- As technology companies add more and more features to their products, consumers are overwhelmed.
- Customers who do not understand how to use complex systems abandon them.
- This "consumption gap" reduces the profitability of technology companies.
- Over time, almost all users of high-tech products demand more and better service.
- If we work with a product sales model we will have to make an extra effort to become a service focused company.
- This model can be converted into a "value-added services" (VAS) model.
- We must transform all our service departments into a "convergent services organization”.
- We can measure how the metric of days it takes a customer to buy a product again as a validation factor for our model. The fewer days the better.
- We tend towards a value-added services model, because technology markets are maturing and "service science" is evolving as a commercial discipline.
What is the "consumption gap"?
Any company whose product involves new technologies faces a serious problem: inventors, programmers and engineers generate innovation after innovation in an attempt to distinguish themselves from the competition, but inventions and functions emerge faster than people learn to use them. The problem is not characteristic of an individual product or a customer who does not know what to do with it: complex systems confuse users. Often those who feel cheated are not technologically conservative or ignorant consumers. Sometimes entire groups of experts do not manage to use all the functions and often do not even know that they exist.
"It turns out that technology does have limits. Not because engineers can't innovate, but because users can't use it.
Even information technology companies often fail to "use software", but the problems of use in consumer markets are even greater: in 2008, more than 70% of mobile phones could record videos, but only 28% of users knew that function. The return rate of electronic products increases from 11% to 20%. Generally, these are not defective devices: people simply cannot get them to work. A study by the Technology Services Industry Association found that people use half of the "software functionality".
"If the end user can't figure out how to use the product we sell, or can't work in your systemor cannot change the business process to suit its functions, [that product] has little or no value to it.
Business profits are reduced by the "consumption gap": the gap between what the product can do for a user and what it actually does. As a consequence:
- "Limits market share" - Only early adopters, a small number of customers, buy difficult-to-use equipment.
- "Slow the pace of repurchase" - People buy technological improvements to a product less often or not at all when they do not know how to use the one they already have.
- "Increases... the cost of sales" - The consumption gap leaves users dissatisfied, raises product sales costs and reduces profit margins.
- "Leave the income and profits from the service on the table" - If we sell only the product and not the service, we are missing an opportunity.
- "It makes the new functions 'useless'." - There is no point in trying to differentiate a product by adding new features if buyers cannot use them. New elements or innovations that make it difficult for consumers to use the product can be harmful.
"The difference between the value the product can provide to the customer and the value it actually provides is... the 'consumption gap'.
3 aspects of complexity often overwhelm the consumer:
technical complexity" is the actual investment of time, effort and knowledge required to set up, integrate and use a new device or system
process complexity" is the chain change that spreads through the company after installing new systems
function complexity" is the struggle to learn new functions, organize unknown processes and transfer data from the previous system
"The fastest and best way to gain market share, improve profit margins and reduce the rampant cost of sales might be to invest more in ... [the] service business, not to cut back on its budget.
How new technology is introduced affects the company economically. To save from 20% to 30% of the initial cost, decide how to "change the internal business process" before adding new technology, otherwise the cost could increase from 6% to 9%. Thinking about change before buying new equipment and software reduces the "consumption gap".
"Values and profit margins in individual technology markets inevitably shift from products to the services that make them possible.
The consumption gap upsets the "virtuous cycle" of technology companies: the pattern that customers follow when they buy an item, use it, consume it and (if all goes well) buy it back at its most recent presentation. As the consumption gap grows, it takes longer for customers to complete the implementation of the product and buy the latest model. British Telecom learned that, in 2008, "the British 71% had up to 10 devices" that were inactive because they seemed difficult to use. Cisco saw that the 41% of the factors preventing "future productivity gains" is because of the difficulty in integrating old processes and new technologies. Look beyond the product itself and think about the service and support people require to get the most out of it.
The solution: developing a model for customer value
Focusing only on the product when there is a consumption gap means fighting for a share of a shrinking market; shift from selling products to customer service in order for the customer to be able to use them. When a technology is new, all your customers are new. As it matures, new customers become "returning customers" and buy advanced items with higher profit margins. This requires a conceptual change: until now, technology companies have defined success as offering more and better features in the product, but if we focus on finding out how many features people actually use and on "end-user adoption", we will find that many markets are waiting for services to be offered.
"Major companies are now realizing that it's a short-sighted idea to sell a technology product as a transaction.
Corporate customers are increasingly insisting on advanced services, because they see how much money and time they are wasting on technology features they do not use. This shift in priorities changes the way profit is generated. Most companies believe that profit is in the product, but now the services market "is growing 10 times faster than [demand for] hardware. For example, Oracle and SAP get "about 70% of their service and maintenance revenue".
"The consumer void has generated a huge industry of rapidly growing third party companies that promise to do what manufacturers cannot or will not do: help the customer get maximum value from their purchase".
