Bill It, Kill It, or Keep It Free?

In tough times, companies hunt for new sources of profitability and growth, frequently ranging far beyond their traditional offerings. Yet in doing so, many of them overlook opportunities for generating sales from services they’re already giving customers for free. Though it sometimes makes sense to stick with a free model, companies too often make that the default option. That’s a costly mistake.

The solution is easy to articulate but, naturally, much harder to implement. Simply put, managers must determine which services they can stop giving away and then start charging for them. We call this the free-to-fee, or F2F, transition. When evaluating any particular service, the challenge can be boiled down to this question: Should you bill it, kill it, or keep it free?

Drawing on insights from our research and consulting with companies across industries, we’ve developed a framework, explained below, for companies that aim to transition services from free to fee. For the past eight years, we’ve studied a variety of manufacturers and professional services companies and conducted workshops with hundreds of managers (see “About the Research.”), and we’ve seen ample opportunities for moving services from free to fee. Our research has focused on B2B companies, but its takeaways also apply to B2C companies seeking to monetize their free services. The challenge is especially acute for B2B companies, though, because their corporate culture is often rooted in selling products, which means that services tend to be treated as afterthoughts.

No company should try to turn every free service into a revenue stream. Nor should companies stop providing free services altogether or hand them all off to distributors, who may be able to deliver them more cheaply. Managers often have legitimate justifications for their giveaways. They may, for example, deliberately bundle goods and services to achieve better pricing.1

But many services are given away because of fear, inertia, or a lack of strategic thinking. A printing-machine manufacturer we worked with provided remote monitoring as a service to protect multimillion-dollar equipment. It considered selling that offering as a relatively inexpensive monthly subscription; the fee would have been only several hundred dollars. Fearing pushback from customers, an executive decided not to invoice for the service. Instead, he buried the cost in the overall margin of each machine sold. The problem with that is he may have ended up overcharging customers who didn’t need the service and thus risked losing their business.

Our three-step framework can help your company avoid such shortsightedness and plot its path from free to fee. The first step is to take stock of all the services you give away. Then you build action plans for pricing and selling services you’ve decided shouldn’t be free. And finally, you manage the inevitable resistance to change, whether from inside your company (especially from sales staff) or from customers and distributors.

Shifting to a Paid Model

When executives review their companies’ free services, they’re often surprised by how much potential revenue they’re sacrificing. In a two-day workshop with 12 country managers at a forklift manufacturer, we reviewed more than 80 services the company provided free of charge — and found that 22 of them offered real chances for revenue generation. Over six months, the company pushed 14 of these from free to fee. It started, for example, invoicing for on-site equipment diagnostics, which its technicians provided during customer visits. The individual fees were small, so customers gladly paid. In one test country, 80% assented, resulting in more than 2 million euros in additional revenues in the first year.

Diagnostics work is just one common giveaway; there are a host of others. (See “Services B2B Companies Tend to Provide Free of Charge.”) Companies do often have strategic justifications for their free services. Sometimes they aim to capture value elsewhere by securing customers’ goodwill and long-term business or gaining future product sales. But we’ve also encountered less strategic reasons for failing to charge for services.

One that we often hear is that a company must offer a service without charging because competitors do. Another is that customers will balk at paying. Some indeed may. Distributors may resist, too, seeing service provision as their turf.

But giving away services can send the wrong signals to important stakeholders. Among customers, it may contribute to a reputation for providing value for money, which sounds like a boon. But as customers grow accustomed to freebies, charging for any service becomes tougher, and potential revenue can slip away. Or they may assume that because a service is free, its value is limited.

Free services may also send the wrong signal to supply chain partners. A tube maker for the oil and gas industry provided advanced material calculations without invoicing customers. Its distributors offered the same service for a fee. The supplier’s intention — to help customers with their calculations — led to spats with the distributors, who felt they were being undercut.

