From Product to Product-as-a-Service
A new business model shaping the future of industries
As technology keeps spreading its wings to newer horizons, industries have had the recent tendency of shifting their core offerings from products to services.
In an era where time becomes an ever-increasingly scarce resource, people are seeking for more efficiency to achieve quite the impossible in the little time they have. To that matter, our exposure to technological shortcuts has critically made us impatient, as we reach everything at our fingertips in no time.
As such, companies had to adjust to our change of behavior: here comes the “as-a-Service” model.
This article will focus on defining this new model through notable examples as well as emphasizing on benefits from both customer and manufacturer sides.
What is the “as-a-Service” model?
The latest business model. Rather than executing a one-time sell, manufacturers are finding ways to “servitize” their products. What does that even mean?
Servitization consists in selling solutions and outcomes to the customers, rather than tangible products. Instead of just providing the means to fulfill the user’s needs, manufacturers are now delivering the actual value out of that tangible object.
Impatient and demanding, customer expectations for productivity are growing faster than ever. As only being aesthetic and functional do not suffice anymore, the challenge is to deliver efficient and personalized solutions to the target audience.
Let me illustrate how bundling products and services can be a step forward for customer satisfaction through the following examples.
IoT Services
You most probably have already heard of “Internet of Things” or “IoT” before. If not, you definitely have used these “things”… without even knowing it!
As a reminder, Internet of Things refers to any object being connected to the internet as well as linked to other devices using embedded sensors. These can range from smart homewares (thermostats, voice assistants), smart wristbands (fitness trackers, smartwatches), driverless vehicles to even smart cities. What’s brilliant about them is their ability to collect and communicate usage data to other objects or systems they are affiliated with.
Why am I telling you this exactly?
Well, having access to that data gives much greater insights over when the product is being used, for what purpose and especially how it is performing. Informed as such, manufacturers can optimize and tailor their offering case-by-case based on their user data. The industry of sensors and connectivity has therefore unveiled a spectrum of unexploited opportunities to extract additional value from our core products.
A concrete example of such IoT-led services is the Rolls Royce’s TotalCare program in aircraft engine manufacturing.
The Total Care program (in the late 1990s) maximizes efficiency out of aircrafts’ operations as well as mitigates the client’s risk of such a costly purchase. In practice, Rolls Royce charges airlines on a Power-by-the-Hour basis while continuously monitoring the engines. Customers can then consume flying privileges on hourly rates by using Rolls Royce owned jets.
To do so, Rolls Royce requires many IoT sensors to gather data about the aircrafts’ health metrics. Analyzing those allows the manufacturer to proactively maintain the lent equipment by predicting any failures, adjusting performance to the user’s utilization and hopefully lengthening its lifecycle.
This IoT-led service is also supporting a stronger alignment in the mindset of customers and suppliers. Previously earning on one-time sales and aftersales maintenance, it was in Rolls Royce’s best interest for the product to prematurely fail. However, converting its products to ongoing services is compelling the manufacturer to continuously sustain a valuable experience for the customer to stay committed with the company.
This servitization focuses on borrowing aircrafts for flying privileges while the providers strives to make its aircrafts durable, trustworthy and profitable though IoT’s predictive maintenance.
The ‘Uberization’ phenomenon
As always, the disruption did not cease to progress. Technology continues to shape the way we think, and even the way we live. What comes to mind is the life-changing rise of Transportation-as-a-Service and how Uber revolutionized mobility.
People nowadays care about getting from point A to point B, and the “how” does not matter as much. Car manufacturers have somehow become mobility providers, as yet again, the focus is transferred on the outcome itself: reaching point B.
The Mobility-as-a-Service model even surfaced a new economy: the sharing one. Instead of reaching out to professionals, the Uber phenomenon now allows anyone to be either the provider or the customer. On one hand, car owners can benefit from the platform by servicing rides to passengers. On the other hand, the increased availability of getting a safe ride wherever you are makes mobility effortless.
This disruption is also rising questions about car ownership. Is it as crucial? Symbolizing independence in previous generations, owning a car does not appeal to younger generations as much. It might still seem cheaper, more convenient and necessary (for some) to purchase a car. However, have you considered the maintenance costs? The depreciation? Or even how much money you are losing everytime your car sits in your garage?
