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
