Best-in-class industrial companies are increasing price differentiation (and competitiveness), diversifying revenue streams, and empowering sales in negotiations to drive higher margins.
What is service monetization and why is it important?
Service monetization is the act of articulating and capturing revenue for activities beyond delivery of goods, e.g., rush orders. In our experience, this pocket involves significant hidden costs in many companies, which typically grow faster than product revenue. Getting service monetization right is imperative. Our recent survey at Simon-Kucher found that industrial companies expect their service revenues to increase by 115% over the next three years. For best-in-class companies, this results in an innovative product-service centric model that focuses on selling a total solution to deliver an outcome/capability and has a material impact to the bottom line (e.g., auto OEM services and spare parts account for ~20% of sales at a 50% margin).
Beyond the profits, what are the benefits of service monetization?
Better value communication thanks to more price differentiation
When services come with their own price tag, their value is much more cleanly and clearly communicated. Customers become aware of the value of different services, what is included, and what they are paying for specifically. Also, customers pay a fair price for what they order, instead of a one-size-fits-all price. A full de-bundled offering can also serve a more price-sensitive customer segment.
Revenue stream diversification
Product-centric, volume-driven companies are prone to volatile revenues due to the nature of their sales cycles and fluctuating demands. Service revenues, on the other hand, are recurring, more consistent, and therefore more plannable, enabling efficient allocation of resources and reducing market risks. Although the customer’s purchase cycle may be volatile, your services can be billed monthly, quarterly, or annually, creating a reliable base that is not dependent on volumes.
Empowering sales through negotiation advantages
When prices are directly connected to the value delivered, it makes it harder for customers to demand price cuts. Services also create a whole new category of battlefield concessions, which set the stage for a productive negotiation. Sales are equipped with a price tag to show the value of any sacrifice they make (e.g. specific delivery windows, supplementary documentation) and customers leave satisfied with their perceived services-related discount.
How are leading organizations executing proper service monetization?
Embracing the power of data and analytics
Industrial companies have a lot of data collected from their equipment and operations. By using this data and investing in advanced analytics, they can provide data-driven services to customers. For example, predictive maintenance helps them anticipate breakdowns and offer timely servicing, which saves clients time and money, adding more value and increasing loyalty.
Remote monitoring and support services
As technology improves, remote monitoring and support services are becoming more useful. Industrial companies can use IoT (Internet of Things) sensors and connectivity to monitor their clients’ equipment and processes from afar in real-time. This helps them catch problems early and offer quick help, reducing downtime and disruptions.
Aftermarket and spare parts management
Regular maintenance and part replacement are essential for industrial equipment. Companies can benefit from this demand by setting up a reliable aftermarket and spare parts system. Providing genuine parts with fast delivery fosters customer trust and loyalty.
Where should companies start on their service monetization journey?
By recognizing and seizing opportunities in service-based revenue streams, companies are unlocking new growth avenues, enhancing customer satisfaction, and solidifying their position in the industry. Start your journey now by clearly outlining the strategy and customer segmentation. The next steps are to build a segment-specific proposition that includes innovative monetization models, outline the go-to-market approach, and equip sales with the right value selling argumentation. Finalize with the implementation around systems and processes.