Augmenting Products with Services

Introduction

Earlier we touched on “augmented products,” which are tangible products, along with all of the services that support them. When companies devise product strategies and decide whether or not to augment their products with additional services, they typically evaluate whether the following criteria will be met:

1. Services can provide a more complete and satisfying customer experience.
2. Services can increase the total revenue for each sale.

Improved Customer Experience

Relatively speaking, goods tend to be more fixed, and services are more variable. If you’re trying to control the quality of a product, the “fixedness” of goods is obviously problematic—perhaps you’ll need costly new equipment or production methods or a new product design to make improvements. If you’re focused on personalizing the customer experience, though, the variability of services can be a tremendous benefit.  A company can provide a range of services around a tangible product—whether that product is a good or a service—thereby providing an enhanced experience for the customer.

Zappos provides the quintessential example of an augmented product that adds tremendous value by offering an improved customer experience. You’ll recall from the module on corporate strategy that Zappos sells shoes and apparel online. The tangible products are the shoes and clothing items that are delivered to the customer’s doorstep. The company has a broad selection and has invested significant capital and effort to create an online shopping experience that is easy and pleasant. The company’s tangible products are very good.

However, Zappos is not the low price leader. In fact, its prices are often 5–10 percent higher than other online shoe retailers. Nor does the company do a lot of national advertising to build its brand. Instead, Zappos has focused on creating a “wow” customer-service experience that not only exceeds customers’ expectations but brings people back again and again. In fact, the company’s goal is to be the company that provides the best service online, period—not just in shoes, but in any category.

When customers buy shoes online they expect the product to be accurately presented. They expect to receive what they order in a timely fashion. They expect to receive help with any questions and have any problems with orders resolved. These are fairly standard customer-service features that customers expect along with the delivery of their shoes or clothes. Zappos goes a step further, though, to provide an even higher level of service to all its customers—at no extra charge:

• Zappos has a 100-percent-satisfaction-guaranteed return policy—at no cost to the customer and no complaints about items returned.
• Customer-service employees encourage customers to order two sizes of shoes to make sure they get a pair that fits, and return the other.
• The company frequently upgrades orders from valued clients to one-day shipping and sends personal notes expressing appreciation for their business.
• Zappos posts a support phone number on every page of its Web site. The company has found that only 5 percent of sales come through the phone, but when customers do call, there is an opportunity to create a deeper relationship.

As a result of these services, Zappos’ augmented product is significantly more valuable and more differentiated than its tangible product, and it’s helped to set Zappos apart as a company that treats its customers well.

Increased Revenue per Customer

It is often the case that augmented services do create new revenue opportunities for the company. Some customers want a different level of service and are willing to pay more for it. By adding services a company can customize its product offering for the segments that desire something more.

Many of these services have become so standard that we hardly think about them. Most electronics come with an option to buy an extended warranty or a higher level of customer support. Airlines provide in-flight meals and drinks; many hotel and rental car packages are essentially augmented products. Many online services such as LinkedIn and the Slack team messaging service offer tiered packages, or offer a free version and a version that includes additional services for a fee.

These services can prove to be highly profitable. Despite LinkedIn’s free offering, 16 percent of its three million users pay for premium services.^[1] In 2014, airlines earned $38.1 billion in non-ticket revenue.^[2]

Companies often struggle to determine when it is best to add a fee for additional services and when the augmented services should be a free extension of the tangible product. The question often ties back to the company mission and objectives, as well as to the competitive landscape. If Zappos charged customers for the various services the company provides, customers would probably feel irritated instead of pampered. Also, Zappos’ extensive customer services are core to the company’s mission and strategy. If American Airlines decided not to charge the baggage and change fees that Delta charges, then it would likely need to recoup those costs in higher ticket prices for all customers. Generally when customers purchase tickets, they consider the base ticket price and not the price that includes all fees. As a result, American would struggle to compete on ticket price in a highly price-sensitive market.

Augmented services give marketers a valuable approach to customizing products and better meeting the needs of all target customers.