Among employees, not charging for services can create a vicious cycle. Like customers, they may assume the service isn’t worth much of their time or effort — their attitude can become, “If it’s free, why bother?” Plus, without charging, companies often lack the funds to invest in service that stands out from competitors’ offerings and adds value for customers. But a fee creates an opportunity to differentiate — and an expectation that good enough won’t suffice. Invoicing can help instill a culture of striving for service excellence.

Consider the following example from the tube maker mentioned above. The company had provided free training to customers, an activity considered by many staffers to be an annoying time sink. Its trainers squeezed the development and delivery of classes into already crammed calendars. As should come as no surprise, the quality of the programs was poor, and neither the company’s employees nor its customers were satisfied. The result was a vicious cycle. Trainers didn’t invest enough time, and customers didn’t take advantage of the low-quality classes — which sapped the already low enthusiasm of the staff.

A much better alternative is a virtuous cycle in which a company moves services from free to fee when customers’ needs and the company’s strategic goals call for that approach. This creates a situation in which employees have the necessary incentives and support to deliver great service. Once the tube manufacturer realized the free training was compromising the quality of its educational programs, it developed, with professional assistance, a for-pay program that squarely addressed customers’ needs. The improved training led to the creation of a certification for customers’ employees, stimulating even more demand. (See “The Vicious Free Cycle” and “The Virtuous Fee Cycle.”)

1. Take stock: What’s your service inventory? The first critical step in an F2F transition is to inventory all free services performed by your company. This raises awareness about the sheer number of freebies the company provides, often without much thought beyond trying to please customers. With a comprehensive inventory, you can identify best service practices across business units and territories and eliminate inconsistencies.

Not every service is suitable for shifting from free to fee. A systematic classification helps distinguish which ones are. All free services should be placed into four categories: profit drains, which don’t create value for customers and should be abandoned; distributor delights, which customers do value but third parties would do a better job of delivering; competitive weapons, which need to be offered for free as strategic differentiators; and gold nuggets, which can be delivered in-house and customers are willing to pay for.

2. Make a plan: How will you mine for gold nugget services that can generate revenues? Gold nuggets — as their name suggests — aren’t easy to find. Unearthing them can require prospecting. And before a nugget produces revenues, it often must be refined. You may have to change the service’s design or how you convey the value proposition to customers. To make the case that customers should pay for services, companies must document and clearly communicate the value they are providing. Yet many fail to collect and analyze the necessary data.

You may also need to figure out how to differentiate the service from competitors’ offerings. For example, a supplier of industrial consumables we worked with gave away inventory management services, a common practice in its industry. Customers, for their part, failed to perceive differences across vendors and were reluctant to pay for the service. So the supplier decided that basic inventory management would continue to be free for every customer, and it identified value-added features that could be combined into fee-based options, all the way up to a premium inventory management system. The top-tier service included real-time online access, consumption reports, best-practice benchmark analyses, and individualized alerts sent to the smartphones of customers’ employees.

Some customers stuck with the basic offer. Others wanted the best. A majority opted for an intermediate offering — and paid an intermediate price. Everyone benefited. The supplier improved its margins because the free service was cheaper to provide, thanks to its basic specifications, and the for-pay options generated additional revenue. Customers were more satisfied because they could choose the level of service they needed.

3. Drive the change: Who’s making this happen? The third step is implementation, which will require some new skills. Pricing excellence is a capability that must be nurtured, because pricing for services differs from pricing for products.2 Many companies fail to recognize that. The problem is exacerbated when people don’t embrace the need for change.

In working with B2B companies over many years, we have observed that resistance to charging often originates within the company, rather than with customers (though customers also must be won over). A manager in a cable-manufacturing company explained: “If our people spent half of their energy on turning around those services where it makes sense to introduce a new pricing model, rather than wasting all their time fighting it, we would long have moved to addressing other challenges.” Here are objections we’ve frequently heard:

• “We have always provided training for free. Customers won’t like the change.”
• “Our competition doesn’t invoice for technical drawings.”
• “Charging for services will turn our distributors against us.”
• “We have no idea what this service is worth to customers.”

