Why service is more profitable than products

Today there is no such thing as a product-only business, according to a new approach that aims to encourage innovation.

In countries around the world, the value of manufacturing is on the decline. The service sector increasingly dominates the economy and in developed countries like Australia, the United Kingdom and United States it accounts for over 70 per cent of GDP.

That’s the official view at least – but in reality, in the digital era it is becoming harder to differentiate between a product and service, at least in terms of their output. Many manufactured products including TVs, mobile phones and ‘smart’ devices deliver a service, and often the service element is greater and more profitable than the product itself.

Take cable television for instance – the cost of making the cable box that delivers the programs is a fraction of the subscription fees users pay to watch them.

Any product that is delivered via the cloud, accesses the internet or incorporates artificial intelligence relies on the services that support it. Arguably, even conventional products can be viewed in terms of the service they provide the customer.

Associate Professor Tim Kastelle, an innovation expert at The University of Queensland (UQ) Business School, cites the old marketing saying;

“If a customer buys a power drill, it’s not because they need a quarter-inch drill bit, it’s because they need a quarter-inch hole.”

Tim believes there is no such thing as a product-only business any more and that all organisations need to think of themselves as delivering a service. This approach – known as service-dominated logic or SDL – can give companies a fresh perspective on their business operations and stimulate innovation at a time when their traditional markets are increasingly being disrupted.

“When you view everything as a service, you get a much better understanding of the people you are trying to appeal to – what they want to achieve and what creates value for them,” Tim explains.
Associate Professor Tim Kastelle

“Understanding that is really important – innovation is about executing an idea to create value, but it’s the latter part of ‘creating value’ that people often overlook.”

The SDL approach views every transaction as service-based. It encourages businesses to focus on the process and benefits involved, rather than the goods or money, which can mask the true value of the exchange. It also sees value as being co-created by customers and others, rather than just by the company itself. That value may be different for each one, depending on the way they use the product or perceive it.

Sometimes users can find value in products which even the inventors have overlooked, so a product created for one role assumes a completely different purpose. The @ symbol was once used by merchants to signify the cost of a unit, but by the 1970s had become a little-used character on a keyboard, until computer scientist Ray Tomlinson used it to denote email addresses. It is now a symbol of the communications revolution.

In 1905, German chemist Alfred Einhorn developed Novocaine as a local anesthetic. He intended it for use in amputations, but surgeons preferred general anaesthetics. Einhorn was disappointed when he found out that it had become popular with dentists; however, over a century later, it is still widely used in dental practices.

SDL thinking can be applied to any organisation in any sector. Tim has spent five years working with science researchers on the ON Prime national science and technology accelerator program, to help them achieve greater impact from their work. During that time nearly 1,000 teams have completed the program. Together with its partner scheme, it has generated more than 50 new science-based startups.

Tim explains, “scientists are very object-oriented in terms of the way they think about their research, but the SDL approach encourages them to focus on the value it creates for people, rather than just getting a research paper published."

"Participants in these programs are about ten times more likely to see their research in use – a huge increase in impact,” says Tim.

So how can you apply SDL thinking in your own organisation? Tim suggests the following steps:

1.    Get closer to your customers

Understand the people you are creating value for. What are they trying to achieve and where do they want to be? What obstacles or challenges do they face? What do they value and what does success look like for them? Gather and analyse customer data to drive deeper insights.

2.    Remember that value is co-created

What customers bring is just as important as your contribution. Consider how users can participate at different stages in your processes. User-driven design allows customers to be engaged right from the start, from specifying their requirements to evaluating prototypes. Other opportunities for value co-creation include self-service and self-assembly.

One example of a product designed by users – albeit not through a formal process – is mountain bikes. In the early 1970s, there was a craze amongst Californian youths for freewheeling down mountain trails. They rode so fast that the grease inside their brakes would burn, so they had to repack the bearings. Bicycle manufacturers soon caught on and started producing commercial off-road ranges.

3.    Take a systems view of your business operation

Think about your business model. How do you create and deliver value for people? What type of institutional arrangements come into play? Consider how you could change your system and business model – although Tim warns that in complex systems or supply chains, it may be more realistic to try to shape the system rather than control it completely.

4.    Try out new things

The way to shape the system is through continuous experimentation. “The goal is to find the fastest, cheapest way to test whether you’re on the right track,” says Tim.

“If it doesn’t work, drop it but learn from it. Experimentation is really important. By testing early, we can greatly reduce the cost of ideas that don’t work.

"If we combine co-creating experimentation with our stakeholders, we can be more confident that any new product or service we launch will create value for people and will be a success,” says Tim.

Find out more about service innovation at the UQ Thought Leadership Series

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