Service design of service packages - gambling?

With the increasing service orientation of the service offer, the question also arises in the industrial sector as to how the various service modules, from maintenance and repair offers to new digital services, can be combined into attractive service bundles and invoiced. An essential point, which in my view has a considerable influence on medium and long-term profitability, is the fact that service packages or bundles have their own competitive dynamics over the entire life cycle. Due to different legalities, providers are confronted with new challenges.

It is worth taking a look at classic service industries (IT services, insurance, hotel industry, passenger transport), where the resulting effects have an enormous influence on market activity.

The following scenarios provide a good overview of challenges that should be considered when designing new service packages.

The lottery win

While all the competition is chasing after new features, optimising and pushing ahead with innovations seemingly demanded by the market, they often take the wrong turn, break down or run out of batteries. In other words, the company takes another close look at its customers or simply hits the bull's eye by adding or changing a service module that addresses precisely the customer needs that are decisive for the purchase decision. This move changes customer perception so quickly that companies are catapulted into a dominant position in the market. In addition, a strong usage habit, a personal customer relationship or other lock-in effects succeed. It can also be a case of "subscribe and forget". In any case, the return on innovation has been managed to turn into a never-ending cash flow party where current and potential competitors only drop in from time to time as party poopers to be pitied and usually go home with empty wallets. Ironically, these "game changers" are not directly related to the actual function of the service, are seemingly trivial or even consist of omitting elements of performance.

Successful examples include:

Especially with digital services, this scenario is not as rare as one might think. However, it is important to recognise this market scenario early on and to draw the right conclusions from it. In the best case, you have handed in your lottery ticket with the six correct numbers in time, in other cases it would not help you to show up at the ticket office a day later with the same number combination. Unfortunately, you never know exactly when the draw will take place or whether it has already taken place. In many cases, however, it has been shown that this point in time is not primarily dependent on the time of introduction of the actual technological innovation, but can be recognised by exponential user growth in combination with low churn rates. If these indicators do not light up green in one's own dashboard and can be located with a competitor in the course of market observation, decisive action is called for. In the rarest of cases, it helps to randomly add further service components to the package or to try to buy customers by accepting low or even negative margins.

Conversely, it is also true that up to that point, every participant still has the same chances, regardless of who is responsible for the technological innovation. In this phase, therefore, two things are crucial: to determine the above-mentioned key figures reliably and in short time intervals and, in parallel, to rummage through the most diverse innovation dimensions with quick test procedures.

From my point of view, a strategy of "passing on the left" is currently very promising in industrial services. With some amazement, I notice the trend that many innovators aim for monetisation too early with a value-based pricing approach and shoot themselves out. Crucial growth metrics such as usage rates can thus not even be determined because the path to exploring the benefits is blocked by an oversized price tag. But the other extreme, that the innovator is not even aware of the commercial potential of his innovation or even attributes the positive customer feedback to a completely different performance component, can also be observed.

All-inclusive until you pay for it

Package formation is widespread in many service markets and can be compared to the all-inclusive approach of package holidays. Once a certain price level has been established, an attempt is made to create new scope for differentiation by increasing the service components included in the package.

This is fine as long as the increase in service follows the "you could if you wanted" principle already mentioned. This means that you can put oysters and champagne on the buffet to impress your customers, as long as you make sure that, due to the time of day and other conditions, they will only eat them in exceptional cases. Otherwise, you will be forced to raise the price level at some point and can only hope that the customers will also pay for this increase in quality. Particularly if no other differentiating features can be used apart from the direct service components, you quickly get into a situation that can be well described as "all-you-can-eat in the industrial estate". This only becomes more hopeless when the schnitzel becomes an XXL schnitzel.

Due to the increasing number of variants and configuration options in technical services, I know the desire for simple and transparent pricing models. From the customer's point of view, transparency mainly means comprehensibility. It can certainly be easier to find one's way around a well-structured and logically structured menu than to find out which of the many different individual components leads to this significant price difference when there are only two different service packages (e.g. Basic & Premium). Anyone who thinks that all-inclusive wrist bands have nothing to do with industrial services should talk to service colleagues from the wind power sector.

Low-cost outliers

If the majority of market participants follow the all-inclusive approach described above and focus primarily on selling the all-round carefree package as the golden mean of their usually three price levels, the low-cost outlier will certainly be on the agenda at some point. Typically, two dominant manifestations can be distinguished.

The price reducer does not think too much, but starts with the thesis that less margin is needed to be happy. In an early market phase, this strategy can sometimes even be successful, especially when innovators and supposed lottery winners have called exorbitant lunar prices through misguided value pricing with low market entry barriers. In more mature market phases, however, such attempts often do not even lead to the industrial zone anymore, but rather end for the luck seekers in a food truck in the DIY store car park, where one prefers to keep a few steps away because of the somewhat rancid smell.

The performance reducer , on the other hand, analysed the input/output factors and process indicators of the service system in more detail and found that a lot of resources are currently allocated to additional functions that hardly play a role in the customer's perception. It was also determined that the performance of the service delivery processes in the service components most prioritised by the customers suffers from the ballast of cost-intensive additional functions. Based on this, the service reducer develops a service package that contains the really important and also perceived functions, which can then be offered at a much lower price with better performance. The previous top dogs have built up large overheads due to the seemingly unnecessary resource intensity, which cannot be reduced so easily. This gives the performance reducer enough time to deepen customer loyalty after the first coup. But even with this approach, caution is advisable, because if, after reduction zeal and increasing customer complaints, it is discovered that it was the cup of coffee and the smile at the reception desk that customers primarily noticed, they can be happy when a supermarket hopefully soon opens next to the DIY store. Especially if the price screw is turned down further to compensate for missing service components.

Misunderstandings

Probably everyone has experienced in various situations that they have paid for a service or even pay for it on an ongoing basis and are shocked to discover that the service components essential for use are not included. It is even more bitter when, as in the case of insurance policies, the missing service component cannot even be supplemented by additional payment if necessary. This is not always the fault of the provider, but I think everyone is familiar with the somewhat queasy feeling after a booking when it is not 100% certain whether a seat has been reserved or whether a ticket has been purchased.

This misunderstanding often occurs with performance options that can be purchased separately but only used in combination with other performance components. Likewise, in the case of subscription models, the terms are not synchronised, so that additional licences continue to be paid for even though they can no longer be used. In my view, the situation is different when functions that are absolutely necessary for use are not included but the marketing department suggests otherwise or the entire range of services was only invented to literally lure customers into a trap. Fortunately, such scams are made more difficult by the increasing networking of customers.

I also include the following frequently encountered service bundles in this area:

Even if such swindles can remain undetected for a long time in some industries, they should be refrained from and any misunderstandings should be avoided as much as possible in the sense of a good customer relationship.

What does the ideal service package look like?

As has been seen from the scenarios presented, the way in which different service modules are bundled into a package can have a significant influence on economic success. The path does not necessarily lead to such "extreme" positioning, yet such market situations are widespread. The ideal composition of a service package for a specific customer segment depends strongly on how homogeneous or inhomogeneous the demand situation is. In order to exploit the maximum purchasing power potential, the marginal utility of each service component must be determined in connection with the overall package and possible positioning effects must be considered. The marginal utility is the experienced increase in utility through the additional consumption of a service component and depends strongly on the respective demand. The latter can of course be influenced by suitable marketing instruments and is not a fixed quantity. Nevertheless, valid assumptions should be made that can be used as a yardstick. Furthermore, it is a basic principle that price differentiation and service differentiation should always be coupled with each other.