002 a practical_guidetocombiningproductsandservices_ver.1.0

Products ＋ ServicesA Practical Guide to Combining

by Venkatesh Shankar, Leonard L. Berry, and Thomas Dotzel

Authors

Author – Venkatesh Shankar

Venkatesh (Venky) Shankar is Professor of Marketing and

Coleman Chair in Marketing at the Mays Business School,

Texas A&M University. His areas of specialization include

Digital Business, Competitive Strategy, International

Marketing, Innovation, New Product Management, Pricing,

Retailing, and Branding.

Shankar has a Ph.D. in marketing from the Kellogg

Graduate School of Management, Northwestern

University and has corporate experience in the areas of

marketing and international business development. He has

worked in diverse countries.

Author – Leonard L. Berry

Dr. Leonard L. Berry is Distinguished Professor of

Marketing, and holds the M.B. Zale Chair in Retailing and

Marketing Leadership in the Mays Business School at

Texas A&M University.

He is also Professor of Humanities in Medicine in the

College of Medicine at The Texas A&M University System

Health Science Center. During the 2001-2002 academic

term he served as a Visiting Scientist at Mayo Clinic

studying healthcare service.

He is the founder of Texas A&M’s Center for Retailing

Studies and served as its director from 1982 through June

2000.

He is a former national president of the American

Marketing Association

Author – Thomas Dotzel

Prof. Dotzel earned his Ph.D. in Marketing from the Mays

School of Business at Texas A&M University.

He also holds an MBA from the University of Texas at

Arlington, a Diplôme from the ESC Pau in France and a

Diplom Betriebswirt from the University of Applied Sciences

and Research in Munich, Germany.

Prior to getting his Ph.D., he worked for five years in the

hospitality industry in diverse countries and in the marketing

division of the BMW Group in Munich

Introduction

Common Hybrid Offerings

Developing Your Offering

Agenda

Introduction

Introduction

Hybrid

Solutions

Products

Services

＋Combined into innovative offerings

Such offerings are commonplace

Attract new customers Increase demand

These days, many firms are trying to mix products with services

in an effort to boost revenue and balance cash flows

Introduction – Ex. Apple and Xerox

Hybrid solution have spurred growth or

helped reverse market-share or profit decline

Apple

The iPod product combined with

the itunes service

Copiers and printers bundled with

Maintenance or customer support service

bundledcombined

Introduction

How to structure

How to market

How to sell

Many companies

don’t think through

While the promise of combined offerings is great,

It’s easy to get them wrong.

their combined offerings

Most of them stumble

in one or more of

four ways

About their research

①

②

③

④

Failure to differentiate

Failure to scale

Failure to assess markets and prices appropriately

Failure to invest in the brand

Common Hybrid OfferingsBefore we look at four factors,

let’s consider the common types of hybrid offerings.


Two underlying characteristics determine

how customers will value and use an offering

① Complementarity ② Independence

Flexible bundle

Peace-of-mind bundle

Multibenefit bundle

One-stop bundle

Through the lens of complementarity and independence,

The following types of hybrid offerings emerged


Complementarity

Independence

HighLow

Dependent

Independent

Flexible bundlePeace-of-mind

bundle

Multibenefit bundleOne-stop bundle

Flexible bundle

Complementarity

Independence

HighLow

Dependent

Independent


bundle


Flexible bundle

This type is best suited to complex products and services

that address thorny customer problems

＝Highly independentCustomers could easily

buy them separately

＝Their value can be significantly

enhanced by combining them in

flexible waysHighly complementary

＋

Hybrid

Solutions

Database

Consulting & management

service

＋Allows companies to get

the most value out of their Oracle investments

Ex. Oracle

Hybrid

Solutions

Products

Services

＋

＝ Packaged database software products

＝ Consulting and management service

The hybrid has boosted Oracle’s growth:

