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A Practical Guide to Combining

Products Services
by Venkatesh Shankar, Leonard L. Berry, and Thomas Dotzel

Authors

Author Venkatesh Shankar


Venkatesh (Venky) Shankar is Professor of Marketing and
Coleman Chair in Marketing at the Mays Business School,
Texas A&M University. His areas of specialization include
Digital Business, Competitive Strategy, International
Marketing, Innovation, New Product Management, Pricing,
Retailing, and Branding.
Shankar has a Ph.D. in marketing from the Kellogg
Graduate School of Management, Northwestern
University and has corporate experience in the areas of
marketing and international business development. He has
worked in diverse countries.

Author Leonard L. Berry


Dr. Leonard L. Berry is Distinguished Professor of
Marketing, and holds the M.B. Zale Chair in Retailing and
Marketing Leadership in the Mays Business School at
Texas A&M University.

He is also Professor of Humanities in Medicine in the


College of Medicine at The Texas A&M University System
Health Science Center. During the 2001-2002 academic
term he served as a Visiting Scientist at Mayo Clinic
studying healthcare service.
He is the founder of Texas A&Ms Center for Retailing
Studies and served as its director from 1982 through June
2000.
He is a former national president of the American
Marketing Association

Author Thomas Dotzel


Prof. Dotzel earned his Ph.D. in Marketing from the Mays
School of Business at Texas A&M University.
He also holds an MBA from the University of Texas at
Arlington, a Diplme from the ESC Pau in France and a
Diplom Betriebswirt from the University of Applied Sciences
and Research in Munich, Germany.

Prior to getting his Ph.D., he worked for five years in the


hospitality industry in diverse countries and in the marketing
division of the BMW Group in Munich

Agenda
Introduction
Common Hybrid Offerings
Developing Your Offering

Introduction

Introduction
These days, many firms are trying to mix products with services
in an effort to boost revenue and balance cash flows

Attract new customers

Increase demand

Products
Hybrid
Solutions

Services

Combined into innovative offerings


Such offerings are commonplace

Introduction Ex. Apple and Xerox


Hybrid solution have spurred growth or
helped reverse market-share or profit decline

Apple
The iPod product combined with
the itunes service

combined

Copiers and printers bundled with


Maintenance or customer support service

bundled

Introduction
While the promise of combined offerings is great,
Its easy to get them wrong.
How to structure
Many companies
dont think through

How to market

their combined offerings

How to sell
About their research

Most of them stumble


in one or more of
four ways

Failure to differentiate

Failure to scale

Failure to assess markets and prices appropriately

Failure to invest in the brand

Common Hybrid Offerings


Before we look at four factors,
lets consider the common types of hybrid offerings.

Common Hybrid Offerings


Two underlying characteristics determine
how customers will value and use an offering

Complementarity

Independence

Through the lens of complementarity and independence,


The following types of hybrid offerings emerged

Flexible bundle
Peace-of-mind bundle
Multibenefit bundle
One-stop bundle

Common Hybrid Offerings


Independent

Flexible bundle

Dependent

Independence

Peace-of-mind
bundle

One-stop bundle

Multibenefit bundle

Low

High

Complementarity

Flexible bundle
Independent

Flexible bundle

Dependent

Independence

Peace-of-mind
bundle

One-stop bundle

Multibenefit bundle

Low

High

Complementarity

Flexible bundle
This type is best suited to complex products and services
that address thorny customer problems

Highly independent

Customers could easily


buy them separately

Their value can be significantly


enhanced by combining them in
flexible ways

Highly complementary

Database
Hybrid
Solutions

Consulting & management


service

Allows companies to get


the most value out of their
Oracle investments

Ex. Oracle
Products
Hybrid
Solutions

Packaged database software products

Consulting and management service

Services

The hybrid has boosted Oracles growth:


Revenues from the service component of
Oracle on Demand grew by 75% from 2006 to
2008, and services now account for about 20%
of Oracles total revenues

Peace-of-mind bundle
Independent

Flexible bundle

Dependent

Independence

Peace-of-mind
bundle

One-stop bundle

Multibenefit bundle

Low

High

Complementarity

Peace-of-mind bundle
This type appeals to customers looking for the assurance
that they are getting a complete, best-of-breed offering

High independence

Low complementarity

Elevator
Hybrid
Solutions

High-quality elevator equipment


with a premium service

Companies can leverage a strong


product brand to attract customers
to an otherwise undifferentiated
service vice versa.

