Do you use a traditional sales process: selling a product and never seeing it again? If you are, you’re missing opportunities to deepen your customer relationships and leaving money on the table. Completing a product sale doesn’t have to be the limit of your sales opportunities, and it shouldn’t be. Why?
This opens up innovative opportunities for you to improve your existing service offerings and develop new service capabilities to allow you to change from selling products to offering an integrated suite of physical products, related and supporting services (internal or third party), and health and operational monitoring functions that deliver capabilities and outcomes for your customers, for a fee.
Think about your products as a platform for delivering tangible business outcomes.
For example, for the manufacturing customer, every minute a machine is running translates into revenue. These customers are looking for optimal machine output or maximum machine uptime, and your fee reflects the value of those outcomes.
This concept, known as a Product-as-a-Service (PaaS) business model, is a game changer—especially in capital-intensive industries. Instead of a one-time purchase classified as a capital expenditure (CAPEX), the customer subscribes to your integrated suite and pays a recurring fee, which is based on time, usage, or outcome, and classifies the fee as an operating expense (OPEX).
The benefits of switching to a PaaS business model include the most obvious: the opportunity to increase revenue from selling services in addition to product-related revenue. A PaaS model also changes the nature of the business-customer interaction from a transaction to a deeper, longer-lasting and more meaningful relationship, as the focus is on understanding the customer, their challenges, and achieving their desired outcomes. This more intimate customer relationship can also reveal further business opportunities.
By focusing on the customer’s desired outcome and the resulting stronger customer relationship, you’ll see a higher customer retention rate, as satisfied customers tend to be more loyal and are more “sticky.”
Sales based purely on product specifications go to the lowest bidder, but by combining the product with your knowledge, experience, and the skills you have with the product, along with your bundle of service offerings, you create a more valuable and sustainable competitive advantage. Your offering is also more valuable to the customer, which results in a higher win rate.
Other advantages for your organization include:
- Increased brand dependence—the cost of switching to a competitor is higher
- Producing a sustainable, predictable recurring revenue stream from monthly subscription fees or usage-based charges
- Smoothing out cyclical cash flow
- Greater opportunity to stay closely aligned with your customer
- Greater differentiation and customization
- Increased share of wallet and deal size
- More efficient service scheduling
- Gaining useful insights into potential product improvements through field performance monitoring
- Improved margin—service often has a higher margin than products
- Ability to charge a premium for administering the program
- Expanding your potential customer base. A reduced capital expenditure requirement lowers the threshold to becoming a customer and opens your offerings to new markets
For an effective PaaS offering, a portfolio of advanced services is key. Proactively identify all the services a customer may require before and after product selection and over the life cycle of equipment operation to achieve their desired outcomes, understand the value that the customer assigns to these services, factor this value into your pricing model, and then deliver on your outcome promises. Some of these include:
- Advisory services, including existing system evaluation and needs identification
- Project services, including new solution creation, configuration, installation, system integration, commissioning, and implementation
- Life cycle services, including preventative maintenance, uptime support, operation, help desk support, training, break/fix and overhaul, remanufacturing, spares-depot, disposal, or recycling.
- Monitoring services, including collecting data from sensors embedded in products concerning usage and condition for remote diagnostics; predictive, proactive, and preventive maintenance and adjust/fix services; consumption monitoring to create customer-specific service offerings; or pushing information to employees or customers through mobile platforms
While customers value the ability of a Product-as-a-Service to potentially reduce costs and free up resources, customers are also attracted to a PaaS model for other reasons:
- A complete holistic solution
- Results aligned with business objectives
- Lower up-front (CAPEX) costs
- Flexibility; they know that resources (whatever they may need) will be available to them as their needs change
- Enhanced support
- Reduced risk; contracted products produce results or they don’t pay
- Convenience by contracting with a single source
- Product and service features adapted to their actual needs
- Predictable total cost of ownership (TCO)
- Predictive maintenance done by the provider, which frees up the customer’s resources and allows them to focus on what they do best
- Maximum uptime
Offering an integrated suite of products and services in a pay-per-use model takes some planning, and is not for the faint of heart.
A PaaS model requires educating your sales force on how to sell a program bundle rather than products; there’s potentially a longer sales cycle; it is more capital intensive, as you own all the inventory throughout its life cycle; it likely requires infrastructure investment; and PaaS requires service excellence.
The PaaS business model involves a significant transformation of your organization, especially regarding revenue: Revenues are more stable over time, but when going from a transactional model with large up-front payments to a subscription or usage model, most of the revenue from your relationship with a customer happens after the sale, with smaller payments collected over a much longer time.
Shifting from an up-front to a recurring revenue stream means sacrificing short-term performance for long-term success, as it often results in a short-term revenue dip. This presents cash flow differences that need to be managed. Other accounting implications may also apply, as the company retains ownership of the assets in a PaaS model.
It will also be necessary to realign your structure, processes, and resources to support the new business model. And adopting a PaaS business model may also involve creating new resources, reconfiguring, and leveraging existing resources or releasing resources no longer required.
Although the most important transformation is the mind-set shift from one of ensuring proper product function and performance to one of pursuing positive impact on customer outcomes.
Any product-centric organization can implement a Product-as-a-Service business model, but PaaS is particularly well suited to organizations offering large and capital-intensive assets with long life cycles, such as industrial machines, jet engines, trucks, and more.
Here are just a few organizations that have transformed from a product company to a Product-as-a-Service provider:
Kaeser Kompressoren has existed since 1919 and primarily sold machinery, including air compressors, for much of its history. But once it began putting sensors on those compressors and examining the data it collected, Kaeser found a new way to generate revenue. Its future-focused strategy is charging for air by the cubic meter from compressors it owns and maintains—it’s “air as a service.” They’re now a utility, like gas and electricity.
Desso supplies carpets to commercial customers while retaining ownership of the product. Customers receive full service, including installation, cleaning, maintenance, and eventually removal, for a monthly fee. At the end of its useful life, the carpet is collected and 100% recycled into new carpet, which is then leased again.
Michelin recognized that vehicle fleet managers are confronted with a highly competitive environment and are looking for practical, reliable, long-term solutions to improve the efficiency of their day-to-day operations and profit margins. To help achieve the results fleet managers are looking for, Michelin has migrated from being a company that sells tires-as-a-product to tires-as-a-service that guarantees performance by taking care of all tire-related issues at a fixed cost. They’re selling kilometers instead of tires. This has led to higher customer satisfaction, loyalty and retention, and raised profits.
NRG Home Solar offers solar panels-as-a-service to residential customers with no up-front installation costs. Product ownership and responsibility for system performance and operation remain with NRG, while customers enjoy predictable rates per kilowatt hour.
Chauffagistes, a French heating specialist, stopped selling air conditioners, heaters, and other temperature-regulating devices and started offering services that maintain a space at an agreed temperature for an agreed price.
Regarding your own organization, rather than selling your products as products, focus on ways you could sell them as a service. Think beyond your products; consider the whole customer journey. Think about all the ways you interact with your customers and how your products help customers achieve their outcomes.
Don’t wait until customers contact you—or another vendor—for advanced services. Concentrate on proactively developing and offering your products as a service and see your customer relationships deepen and your revenue soar.
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