For many manufacturing companies, servicing products is an increasingly important part of the business.1 Manufacturers of everything from elevators and freezers to security systems and transportation equipment—products built to last—find that revenues from after-sales product installation, configuration, maintenance, and repairs are 30 percent or more of their total revenues, and the proportion is increasing. In some industries, the service market is four or five times larger than the market for products.
Over the past few years, as sales growth for new products has slowed and product margins have fallen, services—typically with higher margins and returns on invested capital—have become an increasingly attractive way to provide a point of competitive differentiation. However, most companies have squandered this profit potential by using poorly designed and priced service plans.
A building-equipment manufacturer, for example, discovered that 11 percent of its service contracts didn’t cover its marginal servicing costs, let alone its fixed service costs. A transportation-equipment manufacturer found it had given customers discounts of up to 70 percent for the sole reason that sales representatives were claiming competitive pressures. Such instances appear to be the norm rather than the exception.
No doubt, putting a price on services is more difficult than pricing...