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Jun 27, 2010

Why should you care for services if you make only products?

If you sell products, you may be looking at your Profit & Loss statement - and seeing a lot of manufacturing costs sitting on it - and may be coming to the conclusion that you are in "Product Business". 

But there is a different perspective. The fact is that your customers use your products along with a lot of services and it is quite possible that they may be buying these services from elsewhere. Your sales and profits can actually improve if you recognize that your customers' satisfaction comes out of a combination of your products and someone else's services. 

Let us say  you  are  making  and selling diesel  engines. Does that mean to you that you are in a "Product  Business"?   Banish the notion and see what  your customer  is buying and you  will realize  that  he  is  almost always buying  your  product  along with some services . For example, your  diesel engine will not get sold to a fisherman for his boat unless there is someone to explain to him what type of engines are available, which of these are suitable for his needs, why a specific model is better, answer his queries, to take down his order, to deliver  the engine, to help him install it,  to be there to take his call in case repairs are needed, to go and repair it…etc . All of these are services ! Without these services your engine will not sell.
 
It is possible you do not see the service delivery activity on your P&L account because you have chosen not to undertake the service directly - instead you may be paying the trade (or someone else)  to conduct the pre-sales, sales and after-sales service activities for you.  It may not be on your P&L account but it does not mean you are not responsible for the service delivery.  As far as your customers are concerned, you are responsible for the service because you are selling to them under your name and hence must be responsible for all the services they need to purchase, install and use your product. Many companies see the service as a hassle, an activity that generates nothing but complaints. They prefer to operate manufacturing in one central location where everything can be planned and controlled nicely. Service is not so nice. It is  spread-out, demand for it is unpredictable and it is very difficult to please the customers and also to retain and motivate trained employees. But, when it is becoming increasingly difficult for marketers to differentiate their physical product, service is emerging as the next frontier.
     

A LOOK AT HUL THROUGH ITS P&L LENS

But let us go back to our original thread : why do companies remain under the notion that they are in "Product Business" ? Let us take the example of Hindustan Unilever Limited. Most people, including probably the company executives themselves, may be under the impression that HUL is in “product business”.

Their  P&L shows that ,for the 12 month period ending December 31, 2007,  its  Income   was Rs 14106 Crores and its  Operating  expenses were  Rs 11797 Crores . The accounting policy of HUL shows that sales are net of taxes and also net of the trade commission paid - generally 8% to the distributors and 12%  to the retailers. Let us  recast the P&L account of HUL from the customer perspective and it will be seen that the turnover of HUL is, at consumer prices, actually Rs 18760 Crores and this pie splits as follows.

Trade Commissions :  Rs   3250  Crores ( Service * ) : 17% of consumer spending ( Rs 18760 Crores )
Taxes :  Rs    1400 Crores ( Government )  :  7% of consumer spending
Materials  :  Rs    7414 Crores ( Bought out ) :  40% of consumer spending
Machine  Depreciation : Rs  138 Crores ( Book Charge ) :  1% of consumer spending  
Services ** :   Rs    4409 Crores ( Service ) :  24% of  consumer spending

* service to the consumer and trade is compensated by way of commissions
** employees, ad & promotion, freight

In other words, when consumers spend on HUL products, 80% of it  gets  almost equally split  between  buying of services and buying of  materials : HUL is as much a service organization as a product organization.

The misconception that HUL is in “Product Business” comes from the narrow interpretation of what costs are seen on the books of HUL. What is missed is the fact that HUL’s products will not sell unless they are widely available, widely seen  and widely known. HUL has to do all this - it has no option! But HUL does not do this under its own banner - but gets it done through their sales force (which is on their P&L ), their distributors, their retailers and their ad agency. During the year under discussion as above, they incurred Rs 3250 Crores of trade commissions and Rs 1400 Crores of advertising – a whopping Rs 4650 Crores worth of services - and they do not include other services like travel, sales force salaries, sales offices, godown rents etc. If they too are taken into account, the figure will come close to what they are spending on manufacturing activities.

Ultimately it is HUL which is the wellspring of the service activity : the sales force which contacts its distributors which appoints and services them, the salesmen and delivery boys of the distributors who contact the retailers and sell to them, the merchandisers who put up the shop displays, the billboard contractors who put up HUL ads on their sites, the ad agency which creates ads and releases them in media. They are all  services.

Whys is this important? Because many companies are acting under the wrong notion that they are in the "Product Business" whereas, in reality, they are - and should be acting as if they are - in "Service Business".  Is there a difference in these two in terms of action ? Yes - and huge !

"Product Business" people tend to get occupied with materials and machines and related stuff like sourcing, purchasing, plant layout, supply chain, cycle time, down time, preventive maintenance etc. "Service Business" people tend to get occupied with things like organization, competencies, motivation, performance tracking, training, culture etc. 

Those who think who are in product business must learn to go through the following SARP sequence to understand what business you really are in
  • what are you selling ( vacuum cleaner )
  • what application your product enables (cleaning )
  • what result comes form the application ( good impression )
  • what payoff is acheived in the end ( favorable customer perception )  
You understand what business you are in only when you can answer all the 4 SARP questions.  


 

6 comments:

Shirish Karve said...

Some of us from Capital Goods industry( who worked in Nitch markets and devloped business models on strengths of existing customer referances) would totally agree.
The concern is about its lack of recognition at operative level and we will have to refine lot of strategies so as to empower operative sales, operation and distribution people ( all those who have customer interface in some form).

Prof S K "Bal" Palekar said...

Dear Shirish, can you comment a little more so that I am clear what you are saying ? Regards

Colonel's Diary said...

I guess at the customer end every product takes the form of a service. To quote an example, Tata Tele Services ltd launched 'Photon plus', a ready to use, plug and play internet USB drive. For Tatas it is a new product, for me the end consumer I am seeking a service. The prepaid customers are provided by a lower speed connectivity as compared to the postpaid customers. As a consumer, the Tata Indicom staff failed to educate me on the facilities as a result, they lost a consumer. I shifted to Reliance since TATA Indicom does not have a provision for a prepaid consumer to shift to postpaid. Ultimately, for the end user it is a comprehensive service experience which assumes greater importance than the product. Thanks Bal sir, for a new insight.

Nataraj said...

Boss,

I realise that there is no pure product business, it is the degree of service that is part of the business. it could as high as 100% in case of barber to low 3 to 5% for Cigarette selling Dukander. But I always remember your presentation on Value to a customer....what is the value you add to customer....which is very important than whether you are providing product or service. Can you offer Value for Money and add Value to your customer is the key....Many thanks for making us remember the basics....

kunal reshamwala said...

Sir, I was wondering whether a reverse situation is also possible when you are looking at sale of Service (say Hotel service) where customisation is primary need but consumes more time, instead can product sale principles be applied while selling a service. Can cost of advertisement, etc be reduced but yet have focused marketing for target customers.

Prof S K "Bal" Palekar said...

Kunal, the main point is that when customers consume, they often consume products and services together. Whether you sell products or services, you must be aware of this fact and look at it from the point of view of the customer.