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002 a practical_guidetocombiningproductsandservices_ver.1.0

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  • 1. A Practical Guide to Combining Products + Services by Venkatesh Shankar, Leonard L. Berry, and Thomas Dotzel
  • 2. Authors
  • 3. 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.
  • 4. 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
  • 5. 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
  • 6. Agenda Introduction Common Hybrid Offerings Developing Your Offering
  • 7. Introduction
  • 8. Introduction These days, many firms are trying to mix products with services in an effort to boost revenue and balance cash flows Attract new customers Increase demand Products Hybrid Combined into innovative offerings Solutions + Such offerings are commonplace Services
  • 9. Introduction – Ex. Apple and Xerox Hybrid solution have spurred growth or helped reverse market-share or profit decline Apple The iPod product combined with Copiers and printers bundled with the itunes service Maintenance or customer support service combined bundled
  • 10. Introduction While the promise of combined offerings is great, It’s easy to get them wrong. How to structure Many companies don’t think through How to market their combined offerings How to sell About their research ① Failure to differentiate Most of them stumble ② Failure to scale in one or more of four ways ③ Failure to assess markets and prices appropriately ④ Failure to invest in the brand
  • 11. Common Hybrid Offerings Before we look at four factors, let’s consider the common types of hybrid offerings.
  • 12. Common Hybrid Offerings Two underlying characteristics determine how customers will value and use an offering ① Complementarity ② Independence Through the lens of complementarity and independence, The following types of hybrid offerings emerged Flexible bundle Peace-of-mind bundle Multibenefit bundle One-stop bundle
  • 13. Common Hybrid Offerings Independent Peace-of-mind Independence Flexible bundle bundle Dependent One-stop bundle Multibenefit bundle Low High Complementarity
  • 14. Flexible bundle Independent Peace-of-mind Independence Flexible bundle bundle Dependent One-stop bundle Multibenefit bundle Low High Complementarity
  • 15. Flexible bundle This type is best suited to complex products and services that address thorny customer problems Customers could easily Highly independent = buy them separately + Their value can be significantly = Highly complementary enhanced by combining them in flexible ways Database Allows companies to get Hybrid Solutions + the most value out of their Consulting & management Oracle investments service
  • 16. Ex. Oracle Products = Packaged database software products Hybrid Solutions + Services = 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
  • 17. Peace-of-mind bundle Independent Peace-of-mind Independence Flexible bundle bundle Dependent One-stop bundle Multibenefit bundle Low High Complementarity
  • 18. Peace-of-mind 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 Low complementarity service vice versa. Elevator Typically, a building owner Hybrid or contractor purchases an Solutions + elevator from one company High-quality elevator equipment and then hires a service with a premium service firm to do the maintenance
  • 19. Ex. OTIS Products = Elevator Hybrid Solutions + Services = 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
  • 20. Multibenefit bundle Independent Peace-of-mind Independence Flexible bundle bundle Dependent One-stop bundle Multibenefit bundle Low High Complementarity
  • 21. Multibenefit bundle Here, the products and services are often inseparable Dependent The benefit to the customer, and to the + company’s bottom line, comes from offerings added to the basic one. Highly complementary The digital video recorder Hybrid Tivo’s product Solutions + is useless with Stream from YouTube, record in high definition, its service download music, view on-demand movies
  • 22. Ex. TiVo Products = The digital video recorder Hybrid Solutions + Stream from YouTube, record in high definition, Services = 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
  • 23. One-stop bundle Independent Peace-of-mind Independence Flexible bundle bundle Dependent One-stop bundle Multibenefit bundle Low High Complementarity
  • 24. One-stop bundle This combination does not provide additional value in itself; rather, customers are attracted by reliability of service and shopping convenience Independent Companies increase their share of + wallet simply by making products or services available at the point of sales Minimally complementary Customer’s service Hair care and beauty products experience may not be greatly Hybrid improved by buying these Solutions + products, but customers value the convenience and the Salons recommendations of their style
  • 25. One-stop bundle Products = Hair care and beauty products Hybrid Solutions + Services = Salons Regis Corporation, a $2.6 billion hair care company, owns more than 13,000 salons world-wide
  • 26. Developing Your Offering Developing hybrid solutions can be tricky because Various combinations may have potential.
  • 27. 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
  • 28. 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
  • 29. Look for points of differentiation in product and service markets The first step in thinking about a hybrid offering is to carefully examine the barriers to entry in your target market What is the degree of commoditization? 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. Consider Is the customer’s problem complex? the following If the problem your customer faces is complex, consider questions a flexible bundle that offers a customized solution Can the quality of the service be improved? 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
  • 30. What is the degree of commoditization? 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.
  • 31. What is the degree of commoditization? Xerox leveraging its deep knowledge in solving customers’ document-related problems comparable consulting Helps customers publish documents, service manage Equipment documentation Low High budgets, and secure important information Cost Lower cost Low
  • 32. Is the customer’s problem complex? If the problem your customer faces is complex, consider a flexible bundle that offers a customized solution
  • 33. Is the customer’s problem complex? IBM has carved out a niche with its customized Storage Area Network service, which allows customers to connect to local networks of data warehouse
  • 34. Can the quality of the service be improved? 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
  • 35. Can the quality of the service be improved? 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
  • 36. 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
  • 37. 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? Think about how to put various service in one location. Also scope service delivery by providing centrally administered remote or online services About scale If services cannot be Consider offering employees a variable and scope, delivered from a central compensation plan that rewards them ask yourself location according to sales volume. the following Can the service be digitizeid? questions 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. Once customers start to using and benefiting from Their switching costs for the equipment rise. the service
  • 38. 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
  • 39. 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? 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. Consider How often do customers repurchase either goods or services? the following Typically, products have longer purchase cycles than services do. questions 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. Which should lead the customer purchase, the product or the service? Especially for a one-stop bundle, it’s often best to lead with the product or service that customers choose first.
  • 40. Which half of the offering has the most profit potential? 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.
  • 41. Which half of the offering has the most profit potential? 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 Digital music players Services Music downloading Huge market Even bigger market
  • 42. How often do customers repurchase either goods or services? 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.
  • 43. How often do customers repurchase either goods or services? Hybrid offerings, especially multiple-benefit combinations, have a better chance of success if you hedge between the product and service purchase cycles Purchase cycles Products Hedge between the product and service purchase cycles Services
  • 44. Which should lead the customer purchase, the product or the service? Especially for a one-stop bundle, it’s often best to lead with the product or service that customers choose first.
  • 45. Which should lead the customer purchase, the product or the service? 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 Customers Services Products In the U.S., Choose the brand of Then pick the customers typically service at first handset brand
  • 46. 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
  • 47. Invest in the brand Once you have identified a viable hybrid offering, consider branding or subbranding it to leverage the halo effect. Invest in branding activity that promotes the link between the product and the service Enhance the company’s credibility Branding Branding activity activity Company’s credibility Products Services Branding Branding activity activity
  • 48. 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 potential Low High Low High & & & & You know which The purchase cycles of The customer problem The product or service components customer the product and service is complex is scalable choose first are far apart Peace-of-mind One-stop Multibenefit Flexible bundle bundle bundle bundle
  • 49. 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