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How Service Programs Drive Product Differentiation and Higher Margins

Posted on: 10/22/12

In today's increasingly saturated and competitive marketplace, with rising costs and decreasing profits, many product-dominant companies have expanded their focus to include service programs. Nordstrom, a retailer that has been recognized for its customer service quality on a number of occasions, makes this observation: "We continue to believe that the service experience we offer our customers and the trust we seek to build with them are the most important drivers of our financial success."i According to the Office of the United States Trade Representativeii, "service industries account for 68 percent of the U.S. GDP and four out of five U.S. jobs."

Service-based business models are an effective differentiator, and can improve the profitability of low margin products. With the notable exception of software products, service offerings can drive higher margins and provide long-term recurring revenue.

"You'll never have a product or price advantage again. They can be too easily duplicated. But a strong customer service culture can't be copied." - Jerry Fritz.iii

Twenty years ago, in the early 1990s, International Business Machines Corporation (IBM) was a struggling PC manufacturing company. Its stock price was the lowest it had been since 1983. In the mid-nineties, the company repositioned itself as an IT service provider to offer solutions to their consumers' technology challenges and IBM's market cap increased from $30 billion in 1993 to $221 billioniv. The transition rejuvenated the company's business. In fact, IBM even took the dramatic step to get out of the low margin PC manufacturing business and became a service-centric company.

A product sale is a short-term transaction, a transitory experience, whereas a service is an ongoing relationship. Service-oriented businesses are forced to think about value creation over the entire product life cycle and not just the initial purchase experience. Wrapping product offerings with services encourages companies to get closer to and fully understanding their customers, and developing integrated solutions to meet long-term needs.

Starbucks transformed a commodity worth pennies, coffee beans, into an experience worth $2 a cup or more. The commodities to create a birthday cake from scratch (eggs, flour, milk, sugar) are worth pennies - but wrap a birthday cake in a complete birthday party experience and you can charge $100 or more.v In other words, successful companies are fueled by creating great experiences and great experiences are based on services.

"You've got to start with the customer experience and work backwards to the technology." - Steve Jobsvi

In the technology sector, Apple Inc. is a great example of how to integrate brand, products, and services to deliver a coherent experience to customers. In turn, the market has rewarded Apple, and as of this writing made Apple the most valuable company on the planet (based on market capitalization).

There are many market leaders who have tested, tried and successfully transformed commodity products into profitable experiences by incorporating services into their core business model. The question is what service opportunities should you be developing for your customers, how can these services enhance your profitability, grow revenue, differentiate your brand and add long-term value to your customers?


i Source: Nordstrom Annual Report, 2011



iv IBM market capitalization as of 10-19-2012



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