Prune Your Service Portfolio: Which Services Do Not Pay Off

Why offerings grow and almost never shrink

Every service in the offering once had a good reason. A customer asked, an employee could do it, a competitor offered it. New services are therefore added quickly. Ending a service, by contrast, is unpleasant: it feels like a step backward, a customer might be disappointed, and after all the service used to work.

Bauer and Turčínková (2020) cite an observation that describes the problem well: new products have glamour, while ending existing products is regarded as drab business. The guiding question of this guide is: how can an owner tell which services do not pay off, and how can they end them without damaging customers and reputation? To answer it, we first clarify why services compete for resources, then what research says about the triggers for elimination, and finally set out a matrix for the decision and a process for implementation.

Every service you keep without testing it is paid for by another one.

Basics: services compete for scarce resources

Bauer and Turčínková (2020) take up an idea from German marketing literature: a company’s products are always in competition with each other. They compete for scarce resources such as production capacity, marketing budget, or financial means. In a small service or trade business these resources have different names but work the same way: specialists’ working hours, workshop space, inventory, training effort, and the owner’s attention.

The second basic concept is the product life cycle. It describes how a service is typically introduced, grows, matures, and finally loses demand. In the last phase, revenue and returns fall. It does not automatically follow, however, that every service in this phase must be cut. That is precisely the finding of the research described in the next section.

The third concept is contribution margin. As in the other articles, this is revenue minus the costs incurred directly by the job, namely materials, third-party services, and hours worked. For pruning, the contribution margin per hour worked is more meaningful than the contribution margin per job, because specialists’ hours are usually the scarcest resource. How to determine it is shown in the guide contribution margin per order.

The mental model: the four triggers according to Avlonitis

In the early 1980s, George Avlonitis studied why companies in the British engineering industry drop products from their range. He found that falling sales and profits are not the only deciding factor and grouped the reasons into four categories. Bauer and Turčínková (2020) asked about the same reasons again in 102 personal structured interviews with German mechanical engineering companies and compared them with the British studies by Avlonitis (1984) and Hart (1988) and an American study by Mitchell and colleagues (1998).

The result of the German study is remarkable for how unremarkable it is: the reasons matched those from Britain and the US closely. The authors conclude that the triggers for elimination hardly differ over time or between economies. The study concerns mechanical engineering companies and relies on self-reports. There is less data for service and trade businesses. The four groups can nevertheless be transferred well because they ask generally about returns, resources, market, and alternatives.

Two views: saving complexity or preserving knock-on business

Complexity argues for ending. Every additional service needs knowledge, materials, templates, prices, and explanations. These costs appear in no single line of the accounts; they are spread across all jobs. The case study Lego 2004 shows how variety that grew over years can get a company into difficulty and how returning to the core made a new beginning possible.

Knock-on business argues against hasty ending. A service with a weak contribution margin can bring customers who then buy profitable services. Weekend emergency call-outs may not pay off on their own but secure maintenance contracts, because customers want a provider who also comes in an emergency. Muir and Reynolds (2011) therefore stress that product deletion decisions touch strategic and cultural as well as tactical questions.

I consider both arguments right, but not equally frequent. In most offerings that have grown over time, there are more services without knock-on effects than with them. The knock-on effect is a good argument if it can be shown, for example by customers of one service demonstrably buying others too. It is a weak argument if it is only assumed.

The pruning matrix: testing contribution margin and knock-on effects together

The pruning matrix is the tool of this guide. It combines the financial view with the knock-on question. Each service is classified by two features: how high is its contribution margin per hour worked, measured against the business average? And can it be shown that it brings other, profitable jobs in its wake?

In the example, emergency call-outs are well below average. Whether they stay depends on a simple test: how many customers with a maintenance contract used the emergency service last year, and how many new customers came through it? If this cannot be shown, the service moves one field further. Before a service is ended, it is also worth trying to raise the price. Sometimes a service is not bad, just too cheap. How to do this is described in the guide raising prices without losing customers.

How to end a service in an orderly way

Mitchell, Taylor, and Tanyel (1997) distinguish three areas in elimination: the circumstances that trigger the process, the evaluation criteria, and the strategies used to take a product off the market. The last area is often forgotten in small businesses. A service is not ended by no longer offering it. It is ended by showing affected customers a way forward.

1. Record the decision

   Write down which service will no longer be offered from when and why. State the figures on which the decision is based.

2. Count affected customers

   Who used the service in the last two years? How important are these customers for other services?

3. Offer a transition

   Recommend another provider, offer an alternative from your own range, or set a transition period during which ongoing jobs are still completed.

4. Inform personally

   Important customers hear it in conversation, the rest in writing with reasons and a contact person. Good news to go with it is the freed-up capacity for what they otherwise buy from you.

5. Adjust internally

   Clean up website, price lists, templates, and inventory. Deliberately assign the freed hours to a service with a high contribution margin.

6. Evaluate after six months

   How many customers left, how much time was freed, what was it used for?

The fourth step is the most delicate. How to deliver unwelcome news openly and without evasion is described in the guide delivering bad news.

A routine instead of a clean-up campaign

The studies by Avlonitis, Hart, Mitchell, and Bauer and Turčínková share a side finding: companies rarely take up ending on their own initiative. It happens when the pressure is great enough. For a small business, it is better to make the review a routine, for example once a year together with the price review.

• The contribution margin per hour worked is known for every service.
• Services below average are classified in the pruning matrix.
• For every weak service that is kept, the knock-on effect is proven with figures.
• Services with a deadline have a measurable target and a date.
• New services are added only with a review date after twelve months.

The last point prevents the offering from growing again on its own. A leaner offering is also the prerequisite for offering services as fixed packages with a fixed process. Why that makes the difference between merely growing and scaling is shown in the guide scaling or just growing. And which customers may be affected by pruning also depends on their overall value, as described in the guide calculating customer value.

Conclusion: which services do not pay off

How can an owner tell which services do not pay off, and how should they end them? By comparing each service’s contribution margin per hour worked with the average, checking for the weak services whether a knock-on effect is proven, and ending the rest in an orderly process with customer information and a transition. Research shows that the reasons for this have been the same for four decades. What is missing is rarely the knowledge but the fixed date on which the decision is made.

1. This week: Calculate the contribution margin per hour worked for your six most important services.
2. Next week: Classify the services below average in the pruning matrix and check the knock-on effect.
3. In a month: Make the decision for one service and start the process with customer information.

A pruned offering does not make a smaller company. It makes a company that knows how it earns its money.