Sunday, August 10, 2014

Benefits of Productized Services


Here is a list of benefits of productized services for companies that sell cloud-based software to business customers (e.g. Salesforce, Workday).


1.    Reduce customer concerns related to implementation costs. Mid-tier customers view the open-ended hours based cost model of consultants as a risk, which creates friction in the sales cycle. However, they view fixed-cost packaged services as less risky. Packaged services will reduce the sales cycle and increase pipeline velocity, resulting in lower customer acquisition costs.

2.    Easier to train employees. Packaged services are more defined, and as a result, training employees who deliver packages will be more defined so training employees will take less time. As a result, training costs will be lower and utilization rates will increase, which will contribute to higher margins. Furthermore, it may be possible for less expensive resources to be used, which will further contribute to margin expansion.

3.    More efficiently deliver services at higher quality.  Packaged services are repeatable and less variable. Employees will more quickly move up the learning curve increasing efficiency.  In some cases, automation tools may be used, which will further increase efficiency. Increased efficiency will positively impact margin. Improved efficiency will also enable more consistent delivery of services at a high quality level, resulting in more satisfied customers.

4.    Increased renewal rates. Mid-tier customers, who avoided traditional hour-based consulting due to concerns about cost and ambiguity of value, will purchase packaged services. This increases the likelihood that these customers fully take advantage of the services and achieve a higher level of success. As a result, renewal rates should increase.

5.    Increased service revenue. Packaged services should result in a higher attach rate if targeted at customer segments that currently don’t purchase services, as a result, overall service revenue should increase. However, cannibalization of existing services needs to be taken into consideration. I will address cannibalization in a future post.

6.    Revenue Recognition. Revenue recognition for packaged services that are not priced as a subscription and delivered over time can be recognized immediately, resulting in increased short-term revenue. However, cloud-based companies are viewed favorably due to their predictable revenue, and care must be taken to ensure increases in short term revenue recognition don’t result in unacceptably higher likelihood of revenue variability.

7.    More predictable demand. Demand for productized services are more predictable allowing better matching of demand to resource supply, which result in a higher utilization rate. This will improve overall margins.

8.    Higher margins for services. Many of the benefits described above, such as, higher utilization rate, increased efficiency, reduced training costs, and lower customer acquisition costs, will contribute to margins. Packaged services can further enhance margins by leveraging value based pricing where hourly priced services tend to use cost plus pricing that result in lower margins.


There are a number of addition issues to take into consideration when productizing services, such as, risk of cannibalizing of existing service revenue, and impact on partners. I will address these issues in a future post.
 
Related posts coming soon:

1.    Mitigating risks associated with productized services
2.    How does product management contribute to productized services?
3.    Ideas for productized services and increasing customer success

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