Typically, a building owner


or contractor purchases an
elevator from one company
and then hires a service
firm to do the maintenance

Ex. OTIS
Products
Hybrid
Solutions

Elevator

High-quality elevator equipment with a premium service

Services

Otis attributes 90% of its more than $1 billion in


annual operating profits from 2002 to 2008 to
the addition of the service component

Multibenefit bundle
Independent
Dependent

Independence

Peace-of-mind
bundle

Flexible bundle

One-stop bundle

Multibenefit bundle

Low

High

Complementarity

Multibenefit bundle
Here, the products and services are often inseparable

Dependent

The benefit to the customer, and to the


companys bottom line, comes from
offerings added to the basic one.

Highly complementary

The digital video recorder


Hybrid
Solutions

Stream from YouTube, record in high definition,


download music, view on-demand movies

Tivos product
is useless with
its service

Ex. TiVo
Products
Hybrid
Solutions

The digital video recorder

Stream from YouTube, record in high definition,


download music, view on-demand movies

Services

For the fiscal year ending in 2008,


about 83% of TiVos &273 million in revenue
came from services

One-stop bundle
Independent
Dependent

Independence

Peace-of-mind
bundle

Flexible bundle

One-stop bundle

Multibenefit bundle

Low

High

Complementarity

One-stop bundle
This combination does not provide additional value in itself; rather,
customers are attracted by reliability of service and shopping convenience

Independent

Minimally complementary

Hair care and beauty products


Hybrid
Solutions

Salons

Companies increase their share of


wallet simply by making products or
services available at the point of sales

Customers service
experience may not be greatly
improved by buying these
products, but customers value
the convenience and the
recommendations of their style

One-stop bundle
Products
Hybrid
Solutions

Hair care and beauty products

Salons

Services

Regis Corporation, a $2.6 billion hair care company,


owns more than 13,000 salons world-wide

Developing Your Offering


Developing hybrid solutions can be tricky because
Various combinations may have potential.

Developing Your Offering


A hybrid offering is most likely to yield, sustainable returns
if the dependence between the product and the service can be increased
and if the offering is scalable
In evaluating options, companies should keep in mind four rules

Look for points of differentiation in product and service markets

Scope the service and scale the product

Assess the revenue and profit potentials of various hybrids

Invest in the brand

In evaluating options, companies should keep in mind four rules

Look for points of differentiation in product and service markets

Scope the service and scale the product

Assess the revenue and profit potentials of various hybrids

Invest in the brand

Look for points of differentiation in product and service markets


The first step in thinking about a hybrid offering is to carefully examine the
barriers to entry in your target market
What is the degree of commoditization?
If your product is highly commoditized, look for a way to enhance its
value through the addition of a high-quality service, or vice versa.
This is particularly relevant for flexible and peace-of-mind bundles.
Consider
the
following
questions

Is the customers problem complex?


If the problem your customer faces is complex, consider
a flexible bundle that offers a customized solution

Can the quality of the service be improved?


While performance of a product may not vary much, Human service can
be highly uneven. Try pairing a commoditized product with reliable,
consistent, and quality service

What is the degree of commoditization?


If your product is highly commoditized, look for a way to enhance its value through the
addition of a high-quality service, or vice versa.
This is particularly relevant for flexible and peace-of-mind bundles.

What is the degree of commoditization?


Xerox leveraging its deep knowledge in solving
customers document-related problems
comparable

consulting
service

Equipment
Low

High

Helps customers
publish documents,
manage
documentation
budgets, and secure
important information

Cost
Lower cost

Low

Is the customers problem complex?


If the problem your customer faces is complex, consider
a flexible bundle that offers a customized solution

Is the customers problem complex?


IBM has carved out a niche with its customized Storage Area Network service,
which allows customers to connect to local networks of data warehouse

Can the quality of the service be improved?


While performance of a product may not vary much, Human service can be highly
uneven. Try pairing a commoditized product with reliable, consistent, and quality
service

Can the quality of the service be improved?


