The Value of Service
by Al Hahn

Services are becoming harder to sell, that's a fact. In the past, equipment broke frequently and service was an obvious requirement. Today's products, software included, are of extremely high quality and repairs are seldom required.

For example, let's consider today's PCs. When the desktop was first invaded by computer hardware, customers reported in industry surveys they required 3.5 onsite calls per year. A few years later, they reported 1.5 calls, then it was 0.8 - less than one per year. When we have the next opportunity to measure this, I expect users will report 0.5-0.6 or less, maybe a call every 2-3 years.

What this means is that hardware repair calls are trending down, providing fewer opportunities to demonstrate the need for and value of onsite service contracts. Not surprisingly, customers are questioning the need for service contracts on reliable equipment, especially if they have not had a service call in the past year. This doesn't stop at the desktop, however. Because PCs are so ubiquitous, this affects nearly everyone and causes them to question other services as well as those on their PCs.

On the software side, the picture is more complex. Quality is similarly up, but so are call rates. What has changed is the reason for calls. There are fewer calls to fix software bugs, but more to provide advice on how to get what the user wants.

In high-volume applications, fewer than 5 percent of calls are for bugs, typically more like 2 percent to 3 percent. In a recent research project, we found users tend to call more frequently over time. Initially, they are a little bit intimidated and are reluctant to call out of fear that they will be made to feel stupid. Once they have called, however, they gain confidence and tend to keep calling rather than waste time trying to solve their own problems. The irony is that the better the phone support, the more they are likely to keep calling.

Service is intangible

Indeed the service landscape keeps changing. The net of all the above preamble is that service does not sell itself anymore. Customers are increasingly examining their need for service and support before buying. We have evolved from a period of taking orders for services, to a new era when we actually have to sell them. Unfortunately, we are not well prepared. Traditionally, product salespeople sold service - sort of - while they were selling products.

Financially, this was good, as we got a free ride in terms of selling expenses. The problem is that product salespeople are trained and experienced in selling tangibles. Products, by and large, have been tangible. They have weight, mass style and other physical attributes we can show to customers. Even software can be demonstrated and benchmarked. Services, however, fall into another category called intangible, meaning they cannot easily be measured, sensed or demoed. This presents a dilemma to those who have to sell services. How do you make the value of services tangible and real to the prospective buyer?

Price is tangible

Another unfortunate artifact of service is that price is tangible. For some salespeople this is a way out of a difficult situation. Just work with price. While this can be successful in the short term, it has a whole slew of unpleasant side effects. Selling on price is the laziest way to sell. Research shows companies that sell on price have lower customer loyalty, presumably because buyers never understood the value of the services they were buying. In addition, discounting and price cutting feed customer expectations that there will be more and better discounts or cuts, setting expectations that will be painful to meet in the future.

Price, however, is a measurable commodity, so we are stuck with it as an artifact of services that will not go away by itself. What, then, can we do to offset this problem?

Tools to measure value

There are models to measure value. Hewlett-Packard has a formula, shown in the accompanying box.

The use and understanding of this formula has been spread throughout HP's far-flung computer service organization and helps them to have a consistent method of communicating about value. They are, in fact, probably the most consistent service provider around the world and this approach to value has helped them in dealing with the problems of global service.

One thing is still a challenge in their formula, however. How do you measure the benefits? Price is easy, and if we can compute the benefits in dollars, we can easily apply the formula. Here at Hahn Consulting, we have developed a method we call ValuTools™. We work with the service provider to characterize all the services (and anything else, such as updates to hardware or software) received by a typical customer in a year and we value those using time and materials (T&M), per-call, street price, list price or any other market valuation we can find to work with. A typical example is provided below.

This real data is taken from an actual client's database. Although it is typical, it does not represent everyone's data. For example, there is no listing of the number and value of hardware updates because they were not common for this company. The same analysis for a company that had a high rate of technology changes, a networking company perhaps, might include a lot of expensive hardware on a regular basis.

For them, hardware updates might represent the greatest value of the hardware contract. Generally, however, we see that parts are usually the compelling financial element of a hardware analysis.

On the software support side, the updates are clearly the greatest source of financial value. In surveys, by the way, software updates are very high in importance to customers today, about equal to telephone support. Without these analyses, though, our customers may not have any idea how many calls to expect or how to value the services they will receive. Armed with this information, those who sell service and support contracts can more easily turn price objections into discussions of value.

Adding value in services marketing

The use of such tools is fairly obvious to salespeople, but what about marketers? Well, such value measurements are useful in formulating service packages, communicating value in brochures and presentations and in managing service portfolios over time. HP seems to use their formula most in designing new services. Certainly this is a good idea. If service marketing cannot articulate the value, how can sellers or customers understand it? In HP's case, they have customers involved in design and they also use focus groups and test market new service offerings in selected geographies. All of these steps allow them to test the value of new offerings.

Tools such as our analysis to the left are useful in brochures, data sheets and presentations when services marketing communicates the new programs to the field. In fact, field people are fairly desperate for tools of any kind to make their tasks easier.

Service product management

Another use of such tools I would particularly like to address is in ongoing product management of the services portfolio. Pricing, positioning and other assorted marketing functions are not just performed at product inception, although this is a critical time. I think we tend to forget that everything is in constant motion. Markets, competitors, prices and customer needs change. I believe strongly that service marketers should be measuring all services on at least an annual basis to ascertain if they still deliver value to customers.

From performing the above analysis about a hundred times, I know that the classic service or support contract is about 25 percent cheaper than the same service bought on a T&M or per-call basis. Yet I have seen a small number of companies still selling services that have lost their value. This will not work very long. We need to track our services and adjust to meet customer's changing needs and values. If a service package loses its appeal, it is probably because there has been a value shift.

On the other hand, it is possible to deliver too much. We want to deliver good value, but not be stupid about it. The above example comes close to overdoing it in terms of the software support contract because of the high value of software updates. This is not a complete assessment, however, because the vendor may wish all users to be at the same revision level, so additional issues need to be considered, including service provider goals or economies.

Shifting values

Speaking of shifting values, I mentioned that hardware calls are trending down and software calls are trending up. We all need to be tracking these kinds of things on both a macro level and specifically for our own customers. These are our windows on the future and knowing that hardware calls are dwindling, we should begin building other values into our contracts. For many companies, this means building a software and product advice capability, which can be a good bridge into professional services of all types.

Today, this is often centered upon a strong telephone support center, as supporting customers remotely via centralized services in an efficient model to deliver support. This is the kind of scenario where services marketing can lead the entire service/support organization into the future and contribute strategically, as well as with revenues and profits.