This article is for executives and services leaders in organizations that have given away services to customers in the past and now want to charge for them. Your task is more difficult compared to those who have little history providing services because you have trained your customers and your salespeople that services are free, and since they are free, they can’t be worth much—be prepared for some push-back! I’ll share with you five strategies for making this transition. I’ll recommend the one I find most viable in most situations, and then outline best practices to make it work.
The Four Strategies in Transitioning from Free to Fee
#1: Don’t Do It!
Just kidding, but when you realize all the potential grief you may get for leading this change, you may wish you hadn’t started.
#2: Flip the Switch
This strategy is based upon picking a date in the future and letting everyone know that from that day on, the rule is that all services have fees attached. The positive side is that it is simple, it is “fair,” from the standpoint of treating everyone the same, and if successful, it quickly will add a new revenue stream.
However, this is a really hard strategy to implement and manage. Within minutes of the announcement, the phones will start to ring as sellers call sales management, sales management calls your executives, and the execs call you (the services troublemaker, as you are beginning to be called) all saying the same thing: “Yes, we understand the need to charge for services, and as a rule I totally support it, but in this case it is not a good idea because blah, blah, blah….” (The blah, blah, blah could sound something like: “We will lose a big pending sale because of our price.” “The competition gives services away.” “Doing this will allow the competition a wedge inside the company.” Or, “The client will drop us.”)
If you are initially able to fend off the people internally who are trying to twist your arm, the salespeople will collude and plot with customers and soon the customers will start calling you, either pleading or threatening or both. If you don’t meet their demands, they will call senior management, and senior management will cave. Therefore, the rule of everyone paying for all services quickly becomes the exception, as more and more customers are waived from having to pay. You’ll spend all your time in defensive posture, making it hard for you to get the real work done. From the voice of experience, don’t do it. You will be hated, non-productive, and not much fun to be around.
#3: Grandfather Existing Customers
Under this strategy, all old customers are “grandfathered in” and will continue to get services for free; however, all new customers are tagged to pay. The strength of this is that you don’t rock the boat with the installed base, and new customers don’t have a past history to compare what was and what is. Sold correctly, many customers will pay, providing you with new revenue. The problem here, of course, is that customers talk, and new customers who find out about their second-class status will not be happy and will see this approach as unfair and view themselves as victims. They will complain, and if they do it long enough and loud enough, they will probably get services for free as well. Again, it will take a percentage of management time to deal with a problem that never goes away.
#4: Launch in New Markets
This is a variation of #3, above, where all old customers are grandfathered in. However, if you are opening up new geographies or new market segments, this strategy can work, as customers in these spaces probably will be less likely to be in contact with your old customers. Plus, you can make the case with some credibility that their situation is different and justifies that you charge for service. This approach is more feasible than #2 or #3, but still is a challenge to manage. Again, in most cases I do not recommend it, but it can work pretty well in some situations.
#5: Productize the Old and Sell the New
This is the strategy I recommend almost all the time. The problem with #2 and #3 (and sometimes #4) is that it triggers a powerful, negative psychological response—people will work for gain, but fight to maintain. In other words, people will pay or expend effort if they feel they will get something of value from it, however, they will put up quite a stink if they feel that something is being taken away from them. Think of your reaction if your bank starts charging you for checks that used to be free, or your airline starts charging you for checking bags, or pillows, or blankets, or bottles of water.
The beauty of this strategy is it takes nothing away from the customer or the seller. In this scenario, all the services that have been given away continue to be given away in a cheaper, more manageable fashion, but in addition, a new portfolio of value-adding services is developed, marketed, and sold. The other very positive psychology here is that people are now given an additional choice, and people like choices, as it puts them more in control. The challenge is that this takes quite a bit of work in the two areas described below:
1. Productize the old. Here the focus is to standardize the types of services that have been given away in the past to minimize the cost of these services and create a comparison that will make the new, fee-based, value-added services seem very desirable. For example, in the past, hoping to land a deal, the sales folks may have given away assessments that had no definition of time or quality. In other words, sales would have a pre-sales specialist do it or someone from the professional services group do it, or maybe they would even do it themselves. It was based upon the availability of qualified people and the internal persuasion skills of the seller.
Depending on the situation, it may have lasted one day to three days at the customer’s site. The quality of the assessment was totally dependent on the person performing it. So the shift might be from an ill-defined, get it done when we can, at the quality level of whomever we can get to do it, on-average five-day assessment, to a one-day virtual assessment covering the 10 most important areas delivered in a standardized, professional document conducted by a qualified, trained professional. This new service and the other productized services (e.g., Quick Start Installation for a software product, online core training for a customer administrator, etc.) are developed by services and marketing, but are categorized as a cost of sales and owned by the sales function. This should be done for all services that have been given away.
2. Create the new. Building a high-value portfolio of services offerings (one that customers want and will pay for and you make good money on) takes considerable effort. Plus, correctly defining, packaging, and pricing these services may take skills not currently available in your organization. However, it is the key to making this free-to-fee strategy work. Find people knowledgeable in services marketing, provide them an adequate budget, and take the time to do it right (allow six months to build the core offerings). Customers will quickly see the value and open up their pocketbooks.
Want to do it right the first time? Follow these best practices.
Best Practices in Transitioning from Free to Fee
Radically change the selling compensation plan.
This is really quite simple: Change rewards from maximizing sales volume to maximizing profitability of the total sale (or at least meeting a minimum profitability benchmark). If enforced, those same sellers who wouldn’t think twice about throwing in a year’s worth of support or 100 hours of consulting to clench a deal, now (with calculator in hand) will approach every sale from a different perspective. If they decide to give away or discount services they do so at their own peril, as they endanger taking their spouse to the President’s Council trip in Barcelona or jeopardize maxing out their total compensation. Of course, two things must happen, and they are not easy to do.
1. Get the executive team to agree to change the sales incentive focus from driving volume alone to driving profitable revenue. It requires a fact-loaded, everybody-wins business case to sell this shift (plus patience). It also raises the important discussion of blended margins and the overall profitability of solutions sales. Once senior management sees the overall financial impact, they will become true believers of the cause.
2. Make sure that the sales force is capable of selling services appropriately—could they do it if you put a gun to their heads? If not, train and coach, train and coach.
Partner with the vice president of sales to determine acceptable giveaways.
Yes, you should charge for services but there will always be exceptions.
Make it a mandatory job requirement that your sellers present the benefits of services at the time of product sale, and customers have to say no not to buy them.
A common but powerful example is when buying products online, the customer must accept or decline a services contract before completing the product buying transaction.
Trust but verify.
Use follow-up, customer satisfaction phone calls to confirm that this took place and report this data throughout the organization. Letting go of a seller who does not follow this policy sends a very strong message throughout the organization.
Once your sellers personally see the need for selling services appropriately and have confidence in their services selling capabilities, giving services away will become the exception, not the rule.