If you have a trusted product brand, the untried service component will benefit from
thehalo effect. Apple, Xerox, IBM have leveraged - and improved - brand credibility by
pairing highly trained service teams with product offerings

In evaluating options, companies should keep in mind four rules

Look for points of differentiation in product and service markets

Scope the service and scale the product

Assess the revenue and profit potentials of various hybrids

Invest in the brand

Scope the service and scale the product


A hybrid solution will improve market share and profitability
only if it is scalable
What can be centralized?
Think about how to put various service in one location. Also scope service
delivery by providing centrally administered remote or online services
About scale
and scope,
ask yourself
the
following
questions

If services cannot be
delivered from a central
location

Consider offering employees a variable


compensation plan that rewards them
according to sales volume.

Can the service be digitizeid?


To enhance scalability, look at options for putting components online to lower
the total unit cost of the offering. Use the internet to reinforce the linkage
between the goods and the service.
Once customers start to
using and benefiting from
the service

Their switching costs for the equipment rise.

In evaluating options, companies should keep in mind four rules

Look for points of differentiation in product and service markets

Scope the service and scale the product

Assess the revenue and profit potentials of various hybrids

Invest in the brand

Assess the revenue and profit potentials of various hybrids


Once you have explored different combinations of goods and services,
carefully analyze the markets for each
Which half of the offering has the most profit potential?
One way to create a winning hybrid offering is to identify which product or
service has the highest profit potential and combine it with the most commonly
purchased product or service.
Consider
the
following
questions

How often do customers repurchase either goods or services?


Typically, products have longer purchase cycles than services do.
If you balance the timing and magnitude of cash flows from the product and the
service, you can improve the success rate of hybrid offerings.

Which should lead the customer purchase, the product or the service?
Especially for a one-stop bundle, its often best to lead with the product or
service that customers choose first.

Which half of the offering has the most profit potential?


One way to create a winning hybrid offering is to identify which product or service has the highest
profit potential and combine it with the most commonly purchased product or service.

Which half of the offering has the most profit potential?


By marketing the iTunes store together with iPod, Apple has substantially expanded its
revenue stream. However, the profit margin for digital music is smaller than that for the
player, so Apple makes most of its profits through the iPod

Products

Digital music players

Huge market

Services

Music downloading

Even bigger market

How often do customers repurchase either goods or services?


Typically, products have longer purchase cycles than services do.
If you balance the timing and magnitude of cash flows from the product and the service, you can
improve the success rate of hybrid offerings.

How often do customers repurchase either goods or services?


Hybrid offerings, especially multiple-benefit combinations, have a better chance
of success if you hedge between the product and service purchase cycles
Purchase cycles

Products

Hedge between the product and service purchase cycles

Services

Which should lead the customer purchase, the product or the service?
Especially for a one-stop bundle, its often best to lead with the product or service that customers
choose first.

Which should lead the customer purchase, the product or the service?
Because their reputations are built on service, successful hybrid providers like AT&T and
Sprint exploit this order of choice to more effectively sell their own branded handsets

Customers

Services

Products

In the U.S.,
customers typically

Choose the brand of


service at first

Then pick the


handset brand

In evaluating options, companies should keep in mind four rules

Look for points of differentiation in product and service markets

Scope the service and scale the product

Assess the revenue and profit potentials of various hybrids

Invest in the brand

Invest in the brand


Once you have identified a viable hybrid offering,
consider branding or subbranding it to leverage the halo effect.
Invest in branding activity that promotes the link between the product and the service
Enhance the companys credibility
Branding
activity

Products

Branding
activity

Branding
activity

Companys
credibility

Services

Branding
activity

Which products and services work best together


For a hybrid offering to be successful, firms must decipher which
products and services work best together and present the most upside

Commoditization

Revenue potential

Low

High

Low

High

The customer problem


is complex

The product or service


is scalable

You know which


components customer
choose first

The purchase cycles of


the product and service
are far apart

Flexible bundle

Peace-of-mind
bundle

One-stop
bundle

Multibenefit
bundle

Conclusion

As companies look to the future, they will need to pay more attention to
hybrid offerings if they want to increase their top and bottom lines.
Hybrid offerings attract new customers and improve demand among
existing ones by providing superior value.

They enable firms to boost their revenue and profit streams and improve
liquidity at low risk.
The rules above can help you identify successful hybrid offerings