There has long been a consensus among the investor community that products, especially those with a repeatable business model, have a clear advantage over services. This perspective is often reflected in pricing practices, where product-based revenues typically require higher multiples than service-based revenues.
This preference highlights the propensity for scalability and predictability that products can offer.
However, at least based on my years of first-hand observations, this conventional wisdom may have to be re-evaluated. I am unable to say I’ve taken a quantitative approach, but from tons of of meetings over the last few years, I’ve found that firms that integrate services into their products seem to develop deeper relationships with their customers, which leads to lower churn rates and increased customer value.
Both products and services have value, but I consider that optimal value often lies in the synergy of each.
Better customer understanding and engagement
Integrating services with products adds an invaluable human element to the business-customer relationship.
Services enable firms to better understand and anticipate customer needs, leading to tailored solutions that resonate more deeply with users.
This personalized approach fosters stronger connections and loyalty that is difficult to achieve with off-the-shelf products alone. As a result, firms that supply a combination of products and services often see lower churn rates because their customers feel more understood and appreciated.
Greater upselling opportunities
Combining products and services opens up additional upselling opportunities. Services give firms more touchpoints with customers, allowing them to discover and capitalize on opportunities to offer enhanced or additional solutions.
This not only increases revenues, but also increases customer satisfaction as they profit from a range of solutions that better meet their evolving needs.
The ability to seamlessly integrate recent offerings into your existing structure makes it easier for customers to adopt additional products or services, strengthening business relationships.
Overcoming scalability and cost challenges
A well-executed mixture of products and services challenges the traditional assumption that services are inherently unscalable and expensive.
By leveraging the products as a part of their service offering, firms can achieve greater scalability and improve profit margins. This strategic integration allows services to profit from product replicability and scalability, and products gain additional value through customization and improved service delivery. This symbiosis effectively addresses the challenges of service scalability, proving that the right combination can lead to a scalable, profitable business model.
Therefore, it will be clever for investors and business leaders to reconsider how they value services in conjunction with products. This blended approach not only reflects a more holistic understanding of customer needs, but also enables firms to leverage the full spectrum of business opportunities.
As we move forward, integrating services with products can turn into a key differentiator in the marketplace, redefining what it means to deliver value to customers.