Products are Turned Into Services

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Description:

Have you ever bought a mobile phone? I bet that there was a booklet inside the package, tempting you to join some club, or subscribe to a web page. Only to find out that you had to, 1. supply your personal details, and 2. would receive advertising e-mails, and "Special Offers!" for products you don't need or want. And this is not just the case for mobile phones, you see it everywhere. You want beer? Heineken will give you a mobile service for the latest news.

But why would these companies want you to join their club? Of course, you are an easy advertising target. But there is another, hidden reason: products are increasingly turned into services. Just think about why you can buy the same mobile phone for "0 euros!" if you get this or that contract with it. Apparently, the telco is paying the phone manufacturer from your monthtly payment - and anyone would understand that your monthly payment would drop if you would just pay for the phone immediately.

Products are turned into services. In software, you can see the same situation. Windows Update is a service. iTunes is a service. IBM invests in Open Source - so you can get expensive IBM consulting with your free copy of Linux - or was it the other way around? The reason why is obvious: services provide companies with a great medium to have regular contact with their customers, and to have a better guarantee of receiving money in the future.

In a few years time, you will be able to subscribe to Microsoft.com, and receive the latest copy of Windows, "Free of Charge!". Or you could of course subscribe IBM.com . It's your choice.

[S. Demircioglu][1]The competitive environment for global technology-driven companies has never been more intense. Quite clearly, these companies will invest heavily in new, exciting technologies over the long term. It is also clear that the bases on which these companies compete and differentiate are changing radically. In many situations, product differentiation is giving way to service differentiation and the integration of product-service packages as the basis for competitive differentiation. As a result, many companies that have traditionally been driven by product-centric strategies have shifted their focus to service and product-- service-centric strategies.

[S. Demircioglu][2]Because fixed costs predominate in the development of products, companies can expect higher marginal returns from increases in market share (that is, from scale). The services sector, however, is dominated by variable costs, and therefore increasing returns from scale are rarely possible. Achieving returns from scale would require extensive reuse of client specifications in other contexts - inherently difficult and often not contractually permissible. Such disparities in the two sectors lead to different behaviors: The promise of scale benefits may encourage product-focused view to make higher initial investments in the design of the product architecture. Service-focused view, however, handle variable costs by emphasizing process rigor and efficiency.

Enablers:

Inhibitors:

  • The Internet, again (more choice, more information on competing products);
  • Consumer resistance to subscriptions and advertising

Paradigm

[S. Demircioglu] Products turning into services requires managing service flowing down the chain and information flowing up the chain. For corporates, it means involving everyone -- from engineers to managers to sales and service reps -- in understanding the consumer and identifying his/her needs. It means nurturing flexible teams that cover various parts of the value chain that design, develop, test, and sell new products based on the information gathered from the marketplace.

Timing:

Although this development has been going on for a long time (e.g. car owner's clubs) it has become more important during last decade (2000 onwards), spurred by the Internet boom (think free e-mail, free news, free software, etc.).

Also, the fact that Internet bandwidth has increased between deliverers (companies) and consumers of services means that a new channel has opened up over which services can be deliverd (music, video and other digital products and services).

Web Resources: