I buy my newspapers from my village shop. This is a simple transaction where I purchase a commodity at a pre-set price and they make a small profit and have a low profit margin.Something like this:
Purchase Price (£1.00) – Cost to Shop (£0.90) = £0.10 profit or margin of (0.1/0.9) 11%
So they need to sell a lot of papers with such a small margin if they are going to make any real money.
Now if they want to increase their profit and their margin a little they can persuade me to have it delivered, thereby a adding a standard service (at a nominal price say £0.20) to what was previously a straight forward transaction. The numbers would now look something like this:
Purchase Price of Paper & Delivery (£1 + £0.20 =£1.20) – Cost to the shop of paper & delivery person (£0.90 + £0.10= £1.00) giving a profit of £0.20 and margin of (£0.20 / £1.00) 20%.
So a transaction plus a fixed service is normally more profitable than just a transaction, but the real money is to be made when you add a tailored service to a standard transaction. If my shop agreed to deliver at a certain time pre-agreed with me I would happily pay extra for this service ( I wake up early so like my paper early!) In this situation the numbers may look like this:
I pay £1.00 for the paper & £0.50 for the tailored service (£1.50) and the shops costs stay the same £1.00, so their profit increases to £0.50 per transaction and their profit margin to 50%. Now that starts to sound a lot more interesting.
So if your company currently just sells widgets at a standard price (& margin), how could you add a service or even better a tailored service to the widget?
Amazon does it with books (think speedy delivery), and many top class restaurants now do it with food (think personal dining).