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The Unexpected Price of Free Services

January 5, 2018

As a kid, I delivered newspapers seven days a week. When a wheel brace broke on my Radio Flyer wagon, I had a real problem. Fortunately, my route went by a welding shop and I limped the wagon in. The owner paused what he was doing and did a quick weld that fixed the problem.

 

As the part cooled, I reached into my pocket and asked how much I owed him. The man smiled and waved my money away. “Tell your dad if he ever has a welding job, bring it in.”

 

Free By Choice—or Habit?

 

Not everything we do for customers / clients and prospects has to be viewed through a transactional lens or have a price. Including a limited amount of ancillary services into a contract at no charge, or providing a free sample of services, can build awareness and relationships. Done right, a free service can make an impression that sticks in memory for decades.

 

Done wrong, however, free services can have profit-killing effects. In particular, including too many services in your base prices can easily result in:

  • Being overpriced to accounts and prospects unwilling to pay for services they don’t think they need

  • Under-serving and underpricing other customers who are more results-sensitive and are willing to pay more when they see the value

Either way, a misaligned offering will hold down your sales and margins.

  • Sending customers the wrong signal about the cost of your resources, encouraging overuse of  scarce resources that could be used more profitably

  • Incurring costs that won’t be recovered

 

Case: I met an equipment manufacturer a while back that hoped to land a big corporate prospect, and wound up providing over $200,000 worth of upfront product engineering. The hope was that doing so would one day pay off big. It didn’t; the new customer proved intensely price-sensitive and never became profitable.

 

At least that decision was a conscious bet on the future. I’ve also seen companies provide exceptionally valuable services for free—not consciously, but because they’ve always done it and no one questions it.

 

Even when margins are high, including too many services in your base prices is far from ideal. It’s downright untenable if customer and competitive pressures are compressing margins on core products or services.  What’s more, business that’s presently profitable can quickly go under water next time the economy turns south and volume drops.

 

Unbundling & Pricing Your Services

 

There’s good news, though. You can remove this barrier that’s holding down your company’s profitability.

 

Does your business wrap expertise around your core products or services to achieve a valuable result? Solve or avert an expensive problem for the customer?

 

If so, you have an opportunity to grow sales and margins by pricing one or more services that you’ve been giving away. Here are three strategies you can combine:

 

1. Unbundle One or More Services

 

Put a small team together and identify the activities involved in selling and serving customers.

 

For example, if your business customizes or configures products to meet customer requirements, such service activities could include:

  • Helping customers choose the right options and specifications to meet their needs

  • Defining product dimensions, features, color and finish, or computer system compatibility

  • Coordinating the timing of delivery and installation

If your company provides services only (no products) or an intangible product such as cloud software, service activities could include:

  • Start-up support including training, data migration, etc.

  • Tech support

After going through this process, you can spot opportunities to unbundle one or more services where there’s reason to believe that customers see value.

 

2. Price Unbundled Services

 

Your prices are probably based on marking up from cost, and adjusting those prices in customer negotiations. Value to the Customer should be a major consideration, but very likely isn’t systematically incorporated into your pricing decisions today. Unbundling one or more services can be a great step toward collecting for the value your company provides.

 

In some cases, you may decide that you can charge for a service. Alternatively, you can offer up to a certain amount of the service for free, and charge for any usage above a cap. Finally, you could state a dollar value for it while noting that you aren’t actually charging the customer for it.

 

Pricing one or more services that you’ve been providing for free can help you to:

  • Avoid unrewarded costs

  • Become more competitive with customers that are more price-sensitive

  • Get paid by service-sensitive customers for the extra value you’re adding

 

3. Incorporate Value into Your Messaging

 

Among the most common reasons why B2B companies fall short of their revenue and margin growth goals: Their sales teams lack a compelling answer to the prospect’s question of, “Why should I buy from you—especially when your offering is more expensive?”

 

If your sales team doesn’t have a great answer at this moment of truth, the consequences can be dire:

  • Fewer yeses

  • A slower sales cycle

  • Pricing pressure and squeezed margins

 

Prospects and customers often underestimate the value you’re providing, or take it for granted. The unbundling work described above can help to remedy this. Outline the “so-what” of your services for your customers. Does the service help them maintain and grow their sales and margins? Reduce operating expenses or assets required to run their businesses? Reduce risk?

 

Next, develop an estimate of the financial impact you’re enabling your customers to achieve. Defining that allows you to train your sales team to deeply understand and communicate the dollars-and-cents value of your company’s solutions and outcomes

 

What Comes Next

 

Do you have services you’re giving away, at the same time you’re fighting for every dollar of profit?

 

I recognize that starting to price services that you’ve been providing customers for free isn’t easy. And few companies know how to pick the right services, for the right customers, under the right circumstances.

 

If you sense you have an opportunity here, and can use help in grasping it, let’s begin with a complimentary consultation call. Just follow this link to schedule a time with me.

 

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Bob is a CMO at Chief Outsiders, a national management consulting firm providing on-demand or fractional Chief Marketing Officers to mid-sized and growth companies. www.chiefoutsiders.com 

 

Bob helps companies find their hidden value, get that value recognized by customers, and price to get paid for it. Author of Daring Caution: The Executive’s Guide to Pricing Improvement, he’s an engaging consultant, speaker, and workshop leader.

 

Earlier, Bob was founder and CEO of a venture-funded logistics service provider; VP Marketing for Wickes Inc.; and held increasingly responsible management positions at General Electric Company (on GE’s Corporate Staff, and in three of GE’s operating businesses).

 

Bob has an MBA from Dartmouth’s Tuck School of Business and a BA in Economics from the University of Maine. You can reach him at BSherlock@ChiefOutsiders.com.

 

 

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