By Jim Payne, President, S-Market Strategies
 What happened to premium pricing of services? Why are the prices eroding, and what made the marketplace change? Why do I have to discount more each year when the services remain the same, or get even better?
Déjà vu
My first impression of this critical circumstance that many are observing in their services pricing is a bit of a Déjà vu. The services marketplace is sounding very much like the commodization of hardware products that has taken place in many markets during the past ten years. End-user customers of tangible products came to the conclusion that the differences between brands had become so insignificant that there was no need to pay a premium price for the “better brand”. This consumer realization created a downward spiral of equipment prices that has provided great benefits for consumers. However, hardware commodization has eliminated the manufacturer’s ability to stay in the marketplace for many companies. The choice became, go offshore for manufacturing to reduce labor cost or get out of the business, as there isn’t enough margin left to justify the financial risk of being in business.
The only saving grace for many companies, especially in the B2B markets, became the ability to sell services where the margins are higher, the audience was often captured, up-sell was easy and the annuity potential was so attractive. Even in the consumer sector, some companies learned how to make maintenance and enhancement services an important contributor to their revenue and profit potential.
So what happened to the service maintenance and professional services business opportunity and why are prices beginning to erode like our tangible counterparts? It is easy to see why technology advancements have created commodity hardware products. Once technology developed to the point where most products ran on the same chips and off the shelf hardware, the only difference between competitive equipment became the brand of the product. But what about services, they are not directly comparable hardware, but invisible products that are “made” by the people who deliver them? Or are they?
In an effort to increase efficiency, companies have invested in technology that allows remote support with increased emphasis on keeping the field technician out of the customer site. The logic has been to simply fix the problem over the phone whenever possible with the objective of reducing service cost while making the customer “happy” with quick resolution to their problems. However, much like our hardware counterparts we may be guilty of creating our own potential demise.
As a service professional who spent a portion of my career providing and managing remote and onsite support to customers all over the world, I have to say that the actual repair was only half of the customer experience that justified them spending their funds on a maintenance agreement. The quality of the interaction between client and support personnel creates much of the justification for the price of service. It simply comes down to the real benefits that the end-user perceives and whether it becomes an appropriate and definable value for their needs.
How do we save the comfortable high margin position that we have become so fond of? Are we doomed to a commodity state where we can’t afford to offer service products? Again, let us learn from our hardware counterparts as they are ahead of us in the learning curve.
When you consider technology commodity markets, personal computers have to be near the head of the list as we have seen $2,000 computer prices that have eroded to $400 with paper-thin margins. At the same time, Macintosh computers continue to hold higher prices than PC format machines, although admittedly with a smaller target market due to the niche nature of the Mac cult.
To take it one step farther, MP3 players created a market for portable music that quickly became a commodity due to the rapid technology developments of these simple systems. Again, our friends at Apple have found a way to justify premium pricing with the development of increasingly feature rich iPod MP3 players. The iPod has created a massive premium marketplace demand where consumers simply can’t get enough of their products. Apple also took a lesson from our industry and found a way to offer services that create up-sell and ongoing revenue with the creation of iTunes downloading services off of the Internet.
Defending Against Services Price and Margin Erosion
Apple has found ways to compete with their competition on a different plane than the commoditized products play in. They differentiate themselves and address the needs of the end-user rather than simply cut cost to be competitive. We need to learn from that business strategy, as it is a great example of “adding value” rather than cutting costs.
Better Delivery
So what do Apple products have to do with services price erosion? Quite simply, in order to justify any price other than a commodity price, a company has to differentiate their service products and show real value to the client. If the client is shopping around or asking for significant price reductions, they have reason to suspect that you will respond to their request for a lower price. Providing significant discounts will only reinforce their suspicions and encourage them to push it even farther upon the next renewal or professional services project. In lieu of discounting to retain the client, find new ways to add value that will help with their real needs.
For example, offering improved response time, extended hours of support, additional PMs, consumables or access to self-help tools can be perceived as added value. These can provide differentiation from your competition or the contract that they had last year. Often times, the real cost to offer increased value is far less than the loss of revenue from discounting their services.
Communicating the Value
In addition, services businesses have generally relied too strongly on a “sales centric” model and have not fully understood the value of marketing the benefits that they bring to the clients. If the client doesn’t realize the definable and differentiated value, they will shop around for price or try to negotiate a lower price. Remember to always put yourself in their shoes and consider why you would really buy your services at the prices you charge. If you don’t really know the compelling reasons, they won’t either.
Whether the compelling message is dependability, uptime, throughput or simply trust in your technical skill and character, your clients need to understand the value that you bring to them so well that they could recite it back to you if you ask them. That is what your marketing needs to communicate through words and your employee’s deeds. Your marketing should not only justify the price you charge, but should justify it even if it were 15% higher, rather than the 15% less that many companies are being forced to resort to.
Winning Internal Customers
However, building effective and compelling marketing to justify your pricing is not as simple as tuning a marketing switch and suddenly raising your pricing. The real message needs to be developed from within the company by building your “internal brand” value. The brand message then needs to be marketed internally to develop the culture that represents the value that you bring to your clients. Your employees need to understand and believe in your brand value.
When the value is communicated to the marketplace, it needs to be benefits based and emotionally connected to the client’s needs to justify the investment. Employees must be aware of the value propositions and how they address the needs of the clients. Marketing communications should lead, support and reinforce the message being conveyed to the marketplace that demonstrates to the clients why they need your services and why they are a good value.
About the Author
Jim Payne is the President of S-Market Strategies of Rochester, New York. He has more than 25 years experience in all aspects of services management and marketing. His innovative strategies, programs and tactics have provided increased market penetration, growth, revenue and profits for businesses such as consumer, IT, healthcare, entertainment, graphics and government markets for both direct and channel sales.
For more information, contact Jim at 585-368-0567 or jimpayne@smarketstrategies.com and visit www.smarketstrategies.com for additional articles.
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