Outcome-based selling demands an entirely new and often unfamiliar mindset. In the first of a three-part blog series, IFS looks at the opportunities and challenges facing manufacturers as they consider shifting from a make – sell business model to developing, pricing and marketing new ‘product-as-a-service’ outcome-based revenue streams.
It’s a sobering fact that the future for manufacturers over the next two to three decades lies in selling consumption of outcome-based services, not sales and ownership of manufactured goods. Manufacturing cannot compete on quality and cost any longer. It’s time to find higher value, and more difficult-to-replicate products and services.
The New World Order will increasingly see organizations creating revenue streams that are based on services as well as products. This shift – Servitization – is a natural response to increased competition, fluctuating demand and rising market costs, and in some cases sustainability pressures/drivers When manufacturers start selling outcomes, it allows organizations to differentiate and move away from commoditized saturated product sectors. By evolving from product-related services to customer-business related services, a servitization model offers B2B manufacturers the potential to grow recurring and sustainable revenue streams.
Re-inventing sales revenues
In the automotive sector, manufacturers like Mercedes-Benz, BMW, Fiat and Volvo all offer car-as-a-service subscriptions, with the option for customers to change models over time when they wish. Phillips no longer sells lightbulbs to Schiphol airport in Amsterdam – it sells light. The airport pays for the light it uses, whilst Phillips remains responsible for fixtures, installations and performance. Tomra, for example, services more than 8,000 recycling machines in stores throughout Sweden, allowing consumers to return used beverage containers for recovery. With the help of IFS, Tomra has streamlined its service organization, achieving faster service, smoother administration and more satisfied customers. Consumer product manufacturers like HP are moving from selling ink consumables to selling subscriptions for instant ink, with printer usage remotely monitored to ensure timely delivery. Leading consumer coffee machine manufacturers are now offering coffee-as-a-service – a monthly subscription covers both the machine and the coffee consumables.
The economics are compelling. A study by Aston Business School found a 5 to 10% increase in growth rates and 25 to 30% reduction in costs for companies adopting a servitization model for their business.
Servicing and repair have traditionally been seen as a secondary part of a manufacturer’s operations. Products are invariably sold with warranties, and customers can also take out optional service contracts for service and maintenance. Service interventions are typically field repair for failure (reactive), maintenance-based (preventative) or, where a product is digitally connected, predictive.
Servitization, however, sees a fundamental shift in the approach to, and shape of, service offers. In a servitized model customers can subscribe to business-related services that directly and pro-actively address their own strategic and operational needs. This is a world apart from focusing on product-related or technical issues alone.
Recent research by Noventum1 compared the financial performance of B2B manufacturers providing industrial services. It found that organizations offering predictive and proactive services, such as optimizing business processes and delivering business outcomes, generate the highest gross margin and enjoy increased recurring revenues and contract penetration rates.
The role of technology
The business transformation required to introduce servitization is technology enabled and requires careful investment in digitalization and digital service eco-systems. It also requires a cultural shift to embrace unfamiliar business challenges. The way a manufacturer captures value is changing: it’s no longer about producing products well; servitization is about engineering outcomes that create greater value for customers, whilst also collecting real-time data that can then be monetized.
As a technology provider and digital transformation partner, at IFS we recognize and help to address these servitization challenges first-hand. CFOs, for example, are faced with the dilemma of pricing and selling an entirely new product as a service value proposition. The commercial aspects and the data monetization can be difficult to scope. Rigid manufacturers are used to cannibalizing the revenues of physical products. Whilst service revenues will take time to build, they will eventually outperform revenue from hardware sales.
An effective corporate IT platform, with the ability to leverage data and digitalization, is a pre-requisite of any pivot towards product-as-a-service offers. By delivering ERP, EAM and Field Service Management capabilities, IFS Cloud allows manufacturers to manage production, distribution, maintenance and service operations, all informed by a single unified database. The business agility needed to evolve and innovate with new value chains is also built-in: a composable environment allows more capabilities to be added over time as and when required.
A service-based model also means that maximizing product performance and longevity becomes more important than minimizing the cost of production. My next blog, appearing on 8th February ,will look at the need to manage, maintain and extend product lifecycles, and the role IFS Cloud can play.
Sources:
- Noventum/IFS: The Service Business Growth Model for B2B Manufacturers Benchmark Report 2021
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