Five Keys to Selling a Digital Service Product
Based on an executive workshop held in Minneapolis, MN in 2019
In a previous article show how any company who builds healthcare, agricultural, construction, oil & gas, industrial printing, life science or diagnostic machines can double your revenues and quadruple your margins by building digital service products.
But as we know there are plenty of examples of R&D teams who build great products that are not successful in the market. So the other essential part of the puzzle is selling the digital service product. Here are at least five key areas you’ll need to focus on. We discussed the five keys to building digital service products in another article so we’ll start first here with pricing the product, followed by the top level marketing story, The third major component is the definition of your sales team and how they will be compensated. We’ll finish by discussing business operations and how you’ll pay for all of this.
Let’s start with how to price the product. While there can be a lot of debate about pricing, I propose you start with something simple. Price the digital service product as a monthly percentage of the purchase price of the machine. In the world of software this has ranged from 2–6% of the purchase price of the product. Consider starting with 0.5 or 1% per month. So if your SpectraMax® M3 Multi-Mode Microplate Reader is priced at $75K you’d price the digital service product at $375–750 per month. Of course you’ll have a volume discount matrix, which will offer customers who spend more money a bigger, discount.
Next you’ll need to define the marketing message. Since your number one competition is the status quo, you should start with “selling the Not”. Plenty of people both internal and external to your company think service is break-fix. A few months ago I had breakfast at Joannie’s Café in Palo Alto with the CEO of a company that builds machines for the semiconductor industry. I asked him how many machines he had in the field and he said around 10–20,000. The precision of his answer should have been my first clue. I went on to ask him, “How much service revenue do you generate?” To which he responded with the universal sign of a goose egg. I asked “Why zero? to which he replied “No one wants to pay for service”. Of course the reason no one pays for service is he’s defined service as break-fix support. Anyone who has just bought a $250,000 machine would assume it would work, so why pay for service? Service is not break-fix. Service is information, personal and relevant: information on how to maintain or optimize the performance, availability, security and changes of the machine.
Furthermore, in the modern era find a way to tell your story as a story. Every night when you watch Game of Thrones or your favorite TV show you’ll see some essential aspects of storytelling. Stories have characters. Stories are set in a particular place and time. And all stories fall into three categories: man vs. man; man vs. nature; man vs. himself. Now check out your marketing collateral. How many stories do you have? And finally, no one reads anymore. Start thinking about how to help you prospects see or hear your story.
Once you’ve clearly articulated your digital service product story. Your next major step is to hire and organize your sales team. Make sure this is a dedicated team. Selling service is not the same as selling new product features. You might have noticed the Mercedes sales person is not the same individual as the Mercedes service manager. Your digital service sales people will be more farmer than hunter, since the mother lode is to monetize your installed base. Given these are all customers you should know; this is not the same as trying to prospect for new names.
No sales team works without a compensation package. Given you’re moving from selling one time to selling a recurring service you’ll need to establish a compensation plan which both incents the initial sale of the service, but also more importantly the renewal of this valuable recurring revenue stream. In software companies it’s not uncommon to have customer success managers who sole focus is the continuing satisfaction of the customer.
The fourth key is you’ll need to have business operations create new contracts and ordering documents. You could borrow some of the T&Cs from the software-as-a-service industry, but my most important recommendation is you avoid the creation of SLA (Service Level Agreements with associated point-by-point penalties depending on how you did or did not perform the service. Instead, create a digital service product guarantee, which is all encompassing. In this guarantee, affectionately called the Nordstrom guarantee, you would stipulate that no matter the reason the customer is entitled to a rebate of 20% in the month the claim is made. This will simplify revenue recognition, which will make your CFO happy, reduce the legal expenses and speed the contract signing, which should make your sales teams happy.
Finally, building and selling a new product line will not happen without investment. You’ll be challenged to re-allocate resources from your traditional business. If you’re looking for a tool to help think about how to fund this transformation check out Geoffrey Moore’s last book, Zone to Win. He talks about putting your annual budget into four major categories: performance, productivity, incubation and transformation zones. The performance zone is money you spend to deliver material bookings, revenues, and contribution margins in this fiscal year. The productivity zone is money you spend to increase the efficiency and effectiveness of your R&D or sales organization. The money spent to deploy a new CRM application would fall into this category. Again, the time horizon is the current fiscal year. Most companies will have 100% of their budget allocated to these two categories, which brings us ot the last two categories. The incubation zone allocates funds to developing new business models or new products. The time horizon for these investments is 36–72 months. If you have not started a digital service product then you’d allocate financial resources from the incubation bucket. Finally, the transformation zone is where you put the wood behind the arrow and fund not only the development of the digital service product, but all of the sales and marketing that’s required for it to be successful. Geoff says pick only one project from the incubation zone. The CEO must sponsor it. Furthermore you’d expect to deliver 10% of the current company revenue in a 36-month horizon. Given the market opportunity is at least 2x your current product revenues this is certainly possible for any digital service product.
While not easy, the next major step for any company that makes combine harvesters, front loaders, industrial printers, water purification equipment, agitators or ultrasound machines is to build and sell digital service products. Digital service products deliver information on how to maintain or optimize the performance, availability and security of the machine. These are the fundamental components of the last major step, which is to deliver the product-as-a-service. We’re seeing the revolution occurring in the automobile industry? When will it start in yours?
The 160-page workbook from the executive workshop is available for purchase.
