September 16, 2012

A different approach to increasing services margins

It is interesting how day to day incidents can teach you fairly advanced business concepts. Recently, we got our house painted. Painting is a fairly commodity skill set and fiercely competitive. There is a generally accepted price band and the customer would ensure that they pay within the band and not a rupee/ sq ft more than that. In this kind of an industry, as a painter, how do you make more money than others? To raise the rates that you charge for the same work, you would need to really differentiate yourself from others – and that may be quite a challenge. Not to mention the same drill you have to go with, for every client.

As the customer here, we were also offered special effects on some walls. We browsed through the catalogue of special effects and designs – and finally narrowed down on a couple of walls and the special effect that we need. The output looked great – but what struck me was that the additional effort spent to create the effect was only one hour for each wall! And the additional margin (net of extra material) was few thousand rupees!

We did not mind paying that extra amount as the output was really exceptional and the painter also made a sizeable additional margin (for the effort spent). What made this possible: New product/ offering (Royale play by Asian Paints), prepackaged combination options, standard tool kit for creating the effect and training a wider set of painters to be able to use all of these.

My primary work area being business consulting in the SCM software domain – I started thinking if we could do something similar. Software consulting services are fairly a commodity now and the competition on hourly rates is fierce. Can we then create an offering that is unique/ enhanced and we can charge a higher amount for that? Remember, the idea is to make it scalable and justify the additional effort vs. margin benefit.

This would involve creation of such an offering along with a list of prepackaged configuration options. This options list is very essential as the clients may not be able to visualize the output. In our painting example, we could not have visualized the output – nor can I explain it to anyone who has not seen these catalogs/ pictures.

The next step would be creating tools to standardize the output and training a large set of people. This will ensure repeatability of the process and scalability. Many unique services eventually die out as they as not made scalable – they remain the proprietary of their founders and/ or few highly qualified individuals.

This one incident did give me some good insights into a different perspective on competing in a already crowded marketplace. Let us hope this translates into improved margins. And hope it helps you too…

1 comment:

shanky said...

I think it would be very difficult to charge a premium for any kind of service offering, even if there is a valid differentiation. other can catchup or replicate.
Frankly I am surprised how Infosys has maintained such a margin for a long time.