Revenue models: Service-based revenues

Companies deriving revenues from service offerings charge customers based on time, often on a project basis or as a retained service provider.

Applicable businesses/products for a service-based revenue model

Companies operating on service revenues are common in a broad range of industries including information and communication technology (ICT), cleantech and medical devices. Service revenues often accompany product sales or other types of revenue streams such as:

• Implementation fees
• Consulting fees
• Customer support fees
• Customization fees

Customer relationships

Customer relationships are strong in the case of service offerings. Revenues in this model depend on the seller’s ongoing ability to solve problems and meet client needs. To preserve strong customer relationships, service providers must manage client expectations.

Marketing issues related to the service revenue model

To market effectively, a service provider must combine skilled networking with highly positive recommendations and referrals. Since direct selling drives revenue, the company should also establish and maintain a high level of professional credibility, and employ an extremely capable, customer-focused sales team. Generating sales leads can occasionally be automated, but usually the services revenue model hinges on the sales team developing relationships.

Operational implications

Service providers need to optimize service delivery, and so should direct operational focus on training and deploying high-calibre staff. To develop high-performing staff, service companies need to provide effective training and professional development.

Financial and strategic implications

It can be difficult to quantify the service model for financing or capital investment needs, because the model relies heavily on the quality of the company’s human resources. This can make it difficult to obtain sufficient financing. In general, service companies focus financial considerations on cash flow.

Key metrics

For service companies, the most important metrics to watch are customer satisfaction and billing rates.

Costs and benefits of the service revenue model

A key advantage of the service revenue model is that once a sale closes, revenue starts to generate almost immediately. Depending on the company’s area of expertise, certain services can command high rates and be highly profitable. Unfortunately, the provision of high-quality service can prove difficult to scale.