A Practical Guide to Combining Products and Services

Here’s a cautionary tale: In 2004, when online video provider Akimbo decided to combine a set-top box with a movie-downloading service, it seemed like the perfect offering. The product and service were inextricably linked—one was worthless without the other. Sales of the DVR would drive a steady revenue stream from subscription fees, and customers wanting […]

by

Venkatesh Shankar, Leonard L. Berry, and Thomas Dotzel

by

Venkatesh Shankar, Leonard L. Berry, and Thomas Dotzel

From the Magazine (November 2009)

Summary.

Reprint: R0911H

Most firms are trying to combine products and services into innovative offerings in an effort to boost revenue and profit streams and balance cash flows. These hybrid solutions can help companies attract new customers and increase demand among existing ones by offering them superior value. Such offerings are commonplace—think Apple (the iPod product combined with the iTunes service).

While the promise of combined offerings is great, it’s easy to get them wrong. The problem is that too many companies, expecting to catch the brass ring, don’t think through exactly how to structure, market, and sell their combined offerings. Over the past three years, the authors have analyzed more than 100 winning hybrid offerings from a variety of B2B and B2C companies. Their research shows that most companies stumble in at least one of four ways: failure to differentiate, failure to scale, failure to assess markets and prices appropriately, and failure to invest in the brand.

The authors identify common types of hybrids: A flexible product-and-service combination allows buyers to customize their purchase. A “peace-of-mind” bundle offers the best of breed in both product and service. A multibenefit bundle offers customers an increasing number of add-on features or benefits. A “one-stop” bundle focuses on convenience shopping. The authors also offer a practical set of guidelines for identifying the opportunities to create a successful hybrid offering in your own company.

The Idea in Brief

• In tough economic times, companies need new ways to innovate and drive revenues. By combining a product with a service, or vice versa, firms can improve their bottom and top lines. However, if a hybrid offering is to be successful, managers need to understand which of four potential combinations is most appropriate.

• A “flexible” product-and-service combination allows buyers to customize their purchase. A “peace-of-mind” bundle offers the best of breed in both the product and the service. A “multibenefit” bundle offers customers an increasing number of add-on features or benefits. A “one-stop” bundle focuses on convenience shopping.

• Four rules help managers discover which hybrid combination is most likely to be successful for their firm.

Here’s a cautionary tale: In 2004, when online video provider Akimbo decided to combine a set-top box with a movie-downloading service, it seemed like the perfect offering. The product and service were inextricably linked—one was worthless without the other. Sales of the DVR would drive a steady revenue stream from subscription fees, and customers wanting the convenience of downloading videos would have to invest in the hardware. But the company stumbled when it priced the less-valued component of the bundle, the set-top box, at a high $199, without understanding that the real profit potential was in the downloading service. Things went awry when the company charged users for its movie service. The shows were not top quality, and customers resented having to pay for them on top of what they’d already paid for the high-priced box. The offering failed, and the company went out of business in 2008.

A version of this article appeared in the November 2009 issue of Harvard Business Review.

VS

Venkatesh Shankar (vshankar@mays.tamu.edu) holds the Coleman Chair in Marketing at Texas A&M University’s Mays Business School. Leonard L. Berry (l-berry@mays.tamu.edu) is the Distinguished Professor of Marketing and holds the M.B. Zale Chair in Retailing and Marketing Leadership at the Mays Business School. Thomas Dotzel (thomas.dotzel@mcgill.ca) is an assistant professor at McGill University’s Desautels Faculty of Management.

A Practical Guide to Combining Products and Services

The Idea in Brief

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