InsightsValueProduct + data = Service. Yes, but is the service profitable?

Cars, tires, drilling machines, industrial equipment and many other objects are now full of sensors that capture data in real-time. It opened an opportunity for product manufacturers: launch service-based offers. Though very attractive on the paper, research shows the implementation of these business models is challenging and that the promised profits are not always cashed in. Which are the key profitability drivers for service-based model supported by a product?

Iot-enabled servitized business models

Power-by-the-hour is the poster child of servitisation. 50 years ago Rolls Royce offered a complete engine and accessory replacement service on a fixed-cost-per-flying-hour basis. The rapid growth of connected objects makes that type of offer possible for numerous products. Suppatvetch and his colleagues describes 4 archetypes in recent research:

  • Add-on: provider offers services that are added to a physical product to support its function. Example: Nike Fuel Band
  • Usage-based: customers subscribe to a plan based on their use and needs. Example: Power by the hour
  • Solution-Oriented: provider offers integrated solutions. Example: Schneider Electric EcoStruxure.
  • Sharing: customers pay for using or accessing a product for a limited amount of time. Example: Car2go.

Though different, these 4 models share some common benefits for the firm offering them. Costs are reduced either because resources are more productive (reduced waste, increased use) or because marketing is less costly. Product related revenues can be increased either because clients are more loyal in the long term (or more locked-in) or because the existence of a value-adding service helps to price higher the products. New revenues can be captured with stand-alone or bundled services.

It then seems a no-brainer: moving from products services is a major opportunity for profit increase. However, difficulties and troubles are regularly reported by companies and analysts: the change is costly, it takes time and sometimes profit vanishes along the way. What makes the difference between success and failure?

Key profitability drivers

Of course, situations and context differ and there is no one-size-fits-all recipe for success. However, research has highlighted some interesting conditions for successfully embrace the move from product to service. I choose to focus here on three of them.

  1. Technology matters. Offering a service based on real-time data analysis on a large requires a world-class capability in information technology (cloud storage, communication, computing power, …). These are capabilities traditionally not mastered by product manufacturers. One key issue is accessing the right technological stack, at the right cost.
  2. Customers need to be taken care of continuously and holistically. When services are offered as an extension to a manufactured product, customer relationship changes: customers express needs and concerns without differentiating between the product and the digital service. In addition, in BtoB environment, companies are dealing directly with the users of their products, not only the decision-makers that choose their products in a bid. One key issue is to be able to have one single point of contact for the customer able to take into account all demands. Another issue is to develop new roles, similar to those in the software industry, customer success being one very good example. This is particularly difficult for companies organised with product lines and service lines.
  3. New capabilities are to be built. Security and privacy are two new risks associated with data (whether personal or not). Digital services require specific skills in user experience and interface. Similarly to the first point on technology, the issue here is to reach the minimum threshold and to draw the line between internal and external capabilities.

Culture as the main leverage

Some of the profitability drivers may seem easily accessible: choosing the right partner for a cloud solution, train teams on user experience. However, the big challenge for manufacturers is to infuse new practices and to change the representations of quality and performance within their organisation.

When a company moves from product to service, perceived quality is more important than offered quality, the value proposition is more important than the technical performance. Most importantly when a company moves from product to service, the user is more important than the client.

It doesn’t mean previous capabilities which were central to performance (manufacturing, quality, expertise) are no longer important, quite the contrary. It means they are no longer sufficient and they need to be mixed with new capabilities associated with digital services. This is a culture change, it requires to develop a renewed and shared vision of what the company is about, how it differs from the others and how it operates.

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