Service Marketing: Why You Need It^©
by Al Hahn

Service marketing is relatively new for most service providers. A few large manufacturers such as Hewlett-Packard and Digital Equipment Corp. have had substantial service marketing organizations for years, but this is new territory for most medium-to-smaller sized manufacturers and independent service providers.

It is a rapidly growing specialty, however, with demand for service marketers outstripping the supply. Why are companies adding this function and even adding headcount to it at this particular time? The short answer is because services are becoming more important and harder to sell simultaneously.

In the computer industry today, over 30 percent of revenues flow from services, and more than 60 percent of the profits. Software, medical, telecommunications and other segments are also moving along this same trend line. Competition is torrid and a desperate need for revenue has driven down the margin on the product side. This leaves service margins as a savior for corporations and a target for customers.

Let's face it, in the good ol' days, we didn't really have to sell service, customers automatically bought it. If you bought a high-tech product, you assumed that you would have to buy a service contract because the products needed frequent maintenance and repair, and only the anointed few understood the mystical innards of computers and other high-tech gadgets. One look inside was enough to intimidate most customers into signing anything the vendor demanded.

Something's broken and it's not the product

Well, things have changed. Consumers have long since noticed that their televisions and other electronic products rarely break. The popular advertising image of the bored Maytag repairman hasn't helped our cause either. If that wasn't enough , the personal computer has really cooked the goose that was laying those golden eggs. PCs are everywhere, at home, in the office, in the lab, on the shop floor, in the hardware store. They're all over the place, and they don't break enough - on average, less than once a year, which really kills the annual service contract. Just try to get someone to renew an annual agreement when they haven't had even one service call all year.

The old paradigm that high tech products required lots of expensive service is broken. Maybe we should be in the paradigm repair business, it probably generates higher volumes.

By the way, even if you are not in the PC business, don't fool yourself into thinking that this doesn't affect you. Product quality and reliability is much improved across the board. Even service-intensive products such as high-end CAT scanners and supercomputers are affected.

Had enough? Are you convinced that the service business is tougher today? What then should be done about all this? For many companies, the answer has been to establish a service marketing function.

Service marketing functions

Let's start with some definitions. Service marketing should ideally contain the following functions:

Market & Customer Research (other than customer satisfaction);

Competitive information and analysis;

Service product definition and packaging;

Pricing;

Ongoing service product management;

Marketing communications (brochures, data sheets, etc.);

Advertising and promotion (including public and industry relations);

Sales support.

Basically, service marketing does its homework regarding markets, customer needs, and competitors, and comes up with service packages customers want to buy. It then prices the packages and sends them to the field with appropriate sales tools. Many people are unfamiliar with the complexities of service and tend to think of service products simplistically. They don't realize service packages have lists of features and attendant benefits. They also may not realize that many service providers offer tiered services. Just like American Express has their green, gold and platinum cards, service providers have different service levels, usually offering faster or slower response times and different hours of coverage, as well as other benefits.

Pricing is a science and art in itself. There are many techniques of pricing; cost-plus, competitive or market pricing, commodity pricing, value pricing, and others. It is a difficult and dynamic part of the business and is particularly challenging for new service on a new product. There are so many unknowns that have to be estimated and forecasted.

Reliability and call volumes have to be predicted, but may not turn out to be as expected. Quite often new products require a settling-in period and early call volumes may be double the volume of succeeding years. Customer usage, the types and quantities of questions they pose may be unanticipated. Even very large companies that have pricing specialists may have a hard time coping with new product/new service dynamics.

Something that many forget is that, like any other product, service products need ongoing management. Services and prices need to be adjusted over time to track customers changing needs, competition, and the effect of new products on aging products. Costs can go up or down, competitors become weaker or stronger, new service technologies may be employed. Marketing should be tracking these things, adjusting for them, and supplying information and training to those who sell services. When the time comes to sunset a product, marketing should be developing plans to phase out services on certain products, or handing over support to independents.

Optional functions

Functions that are often within service marketing, but can be independent or lodged elsewhere include:

Sales (direct and indirect);
New business development; and
Customer satisfaction measurement.

A most controversial issue is who has responsibility for selling services? We have no magic answers, but note that Hewlett-Packard, regarded by most as the premiere service marketer, shares revenues responsibility between service marketing and operational line management. I believe this shared approach makes a lot of sense, particularly when telemarketing/telesales techniques are utilized so that everything isn't field-resident. I would also observe, however, it is more common for field operations to own the revenue goals.

New business development can be lodged in marketing. This provides the opportunity for marketing to be a more strategic leader within the service organization. Since service operations do not tend to produce many strategic thinkers, putting this responsibility into marketing may be a very good fit. I believe it is important for service providers to become more strategic; this can be an excellent first step.

Customer satisfaction measurement is an important function that may or may not reside well within marketing. If marketing is already conducting a lot of research, and there is no other logical home for the activity, it will go well there. On the other hand, this can also be part of the Quality function.

Where should service marketing reside?

Some feel that service marketing should be a part of the corporate product marketing organization. This allows for better synergy with product strategies, more resources, etc. While I understand the merits of the argument, I can think of no company where service marketing has sustained success when it was anywhere but within the services organization. Sooner or later, when the pressure to move product is irresistible, services will be shunted aside. Usually this results in services marketing being returned to the services organization within a few years. Worse yet is for it to stay within corporate marketing and be starved for resources and attention. Based upon countless observations of these sad stories, my recommendation is firm, keep services marketing with services operations.

The marketing price tag

When should you invest in a service marketing organization, and how much will it cost? A few years ago, I noted that it seemed companies had to get service revenues up to about $50 million or so before they invested in service marketing. That was just a casual observation, not a formal study. This is changing rapidly, and today it is more likely to be half that. To be sure, there are those that have service marketing at a $10 million level, but they are still the exception.

On a revenue per person basis, there is a wide range of service revenues per service marketing person, from about $5 million to $50 million. Keep in mind that this is usually pure marketing, comparable to product marketing types, and does not include sales people. Dedicated service sales specialists typically produce around $1 million per year, although the range is from $250,000 to $14 million.

Costs of service marketing vary with the definition of functions contained. The industry range at the moment is from less than 1 percent of service revenues to about 5 percent. As service marketing is still new for many, expect this to increase somewhat for the next few years as companies increase their investment. An important factor to keep in mind is that as much as 25-40 percent of marketing expenses are spent for outside services such as market or competitive research, advertising, printing, etc.

The Payoff

Is this investment really worth it? In many cases, the return on investment is swift and substantial. Real marketers can grow revenues, increase margins, reduce discounting, increase the perceived value of services internally and externally, and increase customer satisfaction.

Pricing alone can bring substantial bottom-line enhancement. Small, regular annual adjustments are usually tolerated by customers as inflationary increases necessary to address rising costs. Without marketing staff, little things like this often are unattended to. Then, when three to five years have passed and you try to make up for all those years of rising costs, customers are outraged by substantial price increases.

If you find that service is getting harder to sell, large discounts are becoming the rule rather than the exception and have been forced to adopt me-too pricing because you just don't have the bandwidth for anything else, it's time to get some professional help, and I don't mean psychoanalysis. A good marketing professional should be able to pay for themselves many times over, even within the first year.

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