Service business ideas are a dime-a-dozen. The question is: Which ones will be successful?” One way to find out is to implement the idea. Another is to do the math before taking even the first step.
Watch this comic scene from Opportunity Knocks in which a businessman uses careful logic as he stumbles into a business venture.
Your service may not be what you think.
Consider, for example, how much would someone be willing to pay to listen to Beethoven’s Ninth symphony? Would it be:
- $1 for an MP3 on iTunes?
- $20 for the CD?
- $200 to hear the NY Philharmonic live?
Differences in availability, fidelity, and/or delivery method drive the price one is willing to pay. But price has little to do with the cost of creating the performance. Consider that:
- It costs almost as much to create each of the three versions.
- Producing a high-quality performance of the Ninth is expensive as it requires a large chorus and a large group of highly trained musicians.
- It takes as many musicians in 2017 to perform the Ninth as it did in 1824.
The cost of training musicians has increased over time and elite musicians are scarcer than ever; both of which drive higher costs to find and employ them. In their just posted IntelliVen Insight, Your Service Business May not be What You Think, Cris Sievenpiper and PeterD discuss some key challenges of service businesses, especially those prone to Baumol’s cost disease.
KEY LESSONS
Know what to watch.
The service offering concept should include a clear definition of costs and of value from the perspective of both the provider and the customer. The ratio of cost to value should be carefully measured and appropriate actions taken as relevant measures come into focus. Note especially that costs and benefits can, and often do, change, including the customers’ perception of value, as circumstances, perspectives, and world views evolve.
Consider even that a cup of coffee can be valued differently by different people in different situations and at different times. Does a customer value speed over price? Is s/he looking for a jolt of caffeine? Or perhaps they are just looking for a clean bathroom or a welcoming spot in which to lounge or work.
Note that delivering a cup of coffee quickly is a skill and process problem and connectivity and table space with each cup is primarily a capital cost. Consequently, appealing to different value propositions may have very different delivery cost structures.
Be cost conscious.
Service businesses are often personnel and skill intensive. It can take months to train a Barista. It can take a year for them become efficient. Starbucks considers the process so proprietary that they prohibit photographs. The cost of delivering a unit of value in a service business tends to go up over time.
Unlike manufacturing, it is difficult to substitute machines for people. Unlike manufacturing, service production costs tend to increase over time. It is difficult to maintain profitability when the cost of producing value rises over time even if the value remains constant. The cost of beans and the value of a cup of coffee have remained relatively constant over time while the price has steadily increased.
Think twice about price.
Profitability (i.e., Profit divided by Revenue) is a measure of the efficiency with which a business turns revenue into profit. If coffee sales are a profit center, then price must increase over time just to maintain profitability as wages rise.
Some service businesses innovate by changing how they monetize customer value. For example, some shops may set coffee prices below what it would take to be profitable in order to boost customer traffic that generates greater revenue from the sale of food items.
Avoid pitfalls.
It is easy to fool yourself into thinking that any business idea is a good one and it is especially easy to do in a service business. Consequently it is vital to pay close attention to underlying assumptions and details during service concept design and development. It is also important to continuously monitor and test those assumptions and details during operations.
Click the cover above to read the full Your Service Business Might Not be what You Think Insight.
ABOUT THE AUTHOR
Crispian Sievenpiper is a Systems Engineer focused on service delivery for software intensive systems regulated environments. He has worked primarily on medical imaging device service operations. He has also done research in the economic value of new healthcare technologies and hospital operations.
He earned his PhD in System Engineering from the University of Wisconsin – Madison, an MS in Statistics from SUNY- Buffalo, and an MS in Computer Science from SUNY – Albany. He has taught quality systems and computer technology in corporations and university undergraduate and graduate levels.
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