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&M’s 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

He also holds an MBA from the University of Texas at Arlington.Author – Thomas Dotzel Prof.. he worked for five years in the hospitality industry in diverse countries and in the marketing division of the BMW Group in Munich . Dotzel earned his Ph. in Marketing from the Mays School of Business at Texas A&M University. a Diplôme from the ESC Pau in France and a Diplom Betriebswirt from the University of Applied Sciences and Research in Munich. Prior to getting his Ph.D.D. Germany.

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 .

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 – Ex.

Introduction While the promise of combined offerings is great. How to structure Many companies don’t 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 ① Failure to differentiate ② Failure to scale ③ Failure to assess markets and prices appropriately ④ Failure to invest in the brand . It’s easy to get them wrong.

Common Hybrid Offerings Before we look at four factors. . let’s consider the common types of hybrid offerings.

Common Hybrid Offerings Two underlying characteristics determine how customers will value and use an offering ① Complementarity ② 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 .

and services now account for about 20% of Oracle’s total revenues .Ex. Oracle Products Hybrid Solutions = Packaged database software products = Consulting and management service + Services The hybrid has boosted Oracle’s growth: Revenues from the service component of Oracle on Demand grew by 75% from 2006 to 2008.

Peace-of-mind bundle Independent Flexible bundle Dependent Independence Peace-of-mind bundle One-stop bundle Multibenefit bundle Low High Complementarity .

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

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 .

+ Highly complementary The digital video recorder Hybrid Solutions + Stream from YouTube. and to the company’s bottom line. download music. record in high definition.Multibenefit bundle Here. comes from offerings added to the basic one. view on-demand movies Tivo’s product is useless with its service . the products and services are often inseparable Dependent The benefit to the customer.

Ex. about 83% of TiVo’s &273 million in revenue came from services . download music. record in high definition. view on-demand movies + Services For the fiscal year ending in 2008. TiVo Products Hybrid Solutions = The digital video recorder = Stream from YouTube.

One-stop bundle Independent Dependent Independence Peace-of-mind bundle Flexible bundle One-stop bundle Multibenefit bundle Low High Complementarity .

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 Customer’s service experience may not be greatly improved by buying these products. but customers value the convenience and the recommendations of their style . rather.One-stop bundle This combination does not provide additional value in itself.

000 salons world-wide . owns more than 13.6 billion hair care company. a $2.One-stop bundle Products Hybrid Solutions = Hair care and beauty products = Salons + Services Regis Corporation.

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 ① Look for points of differentiation in product and service markets ② Scope the service and scale the product ③ Assess the revenue and profit potentials of various hybrids ④ Invest in the brand .

companies should keep in mind four rules ① Look for points of differentiation in product and service markets ② Scope the service and scale the product ③ Assess the revenue and profit potentials of various hybrids ④ Invest in the brand .In evaluating options.

consistent. Human service can be highly uneven. 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. and quality service . or vice versa. This is particularly relevant for flexible and peace-of-mind bundles. Consider the following questions Is the customer’s problem complex? If the problem your customer faces is complex.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. Try pairing a commoditized product with reliable. look for a way to enhance its value through the addition of a high-quality service.

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

and secure important information Cost Lower cost Low .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.

consider a flexible bundle that offers a customized solution .Is the customer’s problem complex? If the problem your customer faces is complex.

Is the customer’s 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 .

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

Xerox. IBM have leveraged .and improved .Can the quality of the service be improved? If you have a trusted product brand. Apple.brand credibility by pairing highly trained service teams with product offerings . the untried service component will benefit from the“halo effect”.

In evaluating options. companies should keep in mind four rules ① Look for points of differentiation in product and service markets ② Scope the service and scale the product ③ Assess the revenue and profit potentials of various hybrids ④ Invest in the brand .

Use the internet to reinforce the linkage between the goods and the service. Can the service be digitizeid? To enhance scalability.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. 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. Once customers start to using and benefiting from the service Their switching costs for the equipment rise. . look at options for putting components online to lower the total unit cost of the offering. Also scope service delivery by providing centrally administered remote or online services About scale and scope.

In evaluating options. companies should keep in mind four rules ① Look for points of differentiation in product and service markets ② Scope the service and scale the product ③ Assess the revenue and profit potentials of various hybrids ④ Invest in the brand .

Consider the following questions How often do customers repurchase either goods or services? Typically. it’s often best to lead with the product or service that customers choose first. . Which should lead the customer purchase. you can improve the success rate of hybrid offerings. 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. If you balance the timing and magnitude of cash flows from the product and the service.Assess the revenue and profit potentials of various hybrids Once you have explored different combinations of goods and services. products have longer purchase cycles than services do. the product or the service? Especially for a one-stop bundle.

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. .

so Apple makes most of its profits through the iPod Products Digital music players Huge market Services Music downloading Even bigger market .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.

How often do customers repurchase either goods or services? Typically. you can improve the success rate of hybrid offerings. If you balance the timing and magnitude of cash flows from the product and the service. products have longer purchase cycles than services do. .

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 .

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

S. customers typically Choose the brand of service at first Then pick the handset brand . the product or the service? Because their reputations are built on service..Which should lead the customer purchase. 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.

In evaluating options. companies should keep in mind four rules ① Look for points of differentiation in product and service markets ② Scope the service and scale the product ③ Assess the revenue and profit potentials of various hybrids ④ Invest in the brand .

Invest in the brand Once you have identified a viable hybrid offering. Invest in branding activity that promotes the link between the product and the service Enhance the company’s credibility Branding activity Products Branding activity Branding activity Company’s credibility Services Branding activity . consider branding or subbranding it to leverage the halo effect.

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 .Which products and services work best together For a hybrid offering to be successful.

Conclusion As companies look to the future. The rules above can help you identify successful hybrid offerings . they will need to pay more attention to hybrid offerings if they want to increase their top and bottom lines. They enable firms to boost their revenue and profit streams and improve liquidity at low risk. Hybrid offerings attract new customers and improve demand among existing ones by providing superior value.