Strategy is the fun part of business. There’s rarely a single route to revenue growth. Starbucks, for example, uses a “clustering” strategy, opening its coffee shops so close together that they saturate an area and lock out the competition.
In contrast, Facebook’s strategy is to eliminate potential rivals by acquiring them before they can erode market share – in some cases paying billions for pre-revenue companies.
Ryanair pioneered low cost European travel by reducing standard fares, charging for baggage and incidentals, and adopting surge pricing by charging more when demand increases. Similar surge pricing models can now be seen with the likes of Uber.
Service-centric business models
The traditional business model is to sell a product and the customer pays. The relationship with the customer in this context is based on a transaction. However, in a globally competitive market, many products are now commoditised and margins are getting squeezed, diminishing the leverage from such production-centric approaches.
That’s where a service-centric business model comes into its own.
Servitisation transforms companies from production to service provider, shifting them to delivering advanced services, such as selection, consumables, monitoring, repair, maintenance, disposal, as well as the opportunity to increase service revenues even further by supporting existing third party or competitive products. This creates an ongoing relationship with the customer that effectively locks out competitors.
Rolls-Royce is a good example. Rather than simply selling an aeroplane engine which requires a significant upfront, capital investment by the customer, they sell the hours a customer keeps the engine up and running.
This increases customer intimacy and service revenues, provides a predictable revenue stream for Rolls-Royce, and has disrupted the entire airline industry, lowering barriers to entry, and spawning the creation of low-cost operators.
A model for all sizes
It’s not just massive conglomerates that are reorienting themselves around servitisation.
One of my favourite examples is Hilti power tools. Their management team realised that most people don’t actually want to own a chain saw or power drill – they just want to cut something down or drill some holes.
Their Fleet Tool Management service replaces the traditional tool sale with a service that provides and manages the tools that construction companies need. Large customers, such as homebuilders for example, may have fifty Hilti power tools delivered to a new job site for a finite period of time that the tools are required. Hilti’s customers don’t make money by owning tools, but rather by using tools that work.
According to Aston Business School, original equipment manufacturers have reaped a growth in services revenue of five to ten per cent a year as a result of adopting a servitisation strategy.
The relationship with profit is more complex as it is dependent on a number of factors, including the through-life management of costs and risks. However, in some instances, profits have been two to three times greater than those on product sales alone. Customers enjoy cost reductions that can be as high as 25 to 30 per cent, as well as improved service quality.
By the end of this year, Oxford Economics is predicting that the share of worldwide manufacturers using performance-based contracts will jump to sixty five per cent, and more than seventy per cent of manufacturers will be relying on services as a key product differentiator.
As a business model, servitisation isn’t a new phenomenon – the origin of the term dates back to the 1960s. However, against the back drop of a global recession, product commoditisation, shrinking product margins, and major technology advances in end-to-end service delivery, servitisation is providing companies with an effective hedge against market downturns, and higher barriers of entry for competitors.
As a result, service is shifting from the spotlight to the limelight, becoming a powerful offensive business strategy for top line growth and competitive advantage.
Dave Hart is vice president for global customer transformation at field service management specialist ServiceMax.