INTRODUCTION
This post has been updated after I spoke about why new services fail with Brian Halverson, an expert on gear trains and capital equipment remanufacturing. Brian has had a number of experiences with trying to introduce new services and was plagued with a challenge not covered in the original version of this post.
For service executives, the good news is that new product introductions fail more frequently than new service introductions, especially after we exclude the services associated with the failed new products. Even better news is the cost of developing the new service is generally less than the cost of developing new products. However, the bad news for the service executive whose new service was a dud or hasn’t attained it’s full potential is that it is easy to prevent the failure in the first place.
WHAT IS A NEW PRODUCT FAILURE?
R. G. Cooper is quoted as saying
“About half of all resources allocated to product development and commercialization in the U.S. goes to products that a firm cancels or produce an inadequate financial return.”
Others estimate that between 20% and 35% of new product projects either get killed before they are launched or never produce a significant return. Since the number of new services that fail is a smaller number than failed products, the best we can say is that new services generally cover their development costs (usually relatively low). However, in our experience, the number of “successful” service products that fail to achieve their full earning potential is high. That is the same as the #1 NFL draft choice that, after five years on a professional team, is still the third string quarterback. He certainly failed to live up to expectations!
WHY PRODUCTS AND SERVICES FAIL
In a recent Uservoice.com blog post, the author listed the seven reasons why new products fail. Here is the list with a comparison with why new services fail:
Notice anything special? Right…the causes of new product and services failure are exactly the same. That is because both categories are actually products, frequently managed by product managers and subject to the same market issues. However, there is one major difference, as shown in the following table, from the most recent CMO semi-annual survey. The percent of companies budgeting market research for B2B products is 44.5% while the same metric for B2B services is 37.0%. (20% more products businesses budget for market research than do service businesses.)
We can shorten the list of reasons for failed services down to four key items:
- Not properly defining the service (wrong needs and wants) for each of your key markets
- Incorrect pricing
- Customers don’t think you can deliver what you are promising
- The company only focuses on selling products (From Brian Halverson)
1. NOT PROPERLY DEFINING THE SERVICE (WRONG NEEDS AND WANTS) FOR EACH OF YOUR KEY MARKETS
This point incorporates two concepts – identifying each unique market and then defining what each need and want. Here are two examples from my background.
When I was heading up customer service in the data communication industry, all of our customers needed high uptime. But some were more critical than others. For example, the New York Stock Exchange could not tolerate more that 20 minutes of network downtime during the trading day cumulatively for a calendar year. Money was almost no object for them to ensure their network was always available.
When I moved to the analytical instruments industry, I discovered that academic customers had very different support requirements then QC groups in manufacturing. They each had unique needs, with very different response times and very different budgets.
As in many things in business, customer needs and wants change over time. If it has been more than four to five years since you reviewed how you map your customers into segments and how you structure your service contract components for each, you are probably not maximizing your capture rate and revenue.
2. INCORRECT PRICING
If you are not updating your customer segments and contract content, then it is highly likely that you are also mispricing your services. Willingness to pay does not increase linearly with contract level. It increases with the value your customers perceive they will obtain from the purchase. You can only know this by understanding your customer’s business.
The other thing you should be doing is seeing how your prices compare to other services your customer’s purchase from other companies. If you are selling into a manufacturing environment, then you should know not only what your competitors charge for their services on equipment similar to yours but also what other manufacturers charge for similar services on all sorts of equipment.
Think about how hard it will be sell your service if your customer has 15 different pieces of equipment and the hourly price for on-site service from the other 14 suppliers ranges from $225 to $275 per hour and you charge $375. Or, in the same example, how much you are leaving on the table if you only charge $175 per hour.
3. CUSTOMERS DON’T THINK YOU CAN DELIVER WHAT YOU ARE PROMISING
In some cases, the end user will still buy a service contract from you because she has to demonstrate to the organization that she is doing everything possible to keep all the equipment running. But many others will either migrate to self-maintenance or have a Plan-B when they call you and you disappoint, so that they are not caught short. In any case, you are not doing your company or your department any favors but selling expectations you cannot achieve and you have a high probably of losing customers as soon as they can dump your stuff.
4. THE COMPANY ONLY FOCUSES ON SELLING PRODUCTS (FROM BRIAN HALVERSON)
When I spoke with Brian he discussed two specific issues:
- People in the company looked to a product order as a great event
- Salespeople were not compensated for selling services
The leaders of mature product companies have learned to honor a new product sale. When an order is announced they ask “how many units” instead of “what is the margin contribution.” When sales holds its annual sales meeting they announce the top salesperson – the criteria is units sold or total revenue. Service sales are not included in these honor sessions.
A corollary to the above is that salespeople are not compensated for selling services! Yes, that still happens. Services usually generate higher margin than new oviduct sales yet the salespeople do not want to waste their selling time talking about services when they receive no compensation.
HOW DO YOU RESOLVE EACH OF THESE FOUR QUESTIONS?
Not properly defining the service (wrong needs and wants) for each of your key markets – work with a service marketing consultant to help identify the key segments and then do a market research survey to answer all the questions you have about services, pricing and perception of service capabilities. It is not as expensive as it sounds and most companies can afford a project without destroying their budget.
Incorrect pricing – your first choice should be to ask your sales people. If they quote your services while trying to sell products then they most probably have a very good idea about how much each of your major competitors are charging for their services. As a backup, the market research program can also help you understand what your customers are paying others and what they think is reasonable to pay for your services.
Customers don’t think you can deliver what you are promising – If you have an ongoing customer satisfaction program, then you should already know what your customers think about your service. Also, ask your sales people. Customers tell them what they think! And finally, this should also be part of the market research survey.
Only focusing on product sales – This is a problem because this mentality has now become an integral part of the company’s culture which means it will take a long time to make any significant changes. The first place to start is by paying the salespeople a fair compensation and even considering requiring the salespeople to reach a specific services quota before they can enter the higher tier for product commission.
If you believe that your business would benefit from this type of market research program, contact Sam to discuss our Customer Focused Market Discovery methodology. And remember that every day you delay you are leaving money on the table. Money that can never be recovered.
Also Read: 9 Reasons People Fail To Renew Service Contracts
ABOUT MIDDLESEX CONSULTING
Middlesex Consulting is an experienced team of professionals with the primary goal of helping capital equipment companies create more value for their clients and stakeholders. Middlesex Consulting continues to provide superior solutions to meet the needs of their clients by focusing on our strengths in Services, Manufacturing, Customer Experience, and Engineering. If you want to learn more about how we can help your organization minimize the risk of having new services fail please contact us or check out some of our free articles and white papers here.
Image credit: Image by Gerd Altmann from Pixabay