Jan. 1, 2003
Part four of this five-part series deals with flexible service offerings and the service pricing matrix.Capturing value in service pricing is a major

Part four of this five-part series deals with flexible service offerings and the service pricing matrix.

Capturing value in service pricing is a major step toward changing the product-push firm to the flexible-service firm.

Pricing is about capturing the value that the wholesale firm generates. Although product-based pricing dominates most wholesale firms, service pricing is integral to moving the firm from a product-push organization to a service provider for targeted customer groups.

Using the product-push model, wholesaler managers take unique services and bundle their value with commodity products. This downplays the individual service value because the buyer will often confuse service with the commodity product. Other undesirable results include future conditioning of internal and external customers for "free" service, poor measurement systems to judge service success and little understanding on how to match service development with customer needs.

Figure 1 illustrates how the different functions within a distributorship change as the firm moves from product-push mode to a flexible-service model. For instance, under outside sales of the product-push firm, sellers are account driven, highly qualified in product knowledge and compensated on gross-margin dollars or top line growth.

In the flexible-service firm, sellers are driven by customer profits (probably activity profits) and are compensated on objectives, net profits or customer-activity margins. Other functional areas undergo significant changes as well.

Marketing makes a dramatic move from manufacturer-promotions driven to service development, service measurement and service management. Currently, many distributors copy and use whatever manufacturers suggest for the latest incentive-based product promotion.

While some of these efforts hit their mark, many fail because of poor measurements, late launches, bad market information and complexity. Generally, most "buy this, get that" promotion efforts attract the price-sensitive buyer who moves back to the low-price leader when the promotion is over. For this reason, much of wholesaler marketing is tactical, not strategic, and has limited influence over long-term profitability.

Operations functions change, too, becoming less of a backdoor sales-driven function in the flexible-service firm. Operations managers and marketers work closely to match services to customer segments. Customer segments that consume operations expenses at rates faster than sales growth are candidates for streamlined, outsourced and invoiced, or less service offerings.

Wholesaling, as an industry, offers a horizontal service platform. The method of growth is by acquiring territory and customers via acquisitions or new branches. The overall service offering is a one-size-fits-all proposition or a "horizontal" extension of past service provision.

In the flexible-service firm, service and most marketing offerings are vertical in nature. In other words, different customer segments get different service offerings based on their willingness for the service. To align vertical offerings and match them to segments, the wholesaler must be able to measure, parcel out and price account service usage. Capturing value in service pricing is a major step toward changing the product push firm to the flexible service firm.

SERVICE MATRIX PRICING The service pricing matrix is an extension of the familiar product/account pricing matrix. Matrix pricing reached prominence in wholesaling's second generation (approximately 1960 to 1985) as product offerings became numerous and wholesaler managers needed a tool to consistently apply prices to individual accounts. Most matrix pricing involves putting products or product groups on the "y" axis and discounts on the "x" axis. The result is a consistent matrix that captures pricing for the "A" items and many of the "B" and "C" items.

To capture value for services, and to gauge their importance to customer segments, it is important to have a mechanism to price them. In Figure 2, fictional wholesaler Amperage Supply has developed a service pricing matrix for the Residential Repair Contractor segment. The matrix lists service options for delivery and storage services. Under the delivery options are UPS, 24 hour, same day, two hour, overnight and early a.m. Under the storage services are job-site trailer, shop bin, service van (night time) and second-party warehouse.

Each service is defined as expected, augmented or potential. An expected service is a commonplace offering and is a requisite to compete in the marketplace. An augmented service is a specialized expected service that a few competitors provide and has a visible need in the market. Potential services are highly specialized offerings that are new in their life cycle and possibly unique to the service provider.

In Figure 2, UPS delivery is an expected service and the corresponding fee is crossed out or negated. Same-day delivery is categorized as an augmented service and is fee-based per delivery. Night-time delivery to a service van is a potential service and is based on a monthly flat-rate fee. Each service, depending on how it is measured and its complexity, is put into the pricing file where it's automated for efficiency and accuracy.

Programming service matrices for individual segments is a relatively new concept for wholesalers. Many pricing systems have delivery modes as part of the order-entry process, but these options are not consistent, seldom list all service modes, and make little or no distinction on the life cycle stage (expected, augmented, or potential) nature of the service.

The service matrix has the potential to be a very powerful profit center for wholesaling. Why? Too often, services are given away by sellers to sell commodity products, but this strategy often backfires. For instance, follow-up to gauge the success of the service is often poor. If the service is a flop, it's not deleted from being given away on future orders, which reduces profit. Pricing the service also reminds the customer of service value and that not all services are "free." The service matrix allows management to target service strategies for market segments by application, geography, or account size. This has the potential for managers to consistently use services as offensive weapons where justified. In essence, it allows controlling service offerings where they are needed and limiting them where customers don't want them or won't pay for them.

To begin programming your own service matrix, start with a defined segment. List service options, plot their life-cycle stage, and program fees into the pricing system. If you currently don't unbundle and price services, pick several augmented offerings and price them to a random group of 50 or so customers (preferably within a segment). Review their usage after four to six months and, if successful, roll them out to the entire segment.

Developing and using service matrices by segment is another part of the modern wholesaler pricing system. Too often, wholesalers neglect the power of assigning specific services among customers and end up over serving customers who don't want service and under serving those that do. Sellers in the product-push mentality of yesteryear don't think of services as strategic offerings that can greatly enhance the profitability of the firm. It takes solid marketing strategy to successfully develop service offerings and capture their value by enhancing the pricing file with the service matrix.