How to Monitor your Margins for Better Profitability

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If you’re not satisfied with your current profit margin then it could be time the company reassesses its current offering to clients. If you’re in the business of producing products, for instance, could you add a service side too?

Certainly, an article by researcher and Professor of Marketing at the University of Cologne, Werner Reinartz, in the Harvard Business Review, pointed to the far higher profit margins that could be achieved by adding on a service provision – to the extent it may turn out that the services side is more profitable than the actual products themselves.

Selling services: a whole new ball game

But it’s not simply a case of adding on a service and getting the sales team to start pushing it. Selling is a service that is different to a product. Not only that, but the people you’re selling it to (i.e. the existing ‘product’ contacts) aren’t necessarily the correct people for sales. And, in order to ensure sales effectiveness by getting that company to invest in a service which is a completely new concept you would usually have to go higher up the management chain for approval.

In his studies of more than 20 industrial companies who started adding services to their product offerings Reinartz found that one group had profit margins for those new services which were eight times higher than its product profit margins. However, another company struggled to even break even considering the investment they had put in. Reinartz concluded this was down to the fact they didn’t take enough time to study their sales offering and tried to introduce the services too quickly.

“Successful firms begin slowly, identifying and charging for simple services they already perform and using those to build enthusiasm for adding more-complex ones,” he explained. “They then standardize their delivery processes to be as efficient as their manufacturing ones. As their services become more complex, they ensure that their sales force capabilities keep pace.”

One final step, he pointed out, was to ensure that management switched its focus from the way the company set up and delivered the services, to what the customers needed i.e. if they were having difficulties with a product or it could be made to work more efficiently, then what services could be added in order to make this happen? And what did the company need to ensure they could provide those services?

Essentially Reinartz recognised four key issues to ensure sales effectiveness when adding services to a product offering. These were:

Understanding there is already a service there

The French arm of international pharmaceuticals company Merck never charged for deliveries or insurance. When they did introduce the cost to 100 existing customers as a trial, a huge 90 per cent of them simply paid it. Only 10 per cent queried their higher bill and insisted on reverting. Once the service charges were added to every customers bill, Merck’s profit margins took quite a jump.

Reviewing and monitoring existing services

Air Liquide had the habit of sending all its customers a gas-consumption report. However, on review learned some of them didn’t even bother reading it. The company then stopped producing that service for those customers and increased its profit margins as a result.

Ensures sales are capable of selling services

Services mean longer sales cycles and decisions are made higher up. Schneider Electric encouraged its sales team to focus on cost-plus value-based pricing rather than cost-plus when introducing services. This meant educating them on how their customers’ managers justified decisions internally. In this way the sales team could help the managers ‘sell in’ the services to the decision-makers, increasing their sales effectiveness.

GE Medical Services refer to those in its sales team who sell products as ‘hunters,’ while services sellers are ‘farmers’ i.e. the latter cultivates relationships with customers in order to grow their offering over time.

Looking at customers holistically

Understanding what the customer needs to function can result in increased service offerings as forklift company Fenwick found out. After installing sensors in fork lifts they ended up selling customers new services such as remote monitoring technology and forklift driver training – to the extent their service side today makes up 50 per cent of their profit margin. As a Fenwick spokesman explained: “Whenever we can’t directly break into a customer account with a product, we’ll offer to provide services on a competitor’s product.”

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