On-demand mobility services fix all these worries. The pay-as-you-go model has now been labelled as affordable, flexible and convenient. Uber introduced the possibility to get anywhere, at any time, and people are approving. To confirm it, private car ownership is expected to drop 80% by 2030 in US cities, according to Business Insider.
The fact that Uber has made its way into our daily language by “Ubering” to places or even “Uberizing” business models simply shows how disruptive it is.
The XaaS model
These advanced technologies provide much flexibility on the range of opportunities to differentiate. From IoT technologies to Uberization, anything can become a service. Yes, anything… Even light!
Another example worth mentioning is Philips’ initiative to servitize LED lamps through its Lighting-as-a-Service offering.
As much as they are efficient (thus, usually used on large properties), these lamps remain significantly expensive. As such, Amsterdam Airport Schiphol has now been provisioning this out-of-the-ordinary service since 2015. While Schiphol continuously pays for the energy consumed to light the airport without any upfront costs, Philips still owns the lamps and is responsible for maintaining them up and running.
Why adopt the “as-a-Service” model?
The secret recipe behind Rolls Royce, Uber and Philip’s innovations were not random but planned out to be beneficial on both customer and manufacturer sides.
For manufacturers to reshape their entire business model, profit must be significant. Why should they shift from products to services?
- Better customization
As customer retention now significantly relies on the service delivered, manufacturers have incentives to optimize their customer experience. The rise of IoT enables them to greatly analyze customers and their usage behavior. As a result, this will create newer and more personalized experiences which ought to enhance customer satisfaction.
- Recurring revenues
Instead of receiving one-time incomes, manufacturers now gain from recurring revenues generated over the product’s lifespan. Split into smaller amounts over larger periods of time, the service industry is still considered to be 75% more profitable than any other business unit. Rolls Royce has reported a 40% increase in service-based revenue in the last six years.
- Deeper customer relationships
This model is also aligning mindsets between customers and manufacturers. Suppliers strive to avoid product failure to maximize the value add for both parties. According to Barclays, around three quarter of managers saw servitization as a means of establishing closer customer relationships.
As customers continuously pay for the services they are receiving, there is a much stronger motive for the manufacturers to have a meaningful relationships with its end-user. Doing so will then increase chances of customer loyalty, hence opening new business opportunities.
While these were only on the manufacturer’s side, servitization introduces a win-win situation where customers will benefit as much (if not more).
- Better quality of product/service
Having their audience’s best interest at heart by offering them long-lasting and performing products, manufacturers are now exposing customers to better quality of service. Moreover, customers can only be more pleased towards enterprises’ efforts to customize products through their data-driven analysis.
- Seamless experiences
As technology already accustomed consumers with instant satisfaction, they are without a doubt becoming pickier. Everything must be highly efficient at low cost, and reachable at our fingertips. Manufacturers are then constantly pressured to make those experience as effortless and worthy as possible, in order to stay in the race.
Apart from its ingenious ride-sharing idea, the beauty of Uber is not having to take your wallet out throughout the experience which almost makes it seem like a free service… until you check your bank account of course!
- Cost efficiency and predictability
Nevertheless, on-demand services are usually much more cost-efficient. No need to worry about any additional cost associated with the ownership of an asset, as pay-as-you-go models enable you to strictly pay for what you consume. As such, Schiphol airport will be charged for the lighting it consumed from Philips’ light bulbs, just as Uber passengers will be charged according to the length of their ride.
Servitization translates itself as a holistic shift: from product manufacturers to service providers, tangible objects to smart devices, one-time purchases to demand-based plans, and so on.
Growing their expectations as fast as technology evolves, customers now want their purchases to be worth their time and money. “Nobody wants a drill, people want a hole”… Or don’t give me the tool, give me the solution to my problem.
Businesses are then servitizing their models to aim at minimizing customer efforts, while unveiling additional value at profitable costs. Quite easy, right? Thankfully, our digital transformation era is sourcing businesses to provide better, personalized and longer-lasting offerings to regain competitive advantage.
So, what’s next?
Proven to be more satisfying and profitable, the Anything-as-a-Service model might just be the future of manufacturing. Times are innovating as boundaries between products and services are blurring yet being bundled together for greater outcomes. Alongside, economies where sharing is no longer just “caring” but also a way to capitalize on assets are becoming accepted and more so, encouraged. At last, cloud technologies are only beginning to shape mindsets around trending technologies and the ones to come.
Another month, another article! As always, any feedback is welcome!
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