Service and the Business Models of Product Firms: An Empirical Analysis of the Software Industry

Management Science, Forthcoming

34 Pages Posted: 6 Dec 2013

See all articles by Fernando Suarez

Fernando Suarez

Northeastern University, D'Amore-McKim School of Business

Michael Cusumano

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Steven Kahl

Dartmouth College; Dartmouth College - Tuck School of Business

Date Written: November 11, 2011

Abstract

Some product firms increasingly rely on service revenues as part of their business models. One possible explanation is that they turn to services to generate additional profits when their product industries mature and product revenues and profits decline. We explore this assumption by examining the role of services in the financial performance of firms in the prepackaged software products industry (SIC 7372) from 1990 to 2006. We find a convex, non-linear relationship between a product firm’s fraction of total sales coming from services and its overall operating margins. As expected, firms with a very high level of product sales are most profitable, and rising services is associated with declining profitability. We find, however, that additional services start to have a positive marginal effect on the firm’s overall profits when services reach a majority of a product firm’s sales. We show that traditional industry maturity arguments cannot fully explain our data. It is likely that changes in both strategy and the business environment lead product firms to place more emphasis on services.

Keywords: services, profitability, industry maturity

Suggested Citation

Suarez, Fernando and Cusumano, Michael A. and Kahl, Steven, Service and the Business Models of Product Firms: An Empirical Analysis of the Software Industry (November 11, 2011). Management Science, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2363337 or http://dx.doi.org/10.2139/ssrn.2363337

Fernando Suarez (Contact Author)

Northeastern University, D'Amore-McKim School of Business ( email )

220 B RP
Boston, MA 02115
United States

HOME PAGE: http://www.fernandofsuarez.com

Michael A. Cusumano

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

E52-555
Cambridge, MA 02142
United States
617-253-2574 (Phone)
617-253-2660 (Fax)

Steven Kahl

Dartmouth College ( email )

100 Tuck Hall
Hanover, NH 03755
United States

Dartmouth College - Tuck School of Business ( email )

Hanover, NH 03755
United States

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