Fee-Based Services

In the first two parts of this series we've explored the preparatory skills needed for a company to develop and launch new services. Although some electrical distributors find the idea of charging for services difficult, we believe it's time to start. As with many things in life, work done up front often impacts back end success, and developing services is no different. How well your company generates ideas, germinates concepts, tests and makes decisions about concepts will determine the success of launching new services. How well your company launches services also impacts how much you can charge for those services. This article explores the first few steps in the New Service Development (NSD) process: idea generation, concept development and testing.

Before we delve into NSD, let's look at why it's so important. Most wholesaling models advocate adding services, which the customers value, thus new product sales follow. Given the commodity nature of products, it's difficult to differentiate and add value to similar products. Many distributors lump extra services with commodities, but don't get the value of the services in added product sales. We call this problem the "service trap."

Those who fall into the service trap offer costly higher valued services for "free" as an inducement to get more commodity sales. To understand the trap, look at Figure 1 on page 56. The graph illustrates nine service/price strategies available to the distributor. The vertical axis represents the pricing strategy, and the horizontal axis represents the service strategy. For instance, offering a low price (penetration) for an expected service leads to box No. 7. The best (perhaps only) way to sustain this service/price option is to lower cost with operating efficiencies while designing less error into core service processes.

Of course, the graph is not absolute; in many instances there are combination strategies. The concern is that many distributors follow strategies in quadrants 8 and 9. Simply put, they offer augmented or potential services for nothing and usually don't get top-line sales to offset the cost of the new services. The distributor is then trapped in a cycle of costlier services with little chance of breaking even on increased business.

Much of this service trap is due to the intangible nature of the service, so wholesalers need to change their thinking on developing costlier value-added services.

Be careful about offering new services without seriously considering the Service Trap. First, the link of a new service to top line sales is hard to measure and can be clouded by competitive and economic factors. Secondly, the service cost is most often variable and is an ongoing expense without a guarantee of offsetting fees. Third, if the new service is popular, giving it away indiscriminately will cause capacity problems since everyone wants to use it. With rampant demand and over-capacity issues, the new-service quality will go down. Finally, giving value-added services away for free conditions customers to expect them.

Value-added services aren't value added unless the customer is willing to pay extra for them. The best way to capture and charge for value is in developing service products through the NSD process.

Like the name implies, service products are services sold as products. In essence, they have a name, a value proposition, and a fee that captures their value. Examples of service products follow. Some elicit fees while others are used for key customers. *The safety-products wholesaler that sells fire extinguishers and establishes a service to inspect and maintenance them. *The chemicals wholesaler that develops a service to dispose of customers' hazardous chemicals. *The electrical wholesaler that offers overnight delivery to construction sites' secured containers. *The plumbing wholesaler that offers two-hour emergency delivery in a congested metropolitan area. *The HVAC wholesaler that sells a design and layout service for commercial jobs.

NEW SERVICE DEVELOPMENT The six-step process of funneling an idea into a succinct new service product looks simple in Figure 2, but it's actually a lot of work. How a distributor goes about the systematic development of a service will directly impact its success or failure. Let's explore the first few steps in the process.

Idea Generation. The lifeblood of the NSD process, the best ideas come from your customers, suppliers, employees and database, so it's important to keep your eyes and ears open. Of course, not all ideas will be good ones. Idea generation isn't a lotto; it's a "lotto work." Let's take a closer look at where ideas come from.

Customers. Problematic customer situations can be fertile ground for new-service ideas because problems force you to listen, and listening forces you to resolve issues. Customers' laundry lists of complaints and things they would like done differently are also full of ideas. Just be careful to discern if they're verbalized accurately and more importantly if customers are willing to pay for the new service addressing those issues.

Suppliers. Often overlooked, suppliers are uniquely positioned to see your business with objectivity while maintaining the vested-interest perspective of an insider. Encourage your supplier to voice ideas and concerns.

Employees. The most reliable ideas come from employees. To garner this intelligence, create an internal value-culture, which must begin at the top and ooze through the company. It should focus on the customers (producing right products and services) - not on the industry (trends, competitors or supplier pressures) or the company (cost cutting, sales or profits).

Your database. Often underutilized, the customer database offers service development ideas based on in-depth customer knowledge. If you don't actively mine your data, you might be missing some gems.

Once you've generated ideas, it's time to determine if they are actually profit centers. That takes us to the next step in the NSD process.

Concept Development and Testing. For ideas to move toward becoming a new service, they must be refined and tested. The goal should be translating the service idea into marketplace mantra. Simply put, concept development is positioning. Think about what makes the service different. Unfortunately, often there is really nothing different; this is where positioning becomes instrumental.

Services are easier to position than products because services are linked to people. Just like snowflakes, people are different and will not deliver a service in exactly the same way. For that reason, it's important in service design to remove the more variable steps from human intervention to insure consistent quality.

To create a position for your service in the minds of customers, start by writing a positioning statement. A positioning statement relates how your service is to be perceived by prospects. It represents "the message" your service will deliver in the voice of every medium. Positioning is critical to communications and serves as a point of reference for all elements of the marketing mix, so don't wisp over this.

To begin the positioning process, ask these six questions. What is your service? Who will want the service? What are the special needs of people using the service? Against whom will the service compete? What's different about the service from service of competitors? So? What's the unique benefit customers receive from the service?

Your target audience will consist of likely prospects for your proposed service. These customers are anticipated to establish the demand and be the key for the new-service offering. The target audience must represent a sizable chunk of customers expressing a need for and concerns about the service proposition.

Your frame of reference is your target audience's perception of the service(s) your idea will compete with. Marketers define this as the "category" in which the service will compete. Sometimes a category will point a finger at the competition; sometimes the lines will blur. The higher the number of competitors, the more important it is to make your point of difference clear.

Your point of differentiation's hallmark will be communicated by the benefits of a particular service, but benefits and features are often confused. Features are easily described; benefits, however, can be difficult to describe. Benefits are the results for customers yielded by your service. The words used to describe the benefit must be simple, impactful and stated so customers understand.

Services are essentially just promises by a wholesaler of satisfaction. You must not over promise. As a general rule, consistently under promise and over deliver.

Concept (or position) evaluation is nothing more than finding out, before a service launch, if your service is valued enough to be "purchased." If customers don't value what you offer, it's back to the drawing board. Evaluating concepts is the process of testing assumptions upon which the concepts are based.

To make decisions about whether to continue with a concept or position, use the "market research" process. It's the vehicle managers use to eliminate some of the assumptions made about markets. Figure 3 overviews the steps.

Step 1: Assess needs. The first step is to ensure you measure the right things. In order to get useful answers, you must ask useful questions.

Step 2: Define market requirements. Determining market requirements refers to how you structure the data collection process and how you then compile the results.

Step 3: Analyze data. Data analysis deals with combing through the collected data with an eye toward creating a competitive advantage.

Step 4: Develop internal capabilities. Conclusions are then drafted and delivered to decision-makers via a written report. Writing the report assigns meaning to the measurements. Ultimately, senior management should decide whether or not to pursue a service to the next level. Without support from top management, no new initiative will ultimately succeed in your organization.

Often new product or service ideas are generated by the very research used to test prospective concepts and their positionings. The "go/no-go" decision may send a particular position packing its proverbial bags, but it may give birth to another new concept, which will also have to withstand the rigors of the six-step service development process.

The next step in development is a preliminary financial justification of the service. We'll address that as well as the second half of the New Service Development Process, Communications Strategy, Market Testing and Roll Out, in next month's installment.

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