October 26th 2010

What generates the highest profit margin, product or service? Pricing part 3

Most profit, product or service?

What generates the highest profit margin, product or service? Pricing part 3.

This was a surprising data point from our Oct 2010 survey on pricing.  I was expecting that the impact of  product commoditization, SaaS, web apps, tied freemium offers and the ample opportunity to up sell present clients would have made an impact on the survey from other times. Most analysts say that products are being commoditized and true value is coming from services.  But it seems not.

Mature companies like SAP and Oracle are able to create huge profits from their services group. IBM has swung the majority of its revenue with huge profits from services.  Best Buys Geek Squad has bigger profits than the stores (its a growth department and they generate 60 % of income on products that come from competitors) .

At Rocket Builders we see in this data a reflection of a less mature approach to the market and ultimately pricing errors due to poor value communication in the surveyed companies.  Yes, the technology community is a youthful one , but the companies have been around for a good length of time through many cycles, with ample opportunities to build more mature business models.

A company might have very valid reasons for not getting more margin from a services group. Perhaps:

  • The customers say they will not pay for services
  • The competition does not charge for service
  • Its part of a short term penetration strategy
  • The services  may not be valuable
  • There are no salable  services

Perhaps you have lower services margin for preventable reasons such as:

  • You do not up sell services
  • You do not track margin erosion through the services group
  • You “toss” services in with the product sale
  • You never thought about it
  • You do not know how to do that
  • Its part of your history and culture
  • You do not grow your services departments soft skills and technical expertise
  • Your customer experience is just not that great
  • Field services does not sell

Service revenue should be a large and growing profit center for a well run company.  It requires current customer knowledge and the extraction of the value you help a customer get out of your solution.  But these are areas where knowledgeable and experienced marketing and sales departments can really bring the value stories back to the services department. Customer testimonials are the gold that will fill your mint.

Not getting the profits you deserve is preventable. If you want to know more about how to get more value  for your services, give Rocket Builders a ring.   Bringing out customer value is what we do every day.

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2 Responses to: “What generates the highest profit margin, product or service? Pricing part 3”

  1. This is surprising Reg. I would have guessed services by a long shot.

    I’d like to see this compared to other cities or geographic locations.

    Danny Starr said on 28 Oct 2010 at 11:43 am #

  2. As a client commented to me today, ” no matter how you do it, it is really hard to scale services. Sell licenses if you can”

    rnordman said on 28 Oct 2010 at 1:59 pm #

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