Blog, Pricing

Is Product-as-a-Service the Secret Sauce to Increased Profitability?

By Mitch Lee
October 8, 2019

A clear business trend today is that more and more companies are seeing the potential in increasing the ”servitizing” portion of their business. This is also the case in the aftermarket business, which for many B2B companies, can represent as much as half of the total business volume. These developments are explored at depth in a new market report, Aftermarket 2019 Benchmark, jointly produced by Copperberg and Vendavo. The report will be presented at Aftermarket Europe Conference in Nyköping, Sweden on October 16th, 2019.

The term ”servitization” is used to describe how companies move from selling products and systems to selling the service these products deliver to the customer. In the same way that we see ”Software-as-a-Service” in IT solutions, we are increasingly moving to a world where manufacturers sell the performance of their products and systems rather than the product itself. This commercial concept was originally developed by Rolls Royce in 1962, who had started to sell their aircraft engines on ”Power by the hour” basis rather than sell the engine itself.

The Aftermarket 2019 Benchmark report is the first of its kind to look at this development, and the implication it has for the management of your evolving business model. The study clearly shows the attractiveness that a more service-based model offers to manufacturers. The share of profits that services contributes is far greater than services’ share of sales: a more service-based business model has the opportunity to increase margins. But how do you get started?

3 Steps to Services Success

As illustrated in the new report, there are three key areas crucial for the aftermarket business to master if companies are to succeed with a more service-based business model:

  1. Digitalization and the digital strategy. Increased servitization means an increased need for a proactive business model based on predictive analytical tools that ensure you provide your customer with the performance they have bought and expect to receive. The servitization evolution is often described as consisting of three stages:
    • Reactive model: responding to customer needs
    • Planned service model: using regular check-ups and service intervals
    • Proactive service model: anticipating the service needs and acting accordingly. This evolution places additional demands on having the right data available and the right processes in place to support the change in business model.

 

  1. Pricing and price management. The changing business model also means a need to change the basis and the process for how prices are set. All pricing structures are based on finding the right balance between the customers’ perceived value, the competitive structure and the internal cost base. But with a service-based model, understanding the customer’s value drivers and how these may differ between different markets, business situations and categories becomes even more important and are crucial for commercial success. 
  1. Competence management. Increased servitization places new demands on the competencies required. It is clear that the more companies move towards a proactive service model, the more they will need people with high digital literacy and other new skill sets. The study highlights two key challenges for manufacturing companies: the lack of diversity, and the challenge of recruiting the right talent. And with these new competence requirements, the competition for talent becomes much broader as these skill sets are in demand by businesses in almost every category.

To learn more about succeeding with services, join us at the Aftermarket Europe conference October 16-18, 2019. Vendavo will host a pre-conference workshop as well as participate in a panel discussion on service transformation benchmarks.

  • aftermarket , B2Bpricing , digitalization , profitability , services

    Mitch Lee

    Mitch is a Profit Evangelist at Vendavo with 25+ years of experience in the technical, operational, marketing, and commercial arenas of the process industry. Prior to Vendavo, Mitch was with BASF and Orica in product marketing and business management, driving operational optimization, pricing excellence, and margin improvement, as well as personal engagement in high value sales negotiations. Mitch also has deep experience with raw materials supplier portfolio management having negotiated large scale and long-term agreements with global suppliers.