For many industrial companies, servitization has emerged as a key strategy to drive sustainable growth. In essence, it involves a shift from a traditional product-centric model to selling a total solution combining a range of services around the product. This is fundamentally changing existing revenue models. Examples can be found in many sectors, ranging from elevators (charging monthly fee for ‘elevator rights’), to surgical robots (charging hospitals per surgery for use of the robot) and aircraft engines (selling productive hours of operation).
There are many benefits associated with servitization, such as competitive differentiation, increased customer value and longevity (due to long-term contracts) and reduced barriers to purchase (due to decreased risks for customers). However, this does not mean that these benefits are easy to realize. In our experience, there are four best practices that make this transition a success:
Best practice 1: Integrate revenue model in the process
Most of the industrial companies are product-centric by nature and have therefore well-developed capabilities in the fields of R&D, engineering and quality assurance. Pricing and revenue models usually receive less attention but are equally important for companies adopting servitization. Prioritizing market segments, developing a service strategy and determining the appropriate price metric are important steps in this process.
Best practice 2: Develop value selling capabilities
Selling a service requires a different skill-set compared to selling a range of products. Investing time and resources in developing a sales approach and the capabilities of the salesforce is therefore required. Creating a ‘playbook’ with practical tips, insights in customer value drivers and negotiation tactics are proven steps to do so.
Best practice 3: Quantify the business case and risks
Transitioning to servitization involves several key financial questions. For example: what is the potential revenue impact, and how is our cost structure affected? Which risks can be identified and how to mitigate them? Modelling these risks is difficult, but crucial to make sure the servitized journey is a profitable one.
Best practice 4: Start small
Due to the inherent disruptive nature of servitized offerings, starting small with selected pilot customers or pilot services usually works the best. Not only to learn about the services and address issues that arise, but also to convince customers about the financial viability and the added value of the solution. The lessons learned can serve as a success case to roll-out to the remainder of the business.
Thoughtfully embedding these principles is crucial to make sure servitization is successful in your organization and contributes to improved profitability.
Simon-Kucher & Partners has identified seven pricing trends:
Trend 6: Servitization: Key strategy to drive profitable growth