.

DO

NO

T COPY

FLEXIBLE SERVICES


because they want to continue getting them forfree. Depending on the market response, those ser-vices can be retained as options or discontinued.

One specialty chemical company devised a cleverway to make the overhaul of its standard packagemore palatable to customers. Along with specialtyorganic chemicals, it offered a variety of costly ser-vices, including laboratory support, field consult-ing, on-site testing, and educational seminars. Itcontinued to offer the same variety of services butsimply changed the level of those services availablein its standard package. If a customer buys a mini-mum amount of the company’s prod-ucts each year, it receives “basic”levels of all the services as standard.If the customer wants a higher levelof services, it can either increase itsannual product purchases to a pre-specified amount or pay extra.

As a prelude to recasting some previously standard field services asvalue-added options, a large computercompany began listing a charge forthem, which it then subtracted from the customer’sinvoice with the notation “Do not pay this.” A let-ter accompanying the invoice stated that the com-pany was pleased to have provided the services andgave an estimate of what they were worth–based onthe rates charged by independent industry consul-tants. Positioning the services as extras gave thecompany the option of charging secondary cus-tomers in the future.

Reevaluating Optional Services. After reevaluat-ing their companies’ standard services, managersshould turn their attention to existing optional ser-vices. If the cost of an optional service exceeds cus-tomers’ willingness to pay for it, the service shouldbe discontinued. Changes in technology, requiredexpertise, or insurance risks can greatly reduce oreven eliminate the value of optional services that atone time gave companies a competitive edge. Sup-pliers can sometimes help the handful of customersthat still need those services (or discontinued stan-dard services, for that matter) to obtain them fromother companies.

As we mentioned, there are circumstances inwhich a supplier might want to add a previously op-tional service to its standard package– for example,when the product itself is a commodity that can bedifferentiated only by packaging it with servicesnot offered by the competition. But it is easy to gooverboard. Believing that the supplier with themost extensive set of services often gets the busi-ness, managers in such highly competitive marketsare continually tempted to fold existing optional

services (as well as new services) into the standardpackage. They should resist. Instead, they might,for example, offer a bare-bones-minimum standardpackage of services, cut the price for the productand the standard services, and then let customersbuy the options they want.

Another alternative – one that Baxter Healthcareadopted – is to let customers buy the optional ser-vices wholly or in part with “bonus dollars.” Themore the customer concentrates its purchases withthe supplier, the more bonus dollars it earns and themore services it can “purchase.” Not only does this

approach allow customers to tailor the supplier’sservices to their particular needs, it also reinforcesthe message that they do not have to pay for ser-vices they do not want, which they have to do witha totally bundled package. And to underscore thevalue of the services it offers, a supplier can prom-ise to give customers cash for any unused bonusdollars at the end of their agreement – somethingBaxter Healthcare does.

We found that some exemplary companies choseto retain services as options and had interesting rea-sons for doing so. For example, although Sonoco’sIndustrial Products Division manufactures andmarkets fiber cores, around which such products asnewsprint, yarns, and plastic films are wrapped,management considers the group to be a servicebusiness. The division’s managers try to offer cus-tomers as many options as possible. Customers re-ceive an extensive menu of services – ranging fromwarehousing to analyzing how efficiently or effec-tively they are using packaging – from which eachcan create the set of services it will receive. Eachservice is priced according to its value and all thecosts associated with providing it. Sonoco man-agers say the opportunity to select service optionshas delighted customers.

Adding New Services. Of course, making themost of one’s supplementary services is not just amatter of rethinking how existing services arepackaged and priced. It also involves the way newservices are added to the mix. Each addition canserve a variety of strategic ends.

Customers of Baxter Healthcareearn “bonus dollars,” which theycan use to buy optional services

that fit their individual needs.

DO

NO

T COPY


For instance, shrewd suppliers often add new ser-vices to standard offerings to thwart the competi-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-ing a new service in the standard package, Baxterforces 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 costs of learning how to deliver it effectively.

Offering new services as options has its own stra-tegic advantage: it enables suppliers to gauge mar-ket interest. For example, although the traditionalbusiness of R.R. Donnelley & Sons Company isprinting, management believes that future growthlies in innovative services such as database man-agement, consulting and training, three-dimen-sional pop-up ads, talking ads (print ads with a microchip that plays a message), di-rect marketing, layout systems, andmapping services. To test the de-mand for those services, Donnelleyis offering them as options.

Sometimes adding new optionalservices entails no more than offer-ing new levels of an existing stan-dard service. Managers should ana-lyze each service their companyoffers only at a single level to deter-mine whether they can define alternate levels thatwould have different values for different customers.For example, even though their utility customerstraditionally had equipment-maintenance con-tracts, the managers of ABB’s power transformersbusiness recognized that not all of them wanted thesame level of maintenance service or valued the service the same way. So the managers decided to offer both a basic package and an extraordinarypackage. In addition, the utilities do not have tobuy either package for all their transformers. Someof them simply tell ABB which transformers tocheck and then ask how much 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.

Pricing the OfferingsAs several of these examples suggest, flexible ser-

vice offerings enable managers to be more adaptiveand responsive in their pricing. This approach also

helps them make sure pricing decisions supporttheir strategy for each market segment.

