Free to fee: billing services in industry

One of the few remaining levers to improve the profitability of an industrial company in a mature economy is to enhance its product with services.

As individual consumers, we all know that we have to pay for any additional service that we receive. For example, the extra cost billed for the same-day delivery of a washing machine rather than delivery three weeks later at an imposed time is accepted as a matter of course.

The sales function has to change from "hunter" salesmen to "farmers" who cultivate client relationships.

Why is it that this fact, generally accepted by all consumers, does not apply in the industrial business-to-business world? Too often today, the cost of a service is hidden. The service is considered by those who administer it as a necessary component of the offering, whose added value for the customer is seldom or never evaluated. So it is not traced internally by the company and consequently not integrated into the price of a product. There is nothing to justify this situation, apart from habits that do indeed die hard, but that can be changed by taking a subtle and intelligent approach.

Thinking in marketing has evolved over time, with the focus moving from the product to the customer. Industrial companies are having to become “solution providers.” In mature economies, they can base their competitiveness on their capacity to “be of service.” Industrial value increasingly tends to lie in the management of the relationship that develops between the industrial company and its customers.

Industrial companies are faced with two issues in their approach to extracting the full potential from services:

  • Identifying the relevant services, namely: what value-added services am I able to provide to my customers?
  • Quantifying and qualifying the creation of value for the customer directly related to the pricing and method of billing (i.e., with the product or separate)

The article explains and considers both these issues. It also examines why a portfolio analysis is an important prerequisite to ensuring that an industrial company’s portfolio of products and customers is in line with the future trends of its market, and with the changes in the demands of its customers.

The question then arises of whether services do indeed constitute a source of profit for industrial companies. It is important to bear two points in mind.

First, the development of a company’s structured, profitable service offerings does not happen overnight. It is generally spread over several years and the services do not become truly profitable until certain thresholds have been reached, both in volume of business and in terms of organization.

Second, the profitability of services cannot be taken for granted. It is the result of an organized, proactive policy, even if the initial development of the service often results from the combination of chance and opportunity.

Only companies that have become aware of the problem, and have provided themselves with the means of resolving it, can hope to generate profits through their services.

The complete article was written by:

  • Vincent Michi
    Partner, Advisory Services, Ernst & Young, France
  • Eric Gallardo
    Senior Manager, Advisory Services, Ernst & Young, France

Read the full case studypdf882.99 kB

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