Why service businesses over-deliver and get under-paid

Today I am going to take you through an idea which particularly impacts service businesses. This is usually because they don’t provide a purely tangible ‘product’ – and their customer solutions often include important ‘intangible’ elements.

Imagine that your service business (metaphorically) offers to ‘jump over a 3′ high jump bar’ for your customers (see the illustration below)

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Most service businesses concentrate on clearing the 3′ bar and only worry if they jump too low and ‘knock the bar off’. If you jump too low, then the customer will complain. However, the (relatively) ‘good news’ about making such mistake is that it is really easy to notice – and will generally be easy for you to fix. Obviously if this happens a lot then you have a particular problem.

However, ‘knocking the 3′ bar off’ is not usually your biggest problem. A far bigger (and often hidden) problem is that your business does not clear the 3′ high jump bar and then stop at 3′.

Actually, sometimes your service business will jump 4′ or even 5′ for certain customers – but even that is not the real problem. If you had been able to charge those customers $3 for 3′ – $4 for 4′ – $5 for 5′ (etc.) that would have been great news.

No – your really big business problem is that you are regularly jumping 4′ or even 5′ for your customers – but far too often you are only charging them $3 for the privilege. In short you over-engineer their service level and get under-paid – or – ‘do too much for the money charged’.

The reason this happens is because:

  • You have not clearly separated (internally) the difference between the 3′ – 4′ – 5′ service levels. What extra benefit does the customer receive for 4′ compared to the 3′ level (and so on)?
  • The lack of clear (internal) separation makes it very difficult (nearly impossible) to sell the extra benefits (externally) to the customer. You can’t easily (and consistently) highlight the additional $ value at the point of sale.

The result is that service businesses often do too much work for the money they charge. Even worse this problem is compounded by then going back (after the event) to that customer and saying – ‘I know we said we were going to jump 3′ but actually we have jumped 5′ (without checking whether you wanted us to do that) – can we have $5 instead of $3 please’? Often this discussion may result in a ‘compromise’ (e.g. maybe the customer will agree to pay $4) – but actually nobody is very happy. We have jumped 5′ for $4 – and the customer feels like you have taken advantage of them.

Service businesses need to work harder (in advance) at defining and separating the different service levels (benefits) and corresponding price points – so that differences in benefit (at the point of sale) are very clear.

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In the simple illustration above the 3′ – 4′ – 5′ separations have been clarified as follows:

  • For 3′ ($3) we will provide you an efficient, high quality consultancy service – but we will be ‘reactive’ (you call us when you need particular help). NB – sometimes this level of service may be introduced precisely because you want the customer to value the difference between ‘reactive’ and ‘proactive’ services (see below).
  • For 4′ ($4) we will work with you to understand your direction (and your particular service needs) – and we will work ‘proactively’ together to help achieve this (we will call you with value-added ideas, relevant to your needs).
  • For 5′ ($5) we will work ‘strategically’ together and help you to maximize business value. We will build a long term relationship and become your business coach/mentor.

Having defined the differences in service levels (internally) between the words ‘reactive’ – ‘proactive’ – ‘strategic’ service, it becomes relatively easy to sell the differences to the customer in advance.

Putting it another way, if you don’t separate the differences, then the customer paying $3 may well assume that they are going to receive a ‘proactive’ service. If that separation is not made clear at the point of sale then you will either end up with an unhappy customer – or you will continue to provide a 4′ jump for a $3 fee.

That is why service businesses often feel like ‘they do too much for the money’ – but really they only have themselves to blame. Their value proposition is not clearly separated between different service levels.