Revenues from the service component of

Oracle on Demand grew by 75% from 2006 to

2008, and services now account for about 20%

of Oracle’s total revenues


Complementarity

Independence

HighLow

Dependent

Independent


bundle



This type appeals to customers looking for the assurance

that they are getting a complete, best-of-breed offering

High independence Companies can leverage a strong

product brand to attract customers

to an otherwise undifferentiated

service vice versa.Low complementarity

Hybrid

Solutions ＋

Elevator

High-quality elevator equipment with a premium service

＋

Typically, a building owner or contractor purchases an elevator from one company and then hires a service

firm to do the maintenance

http://www.otis.com/site/jp/pages/Services.aspx

Ex. OTIS

Hybrid

Solutions

Products

Services

＋

＝ Elevator

＝ High-quality elevator equipment with a premium service

Otis attributes 90% of its more than $1 billion in

annual operating profits from 2002 to 2008 to

the addition of the service component

http://www.otis.com/site/jp/pages/Services.aspx

Multibenefit bundle

Complementarity

Independence

HighLow

Dependent

Independent


bundle


Multibenefit bundle

Here, the products and services are often inseparable

DependentThe benefit to the customer, and to the

company’s bottom line, comes from

offerings added to the basic one.Highly complementary

Hybrid

Solutions

The digital video recorder

Stream from YouTube, record in high definition,

download music, view on-demand movies

＋

＋Tivo’s product is useless with

its service

Ex. TiVo

Hybrid

Solutions

Products

Services

＋

＝ The digital video recorder

＝Stream from YouTube, record in high definition,

download music, view on-demand movies

For the fiscal year ending in 2008,

about 83% of TiVo’s &273 million in revenue

came from services

One-stop bundle

Complementarity

Independence

HighLow

Dependent

Independent


bundle


One-stop bundle

This combination does not provide additional value in itself; rather, customers are attracted by reliability of service and shopping convenience

IndependentCompanies increase their share of

wallet simply by making products or

services available at the point of salesMinimally complementary

Hybrid

Solutions ＋

Hair care and beauty products

Salons

＋

Customer’s service experience may not be greatly

improved by buying these products, but customers value

the convenience and the recommendations of their style

http://www.regiscorp.com/

One-stop bundle

Hybrid

Solutions

Products

Services

＋

＝ Hair care and beauty products

＝ Salons

Regis Corporation, a $2.6 billion hair care company,

owns more than 13,000 salons world-wide

http://www.regiscorp.com/

Developing Your OfferingDeveloping hybrid solutions can be tricky because

Various combinations may have potential.

Developing Your Offering

A hybrid offering is most likely to yield, sustainable returns

if the dependence between the product and the service can be increased

and if the offering is scalable

In evaluating options, companies should keep in mind four rules

① Look for points of differentiation in product and service markets

② Scope the service and scale the product

③ Assess the revenue and profit potentials of various hybrids

④ Invest in the brand

Look for points of differentiation in product and service markets

The first step in thinking about a hybrid offering is to carefully examine thebarriers to entry in your target market

What is the degree of commoditization?

Is the customer’s problem complex?

Can the quality of the service be improved?

Consider

the

following

questions

If your product is highly commoditized, look for a way to enhance its

value through the addition of a high-quality service, or vice versa.

This is particularly relevant for flexible and peace-of-mind bundles.

If the problem your customer faces is complex, consider

a flexible bundle that offers a customized solution

While performance of a product may not vary much, Human service can

be highly uneven. Try pairing a commoditized product with reliable,

consistent, and quality service


If your product is highly commoditized, look for a way to enhance its value through the

addition of a high-quality service, or vice versa.

This is particularly relevant for flexible and peace-of-mind bundles.


