October 2010

"A business absolutely devoted to service will have only one worry about profits. They will be embarrassingly large."

Henry Ford


With the service economy on the ascension, companies are yearning for mechanisms to connect their service solutions to their customer's problems, and have the customer acknowledge that their solution is the best. In order to meet these requirements, the foundations of the model used to deploy such solutions need to be concrete. The solution must capture the fundamental nature of the target markets and embody all of the customers’ expectations. This article reviews literature that will inform the development of these models and identifies relevant strategies to enable growth options around service-based solutions.


With developed economies requiring a migration away from the traditional manufacturing mindset, it has been acknowledged that these economies need to move up the value chain. This leads to the "servitization" of manufacturing and products (Neely, 2007; Frei, 2008). With these changes, the rise of the service-based economy is evident, and it requires those who wish to operate in the services arena to understand the principles around which they should position their offering.


Before exploring these principles, it is worthwhile reviewing the common attributes shared by all services, as described by Axel Johne and Chris Storey (1998):

  1. Intangibility: Services are usually processes, not physical things.

  2. Heterogeneity: Service quality varies from provider to provider and over time.

  3. Simultaneity: Services are produced and consumed simultaneously; they cannot be held in stock.

These attributes require a company to develop a sales strategy that is unique to the service model. Frances Frei (2008) identified four essential ingredients for a successful service-based company or solution. By focusing on these four elements, a company can develop a robust business that is capable of responding appropriately to the unique opportunities and risks that develop when selling services:

  1. The offering: The service must meet the needs of the target customers, but also the company should provide differentiated excellence in areas where it will be valued by its customers.

  2. The funding mechanism: The company must identify how the costs of delivering an excellent service will be covered.

  3. The employee management system: High-quality services require a high-quality workforce for their delivery. Effective management of employee motivation and their ownership of service engagements will be reflected in the reputation of a service business (Heskett, Sasser, and Schlesinger, 1997).

  4. The Customer management system: The customer is part of the value-creation process in service engagements. Accordingly, service companies must develop techniques to manage customers so that their services can be delivered effectively.

Service-Based Strategies

Three service-based strategies can be used to create new services or migrate an existing product to a service offering. They are the "net promoter" strategy, the "hidden assets" strategy, and the "applicable processes" strategy. Each requires specific tools to develop the key element of service-oriented arena: customer focus. These strategies encourage customer loyalty, develop customer willingness to promote a company's service, and provide a method for analyzing customer needs.

Net Promoter Scoring

In his book, The Ultimate Question, Fred Reichheld (2006) developed the concept of the "net promoter score," which he described as the key metric that can help determine a path to growth. This metric is directly associated with customer loyalty, which Reichheld defines as "the willingness of someone - a customer, an employee, a friend - to make an investment or personal sacrifice in order to strengthen a relationship." The premise is that customer loyalty drives top-line growth and that customer retention, or repeat business, can be linked to profitability.

The best indicator of loyalty is what a customer tells others about a particular service or product offering. Accordingly, Reichheld's research showed that the most important question on a customer satisfaction survey is: "Would you recommend us to a friend or colleague?". This "ultimate question" can then be used to take the percentage of customers who are "promoters" and substract the percentage of customers who are "detractors." The result is the company's net promoter score. The key to growth is to develop a strategy that will maximize a company's net promoter score.

A recent blog post on the Customer Think website compared the results of a standard "customer satisfaction" score with the net promoter score and found that the net promotor score was a better predictor of revenue growth. For further details on the net promoter score, see: http://www.netpromoter.com/.

Hidden Assets

The "hidden assets" strategy was proposed by Adrian Slywotzky and Richard Wise (2002) to help incumbent firms that are experiencing stagnation in their traditional product-centric growth. Growth stagnation can be masked by activities that are not sustainable in the long-term, such as international growth, acquisitions, and price increases. Once these sources of growth are removed, the company may discover that their core growth is not sufficient for the company to remain competitive. Firms must focus on higher-order needs of their customers in order to identify new growth or new service opportunities. These "reflect customer's need to improve their overall economics, in which the product plays just one role."

Slywotzky and Wise contend that the solution lies in leveraging the company's "hidden assets." These may be a combination of the company's relationships, market position, networks, and information - strengths that the company may take for granted. By recognizing and leveraging these assets, the company can create value for their customers and growth for their investors.

Applicable Processes

Werner Reinartz and Wolfgang Ulaga (2008) have identified the key steps of a strategy to sell services more profitably. The first step is for product-based companies to realize that many of them are already delivering services. Once this fact is acknowledged, a strategy to expand their service capability can be developed. For example, the company can identify services that are delivered around their product, but which are currently included in the product price, such as shipping costs. In many cases, a transition from "free to fee" is possible by explicitly charging for these services. In the second step, the company should evaluate its business processes to ensure it has the correct processes in place to:

  1. Build flexible service platforms with common delivery processes.

  2. Monitor the costs of processes to identify profit drain.

  3. Exploit technical process innovations.

The third step is a common key point of failure; the task is to identify the applicability of the sales team to the offering they are providing. Compared to selling products, services typically require longer sales cycles and a more strategic and complex sales process, with key decisions being made higher up the customer food chain. A service-savvy sales force is required and they must be supported with appropriate incentives and tools. The fourth and final step is to focus on the customers' processes, incentives, and structures and ensure they are aligned with the company's offerings. This enables the company to deliver holistic solutions: a service package that fully meet the customers needs and provides opportunities to improve future service delivery based on a better understanding of the customer's world.

Key Takeaways

A service solution does not sprout from an infertile idea, it is constructed from a rounded analysis of the needs of customers and the opportunity potential for a provider. For many companies, this analysis may require internal reflection to identify and address areas of complacency and neglect before repositioning their current solutions.

As a provider of a service, a company must focus on loyalty and the associated "sacrifice" that a customer (and potential promoter) invests in demonstrating such loyalty. This is a means of gauging the quality and long-term feasibility of a particular service offering.

Service providers also must be seen as convincing leaders in their field. Their existing and prospective customers must share the conviction that they can effectively deliver the defined service solution. Front-line staff must be nurtured to position and promote the service in the most credible and knowledgeable manner as possible.

Finally, in one way or another, all companies are providers in the service domain, and they all need to ensure that their service provides the best fit for all stakeholders involved.


With the increase in the number of service opportunities and competition, companies must ensure that the model on which their opportunities are based is multi-focused. It should encompass more than just the offer itself, and include an understanding of the customer's needs, how the service costs will be covered, and how employees and customers will be managed to best deliver an effective service. Companies must also recognize their own service-delivery capability, whether they are a product-based or service-based company. Finally, by using appropriate tools and strategies that can be used to better understand the needs of customers, companies can develop targeted service offerings that will resonate with their customers and lead to more profitable and sustainable solutions.

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