Offering services gives us the opportunity to be the expert consultant for our clients. When people buy computers or DVD players from chains like Best Buy (which offer installation), they ask for advice on what to buy. If the company does not offer that service, people will not turn to it for purchase advice, which isolates them from a crucial flow of information: we do not know our customers' doubts or what they would like the product to offer them. The change from product to service obeys "five inescapable laws of service severity for technology companies":
- "Complexity forces every technology company to add a layer of services" - People don't just buy high-tech items: they research, purchase, install, fix, support and discard them. Focusing on service solves these steps.
- "Technology services are more profitable over time; products are less so. - Services go through three phases: the "people phase" (employees find out what the customer needs and how to meet them), the "tool phase" (these experiences are codified in internal processes and tools) and the "product phase" (processes are incorporated into the product itself); for example, machines are self-testing so that the manufacturer offers the same degree of support with fewer employees.
- Each function produces the need for new services - "Services have their ups and downs. Each successive wave of functions creates the need for a new generation of services. Service companies must learn to automate previous service needs and build capacity for new ones.
- "Profit margins... inevitably shift from products to services." - When a technological product reaches the stage of common use and becomes a commodity (which happens more and more quickly) its profitability disappears.
- Technology products become services - A sale usually ends the relationship with the customer, but when the product becomes a service, the relationship continues, and brings you closer when you have new products and features to sell.
Business models: problems and alternatives
The general service offering is not enough; it must offer services and support specialized. Technology companies emphasize cost-effective "maintenance support and professional services", but customers want more than just to keep their equipment running: they are increasingly negotiating, preferring simpler products, and avoiding maintenance contracts for what they consider mainstream products. Under pressure, salespeople are offering greater discounts. At that level, services can include maintenance, support, consultation, "training and coaching" of consumers and "pay-per-operation", such as outsourcing.
"Although the ALS model offers early adopters a chance to change the game, putting it into practice will not be easy.
Don't hand over a profitable transaction to a third party, offer it under the "value-added services" (VAS) business model, which is more advanced than previous "availability services", designed to keep buyers' systems running while obtaining "high gross margins" from sellers and predictable revenues. The proactive VAS model aims to reduce ownership costs, increase value for customers and "accelerate product value consumption", so that they buy back sooner. Most technology companies spend only 1.5% of their budget on driving sales but withdraw service when the customer implements their products.
"From the very beginning of personal digital technology, consumers and technology manufacturers established an unspoken agreement: 'If you give us bad service, we won't pay for it'".
The key is to invest in the creation of value-added services. The transformation is already underway: today's call centers are integrated into the Internet and located in low-labor cost locations. There, employees are skilled in the use of software and offer many "minor skills" needed to work with people and knowledge management systems. To find out if the VAS model is right for our company, we need to review the customer list: do they see their offerings as "high value", can we take advantage of existing "remote support centers" to provide services, do we need to update the website so that the customer can access their services directly?
Creating a new future for the company
Implementing the VAS model means overcoming obstacles and costs. The first obstacle is internal: your company's "product DNA" lies in selling products, not services, and your financial system measures revenue according to known "channels" of revenue production, including support, products and professional services. It is difficult to measure the impact of services, because companies do not know what to measure and do not collect the right information. Their executives may be hesitant or uninterested, and Wall Street is traditionally skeptical of services companies.
"The cultural shift to a more integrated role in the sales process will be difficult, but it is critical if today's technology services company is to move to the next level.
In fact, it used to seem that a service (not sales) business involved declaring that you didn't really have a product, but that is now disappearing. The newest way to measure customer success is to calculate how long it takes to upgrade or purchase their next product. That statistic is called "days to repurchase" (DPR) and does not apply to any particular corporate division, but rather directs everyone to the new value-added service-driven purchase. Today, almost all companies focus on the time before the sale: innovating, marketing and selling. The shift to DPR shifts the emphasis to post-delivery time. Reduce DPR by increasing the value customers get from your product, and helping them to know how to use and integrate it. This gives you greater control over the process and more information about how the product is actually used; it also shortens the path to satisfaction and repurchase.
"Companies that have a good, well-developed and integrated service capability will gain market share that others will lose.
To adopt the VAS model, work with your customers to "solve" the problem, integrate the results into the product, "package" your solution for reuse, and establish a "scale" of profitability. Companies that are successful with VAS work with their customers to "co-generate" responses to technical difficulties. To begin, cultivate "a small layer of smart employees" who learn from their customers' progress and reprocess that lesson to help others; then use "one-to-many systems" (tutorials or Web sites) to share information.
"More and more, the money will come from the services."
As customers move from desiring functions to demanding value, VAS are at the forefront of an emerging field called "service science": in many countries, new university programs are investigating services as a business discipline. Most companies understand the "product development cycle" but lack a similar understanding of services; however, the growing demand will ensure that they learn to include service as an integral part of their offering. As "product measurement" becomes more widespread and available, reporting on how services are used will enable your company to become a "converged services organization" that eliminates current silos. Leverage professional services, technical support, "field efficiency" and "training and coaching" specialists, but without letting one group dominate; the VAS model benefits the entire enterprise.
About the author
J.B. Wood is president and CEO of the Technology Services Industry Association. He is co-founder of InsightExpress, a company that helps companies use the Internet for market research.
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