In a business world where competition is higher than ever before, it has become increasingly difficult for firms to differentiate solely on products. That is why many firms have begun focusing on services too. This Idea looks at this trend, referred to here as ‘servitization’ and considers how you can ensure the shift to such sales is a successful one for your organization.
There has been a growing trend in recent years for suppliers to differentiate their products through services, rather than solely through products. Consider the case of Apple, whose market share has consistently come under assault from cheaper tablets and touch screen phones competing with their iPad and iPhone. Nevertheless, it has managed to stay ahead and one of the reasons why is through a focus on customer service; Apple stores are designed to feel friendly, with a hands-on experience of their products.
In a report published by Cranfield School of Management, Professors Lynette Ryals and Neil Rackham refer to this trend as ‘servitization’. In essence, servitization is the shift, or transformation, made by companies from selling products to providing services and solutions. A classic example is of Rolls Royce, which now contracts with many of its customers for ‘power-by-the-hour’: the customer buys the power an aero engine delivers, instead of the aero engine itself, and Rolls-Royce provides all of the support (including maintenance) to ensure that the engines continue to deliver power.
These kinds of sales are described by Ryals and Rackham as ‘complex’ business-to-business sales, and they typically involve a high level of customization. They also tend to involve a higher cost of selling and longer sales cycles.
However, there is evidence that firms are struggling to profit from servitizing; often, servitizing means that the opportunities to gain efficiencies through standardization are limited. As such, servitized selling is a risky activity — riskier than selling standard services or products; for example, there is the risk of spending too much time and effort on a complex sale with the chances of winning it potentially lower than the chances of winning a smaller, standard deal.
Companies transforming into servitized firms must have a process that deals systematically with the costs and risks associated with servitization. Ryals and Rackham suggest that every sales opportunity, whether with an existing or with a new customer, be evaluated based on its desirability and winnability; in other words, the following questions must be asked: do we want this opportunity (desirability), and can we win it (winnability)?
The reality highlighted by Ryals and Rackham’s paper is that organizations transforming into product-service providers face critical internal and external challenges. As such, they set out a conceptual framework to demonstrate how the desirability of a sales opportunity should be evaluated: the sales team should consider whether desirability is positively impacted not just by financial value, but also by relational value, and is negatively impacted by risk.
‘Financial value’ refers to the net present value of the opportunity, whereas ‘relational value’ refers to indirect financial benefits to a supplier’s customer relationships (such as referrals, innovation and learning opportunities, reputation, etc.).
Moreover, if a supplier is servitizing, it should frequently re-evaluate its sales opportunities during the sales process, so that it can understand the expected monetary value of each opportunity and, where necessary, pull out of less attractive opportunities. This will ensure it does not over-extend itself.
Finally, servitizing also has an effect on the relationship between the organization’s marketing and sales departments; traditionally, they work in a linear fashion, with marketing identifying opportunities and then handing them over to sales. In servitized firms, they should work together and take a more systematic and iterative approach to sales opportunities.
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