Obviously, what a company chooses to do withits prices when it trims services from its standardpackage depends on the competitive conditions itfaces in a given market segment. In a cutthroatmarket, for example, a supplier might lower itsprices by the full amount of the cost of the dis-continued services. In a less competitive market,where the players have more flexibility in theirpricing decisions, a supplier might maintain 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 amount equal to the cost ofproviding the service, raise it less than the cost of providing the service, or perhaps even raise itslightly higher to camouflage a price increase. Sev-eral suppliers in our study that were competing inrelatively stable markets and whose priority wasgaining market share chose not to change their

prices; they wanted to use the added options to gainnew business. Others, which were competing inmarkets where price-cutting was rife, added op-tions to avoid having to cut 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-usediscount). This approach makes it easier to keeptrack of service giveaways. Yet it gives the companythe flexibility to respond quickly to specific situa-tions–like the need to blunt a competitive inroad orto attract business in targeted new segments. Mit-subishi Electric Industrial Controls offers a propri-etary software development tool 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–free of charge. But it charges forsubsequent consulting.

Introducing new services asoptions allows companies such

as R.R. Donnelley to assess howmuch customers value them.

DO

NO

T COPY

FLEXIBLE SERVICES


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 Premier Support (custom consulting on highly specializedapplications). Depending on the type of softwarepurchased, which ranges from Desktop Applica-tions (for example, Word or Excel) to Advanced Systems (for example, Windows NT), these servicesare either not 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 entitle 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!

Creating Value MerchantsFew 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 practicesbefore introducing their updated service packages.

One that we mentioned already is Van 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 musteither be charged against sales or be 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 maintain it properly. In addition,various functional areas within the AutomationGroup are charged for services. For instance, engi-neering is charged if a poorly designed product gen-erates substantial warranty work.

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

To hold down costs and increasecustomer support, Microsoft introduced a menu of servicesranging from simple tips to specialized help, for which itcharges a variety of prices.

DO

NO

T COPY


sales to end users and are more innovative and lesscostly than the competition’s.

The Industrial Products Division’s sales repre-sentatives 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 detailedmenu of Sonoco’s products and services. Or if thecustomer prefers, the sales reps can assemble sever-

al tailored packages of products and services. Alongwith the prices of each proposed package, the salesreps provide a summary of how much money thecustomer can expect to save if it buys that package.Sonoco managers report that since they began offer-ing such extensive choices, both sales volume andmarket share have increased.

But to make this kind of pitch, sales forces needmuch more information about the cost and prof-itability of services than most companies typicallyhave entrusted to them. Only with this knowledgecan they focus effectively on the accounts with thegreatest profit potential.

Compensation also has to support the mission.By and large, people do what they are paid to do.Those in sales are no different. For this reason,companies that want to turn their salespeople intovalue merchants must tie their compensation to in-creasing long-term profitability and not just boost-ing this quarter’s sales or profits.

That is what Sonoco’s Consumer Products Divi-sion, which makes products such as fiber tubes,has done. It divided customers’ accounts on a mar-ket-by-market basis and then gave small cross-functional teams responsibility for a portfolio of accounts. In essence, each team manages its ownbusiness. Each develops market plans, preparesbudgets, and initiates improvements to productsand services. Sales managers can earn up to 50%

and salespeople up to 25% of their salaries inbonuses, which are based 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 managementto guard against compensation schemes that re-ward salespeople for selling as many services asthey can to a given customer. 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 itscustomers and hurt the businessover the long term.

Many companies refrain from im-plementing flexible service offeringsfor fear that charging extra for op-tional services that had been stan-dard will cause certain customers to

walk. One 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 better job ofmeeting customers’ individual needs at reasonableprices. Flexible service offerings, they say, havehelped MCI to increase business significantly. Oth-er suppliers, such as AKZO Nobel, say they are get-ting a higher return by focusing their resources onthe customers that value them the most.

But implementing flexible service offerings re-quires developing that most-difficult-to-acquireskill: the ability to say no adroitly to some custom-ers. Suppliers must be willing to say no to cus-tomers that want full-service packages at no-frillsprices. Without this skill, flexible service offeringsdevolve to business as usual – “giving it away.”Practiced deftly, this approach will give a companythe reputation of being firm, consistent, and fair.

The authors acknowledge the financial support of the Institutefor the Study of Business Markets (ISBM) at the PennsylvaniaState University and the contributions made by the managerswho participated in the field research. They are particularly in-debted to Arne Bennborn of ABB Asea Brown Boveri for his sup-port and guidance.

Reprint 95101

Companies that want to turn salespeople into valuemerchants should tie their pay toincreasing long-term profits.

DO

NO

T COPY

Harvard Business ReviewSubscription ServiceP.O. Box 52623Boulder, CO 80322-2623

Telephone: U.S. and Canada (800) 274-3214Outside U.S. 44-85-846-8888Fax: (617) 496-8145American Express, MasterCard, VISA accepted. Billing available.

Harvard Business ReviewOperations DepartmentSoldiers FieldBoston, MA 02163

Telephone: (800) 545-7685Fax: (617) 496-8145

Inquire about HBR’s custom service for quantity orders.Imprint your company’s logo on reprint covers, select articles for custom collections or books. Color available.

Telephone: (617) 495-6198Fax: (617) 496-2470

For permission to quote or reprint on a one-time basis:Telephone: (800) 545-7685Fax: (617) 495-6985

For permission to re-publish please write or call:

Permissions EditorHarvard Business School Publishing CorporationSoldiers FieldBoston, MA 02163

(617) 495-6849

HBR Subscriptions

HBR Article ReprintsHBR Index

HBR Custom Reprints

Permissions

Harvard Business Review

s11-5.capturing value of supplementary svcs.pdf

Documents