Why are these excuses so common, aside from the fact that it’s human nature to resist change? For one thing, managers don’t want to hold people accountable for service revenues — it’s more work and, in companies focused on products, viewed as a distraction. For another, salespeople want to keep doing business as they always have, and free services help them close deals. What’s more, field technicians often don’t share information about F2F opportunities, because they haven’t been alerted to their potential or given the right incentives. F2F initiatives thus often get stuck in “ceremonial adoption”: Everyone endorses the idea, but no one does enough to make it happen.

But those problems can be addressed.

Address the sales force first — that will help bring managers on board, too. To prevent ceremonial adoption, companies must first overcome resistance from salespeople. Even the savviest F2F initiatives will fail without their buy-in.

We’ve found that salespeople resist charging for services for several reasons. They often believe their companies’ prices are already high, and customers naturally concur. But across industries, research has shown that sales reps overestimate prices; they think their companies’ offerings are more expensive than they are. Likewise, clients understandably object to paying for services they’ve received for free, even when fees are reasonable. Some salespeople also have a self-serving bias, attributing lost deals to pricing rather than to their approach.

To counter these tendencies, managers should provide data on both customers’ value perceptions and competitors’ service offerings. But they should also be honest and acknowledge that closing sales can become tougher when services carry fees, especially in the early days of adoption. At the extreme, longer and more complex negotiations may lower individual reps’ sales volumes, bonuses, and commissions. Managers must address this legitimate concern. In some cases, incentives for the sales force have to be adjusted and greater investments in training have to be made. Managers also must evangelize for the overall goal by stressing the upside potential of F2F — better service delivery, happier customers in the long term, and the potential for higher revenues. Communicating the overall vision and goals will help overcome resistance to change.

Salespeople also sometimes fear that, once customers must pay for services, their expectations will increase, which could lead to dissatisfaction. Difficult conversations with customers do arise as a make-or-break point in nearly every transition we’ve observed. Role-playing in realistic sales scenarios with feedback can help prepare reps for those conversations. Sales reps share best practices with one another, and their managers should celebrate their early successes. Be aware, though, that not all salespeople will be able to make the transition. At one company we worked with, the sales force simply couldn’t overcome its reluctance about charging for services. The company had to hire new reps. It brought in people with consulting backgrounds who were used to charging healthy fees for services.

Manage relationships with supply chain partners. An F2F transition can strain partner relationships, too. In markets in which companies rely heavily on distributors, companies risk channel conflicts unless they carefully communicate what they’re doing and how it can benefit everyone.

When a European manufacturer of construction materials faced stagnant product sales, it identified a host of value-added services it could provide for customers. These ranged from subassembly of components to on-site delivery of assemblies. Its distributors already provided many of these services. As a result, when they heard the plans, they were furious, accusing the manufacturer of undermining them and threatening to partner with its competitors. Without a thought-through communication strategy, a worthwhile, even necessary, initiative triggered blowback.

But when companies carefully consider the implications of their F2F moves, they may actually strengthen their channel relationships. A supplier to global logistics companies identified international consulting as a service that intermediaries didn’t provide but customers were willing to pay for. Its international customers wanted to receive the same service level across all country units. Local distributors, unable to work across national borders, couldn’t provide the consistency or quality required. So the company shared with distributors its intentions to do the consulting and explained how they could participate.

Although the distributors could no longer sell some services locally, they gained a new opportunity to contribute to service execution, for which they then invoiced the company, not its customers. In this case, what could have been a conflict ended as a shared victory.

Sustaining the F2F Journey

Applying the F2F framework gets you going in the right direction, but then you must sustain your free-to-fee push. Transitions often start with hard numbers, like cost and price data, contribution margins, and market-share statistics. Managers have been schooled in the idea that you can’t manage what you don’t measure. But as projects progress, the need for cultural change emerges. Soft requirements, like creating price confidence, instilling a sense of urgency, and sticking with the plan, even when the inevitable objections and conflicts arise, become keys for success.

So companies must continually educate managers and employees about why the transition is needed and how they should support it. If they lose sight of that, the company will soon be back where it started, providing too many “free lunches” for customers and missing opportunities to capture revenues and profits.