Here’s a cautionary tale: In 2004, when online video provider Akimbo decided to combine a set-top box with a movie-downloading service, it seemed like the perfect offering. The product and service were inextricably linked—one was worthless without the other. Sales of the DVR would drive a steady revenue stream from subscription fees, and customers wanting the convenience of downloading videos would have to invest in the hardware. But the company stumbled when it priced the less-valued component of the bundle, com the set-top box, at a high $199, without understanding that the real profit potential was in the downloading service. Things went awry when the company charged users for its movie service. The shows were not top quality, and customers resented having to pay for them on top of what they’d already paid for the high-priced box. The offering failed, and the company went out of business in 2008.
These days, many firms are trying to mix products with services in an effort to boost revenue and balance cash flows. Hybrid solutions—products and services combined into innovative offerings—can help companies attract new customers and increase demand among existing ones by providing superior value. Such offerings are commonplace—think Apple (the iPod product combined with the iTunes service) and Xerox (copiers and printers bundled with maintenance or customer support services). For these and many other companies, hybrid solutions have spurred growth or helped reverse market-share or profit decline.
While the promise of combined offerings is great, it’s easy to get them wrong. The problem is that too many companies, expecting to catch the brass ring, don’t think through exactly how to structure, market, and sell their combined offerings. Over the past three years, we have analyzed more than 100 winning hybrid solutions from a variety of business-to-business and business-to-consumer companies. Our research shows that most of them stumble in one or more of four ways: failure to differentiate; failure to scale; failure to assess markets and prices appropriately; and failure to invest in the brand.
Before we look at these factors, let’s consider the common types of hybrid offerings.
