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Managing Product-Support Services

Manufacturers of equipment—small appliances, office machines, tractors, mainframes, airplanes—all must provide product-support services, now a battleground for competitive advantage. Some equipment companies, such as Caterpillar Tractor and John Deere, make a significant percentage of their profits from these services.40 In the global marketplace, companies that make a good product but provide poor local service support are seriously disadvantaged.

Identifying and Satisfying Customer Needs

Traditionally, customers have had three specific worries about product service.41 First, they worry about reliability and failure frequency. A farmer may tolerate a combine that will break down once a year, but not one that goes down two or three times a year. Second, they worry about downtime. The longer the downtime, the higher the cost, which is why the customer counts on the seller’s service dependability—the ability to fix the machine quickly or at least provide a loaner. The third issue is out-of-pocket costs. How much does the customer have to spend on regular maintenance and repair costs?

A buyer takes all these factors into consideration and tries to estimate the life-cycle cost, which is the product’s purchase cost plus the discounted cost of maintenance and repair less the discounted salvage value. To provide the best support, a manufacturer must identify the services customers value most and their relative importance. For expensive equipment, manufacturers offer facilitating services such as installation, staff training, maintenance and repair services, and financing. They may also add value-augmenting services that extend beyond the product’s functioning and performance.

A manufacturer can offer, and charge for, product-support services in different ways. One chemical company provides a standard offering plus a basic level of services. If the business customer wants additional services, it can pay extra or increase its annual purchases to a higher level. Many companies offer service contracts (also called extended warranties), agreeing to provide maintenance and repair services for a specified period at a specified contract price.

Product companies must understand their strategic intent and competitive advantage in developing services. Are service units supposed to support and protect existing product businesses or grow as an independent platform? Are the sources of competitive advantage based on economies of scale (size) or economies of skill (smarts)?42

 
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