Q: Last year, we sold more professional services than expected. Now it looks like our services revenue will be higher than that generated from software product sales by the end of the year. What key success factors should we watch to maintain our company profits?
A: Managing professional services tends to be highly predictable with a steady positive cash flow. Whereas, managing a product business can result in very unpredictable swings in monthly revenue generation.
The fluctuation in revenue is one reason why product sales generally carry higher profit margins than the steady cash flow generated from service fees.
Set and monitor product and service line gross profit margins
Professional services have become a commodity in most industries and this has resulted in competitive pricing. So, I would suspect that your concern about maintaining gross profits of the past, when product sales dominated your business, is very real now that operations are more services oriented. When the majority of your revenue came from high margin product sales, you could afford to provide lower margin professional services to train new customers and implement product solutions. Now that services are exceeding product sales, your overall gross profit margins are, most likely, dropping.
Maintaining a profitable balance between services and product revenue can improve overall company profitability. Proprietary equipment or software sales allow for slightly higher margin services fees when the customer is locked into your product. Conversely, product-educated service providers can steer prospects toward buying your proprietary high margin products. Everyone sells what they know will work best for the customer.
Test business strategy by knowing what customers think of you
If you think your business is now and will be more services-driven than product-driven, it is time to rethink your business and pricing strategy. Very large companies in the information technology industry, like IBM, are successfully moving from product-driven to services-driven businesses. Having your product customers outsource their management and maintenance services to your company may prove to be a long-term win-win arrangement.
Once you decide on what drives your business, services or products, it is time to check to see how your customers and potential customers see your company. Customers’ buying decisions are based upon their perception of the best value available. Value is comprised of service, quality and price. Note that it’s “perceived value” that counts.
Perception is how others view us. You have a great deal of control over that perception; in how you and your employees present your company in person, advertising, correspondence and brochures, and what you deliver in product or services. If you clearly understand your company’s technical and marketing strengths relative your competitors, you can deliver a consistent and powerful message. A key success factor is to periodically test to see how your customers’ perceptions have evolved---to always know what they really think about your firm.
Periodically analyze what your customers want to buy from you
When you and your employees are delivering products or services to customers, you receive “grazing rights” within your customer’s place of business. These grazing rights give you the ability to look for new opportunities where your firm can provide something that your competitors can’t readily deliver.
Once you have defined what that new service or product might be, informally ask your customer contacts if they would be interested in buying such a product or service from you. If their answer is “yes,” explore what it would take to structure your organization, your operations and your company’s image around these new strengths.
Developing and delivering new customer-driven products and services can lead to consistently profitable revenue growth.
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