Equipment

Cost

High

Low

Low

consulting

service

comparable

Lower cost

Helps customers publish documents,

manage documentation

budgets, and secure important information

Xerox leveraging its deep knowledge in solving

customers’ document-related problems


If the problem your customer faces is complex, consider

a flexible bundle that offers a customized solution


IBM has carved out a niche with its customized Storage Area Network service, which allows customers to connect to local networks of data warehouse


While performance of a product may not vary much, Human service can be highly

uneven. Try pairing a commoditized product with reliable, consistent, and quality

service


If you have a trusted product brand, the untried service component will benefit from the“halo effect”. Apple, Xerox, IBM have leveraged - and improved - brand credibility by

pairing highly trained service teams with product offerings

http://www.ibm.com/jp/ja/

Scope the service and scale the product

A hybrid solution will improve market share and profitability

only if it is scalable

What can be centralized?

Can the service be digitizeid?

About scale

and scope,

ask yourself

the

following

questions

Think about how to put various service in one location. Also scope service

delivery by providing centrally administered remote or online services

To enhance scalability, look at options for putting components online to lower

the total unit cost of the offering. Use the internet to reinforce the linkage

between the goods and the service.

Consider offering employees a variable compensation plan that rewards them according to sales volume.

If services cannot be delivered from a central

location

Once customers start to using and benefiting from

the serviceTheir switching costs for the equipment rise.

Assess the revenue and profit potentials of various hybrids

Once you have explored different combinations of goods and services,

carefully analyze the markets for each

Which half of the offering has the most profit potential?

How often do customers repurchase either goods or services?

Which should lead the customer purchase, the product or the service?

Consider

the

following

questions

One way to create a winning hybrid offering is to identify which product or

service has the highest profit potential and combine it with the most commonly

purchased product or service.

Typically, products have longer purchase cycles than services do.

If you balance the timing and magnitude of cash flows from the product and the

service, you can improve the success rate of hybrid offerings.

Especially for a one-stop bundle, it’s often best to lead with the product or

service that customers choose first.


One way to create a winning hybrid offering is to identify which product or service has the highest

profit potential and combine it with the most commonly purchased product or service.


By marketing the iTunes store together with iPod, Apple has substantially expanded its revenue stream. However, the profit margin for digital music is smaller than that for the

player, so Apple makes most of its profits through the iPod

Products Services

Huge market Even bigger market

Digital music players Music downloading


Typically, products have longer purchase cycles than services do.

If you balance the timing and magnitude of cash flows from the product and the service, you can

improve the success rate of hybrid offerings.


Hybrid offerings, especially multiple-benefit combinations, have a better chance of success if you hedge between the product and service purchase cycles

Products

Services

Purchase cycles

Hedge between the product and service purchase cycles


Especially for a one-stop bundle, it’s often best to lead with the product or service that customers

choose first.


Because their reputations are built on service, successful hybrid providers like AT&T and Sprint exploit this order of choice to more effectively sell their own branded handsets

ProductsServices

Choose the brand of

service at first

Then pick the

handset brand

Customers

In the U.S.,

customers typically

http://www.wireless.att.com/learn/video-library/

Invest in the brand

Once you have identified a viable hybrid offering,

consider branding or subbranding it to leverage the halo effect.

Products Services

Company’s

credibility

Invest in branding activity that promotes the link between the product and the service

Enhance the company’s credibility

Branding

activityBranding

activity

Branding

activityBranding

activity

Which products and services work best together

For a hybrid offering to be successful, firms must decipher which

products and services work best together and present the most upside

Commoditization Revenue potentialHighLow HighLow


bundle

Multibenefit

bundle

One-stop

bundle

The customer problem

is complex

The product or service

is scalable

The purchase cycles of

the product and service

are far apart

You know which

components customer

choose first

＆＆＆＆

Conclusion

As companies look to the future, they will need to pay more attention to hybrid offerings if they want to increase their top and bottom lines.

Hybrid offerings attract new customers and improve demand among existing ones by providing superior value.

They enable firms to boost their revenue and profit streams and improve liquidity at low risk.

The rules above can help you identify successful hybrid offerings

002 a practical_guidetocombiningproductsandservices_ver.1.0

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