In one line: Combining a product with a service can lift both revenue and differentiation, but only if you choose the right kind of bundle and know which half actually earns the money.
Core idea
Many companies sell hybrids: equipment with maintenance contracts, devices with subscriptions, software with consulting. Shankar, Berry and Dotzel studied more than a hundred successful hybrids [1]. They found that the failures tend to come from the same four mistakes:
- not truly differentiating the offering
- not making it scalable
- misjudging the market and the price
- not investing in the brand that links the two parts
They sort hybrids by two traits:
- complementarity: how much using the product and the service together increases the value of each
- independence: whether each part is useful on its own
How it works
Four types of bundle:
- Flexible bundle. The parts are independent but strongly complementary, and customers combine them to solve a complex problem. An example is enterprise software plus customization services.
- Peace-of-mind bundle. The parts are only loosely connected, but a trusted brand on one side reassures buyers about the other. An example is equipment from a leading maker serviced by the same maker.
- Multibenefit bundle. The product is useless without the service. The company differentiates, and earns, through add-on services layered on top.
- One-stop bundle. The value is convenience: buying related products where you buy the service.
Four rules for designing one:
- Differentiate. If the product is a commodity, add a high-quality service, or the reverse. Complex customer problems suit hybrids best, because they are hard to copy and raise switching costs.
- Scope the service, scale the product. People-intensive services must be centralized, delivered remotely or digitized to scale.
- Find where the money is. Identify which half has the higher profit potential, and balance the purchase cycles. Products are bought every few years, services far more often.
- Invest in the brand. A trusted brand on one side transfers credibility to the other. This is the “halo effect”.
In practice
The article’s cautionary case is a company that priced its hardware high when the real value lay in the service. Customers balked at paying twice, and the company failed. For engineers, the hybrid question changes product design. An instrument sold with a calibration and support contract should be built for remote diagnostics and easy field service. A system sold with a sustainment contract should be designed with its lifetime service revenue in mind.
Questions to ask yourself
- Which half of our offering makes the profit, and which half wins the sale?
- Is our service scalable, or does it grow only by adding people?
- What does our customer buy every few years, and what could they buy from us every month?
Connections
- Running the service side: Service Strategy.
- Mapping the business and the offer: Business Model Canvas, Value Proposition Canvas. Lifetime money: Product Development Economics.
- Strategic fit: Business Strategy.
- Capabilities exercised: Vision, Connecting Across Disciplines, Decision Making.