Common Product-Service Business Strategies

It’s a common business strategy to integrate a physical product with a service. In many ways, it’s been that way for over a century, but with an even tighter possible integration now that the service can transform the way the physical product works (via firmware updates, new service agreements, applications, games, content, etc.) There seems to be a few common business strategies for these product-service combinations.

The first type is where the main product is expensive and the service is cheap (and perhaps even free). This is a model that goes deep into the past: likely as far back as Kodak selling an expensive camera and the film (rather) inexpensively. This is the iPod/iTunes store model. Sell the expensive device, then make the stuff that goes in it or the stuff that makes it work cheap. Kindle works this way, as does TiVo.

The second type takes the opposite strategy: sell the main product cheaply (or give it away), and make the content/limited additional resource/service expensive. This is the standard model for mobile phones: give away the phones or sell them at a loss, and make up for the loss by attaching an expensive service. Most printers work this way too: sell the printer cheaply, but make the toner expensive. Cable TV also uses this model. To use another camera example, the Polaroid camera was like this as well: inexpensive device, expensive supplies to make it work.

The iPhone is an interesting hybrid. The phone is sold cheaply but with an expensive service, then via a second service, you can also buy inexpensive items (apps) to fill it up. It’s a real win-win strategy and no wonder companies like Nokia are scrambling to replicate it.

Cheap products with cheap services seem to be pretty limited to objects like toys (e.g. Webkinz, Barbie Jet Pack sold separately) low-end consumer electronics, and digital products such as web/software products, where the cost of making additional products (once the original is made) is low. Web products can also move up into the second type of strategy (by having users buy the so-called “pro” account).

Over time, however, most product-service combinations will end up as cheap-cheap, as both the product and service become more common. Cameras and film are now both inexpensive, for instance. (“Film” itself usually being measured in MB these days.)

Considerably more rare (to the point that I can’t think of any examples in the mass market space) is the strategy of selling an expensive main product and also an expensive service along with it. This is probably more common with specialized products like medical devices and high-end, professional level products. With high price points on both sides, the customer base definitely thins out.

The type of business strategy your company is trying to leverage is an important thing to understand while designing a combined product-service. The kind and type of product and service you will design could vary significantly depending on the kind of strategy your organization is pursuing.