Servitization and subscription models in manufacturing are not new concepts, but they are gaining more and more attention. And rightly so.
Manufacturers are realizing that products and services do not need to be sold separately but as a whole package which offers new opportunities and benefits, both for them and their customers. Higher margins on services and falling margins on products are also a significant factor for this business model transformation.
The focus is on performance and results rather than on ownership of products.
As customer preferences have changed so has the value proposition. Customers are buying the outcomes, not the equipment. They are promised technical support and maintenance for periodical subscriptions stated in service contracts.
Meeting the challenges
Moving from a product-based to service-oriented business model seems like a win-win situation for both the manufacturers and their customers. But no change that promises impressive outcomes comes easy. And when dealing with changes, one can expect resistance, both internal and external. Here are only some of the challenges that manufacturers face with servitization:
Services are harder to sell
Selling physical, tangible products is generally less challenging than selling services. When dealing with the product itself, the customers know what they invest in and what value it can bring.
In service-based models customers receive a different kind of value, obtained through intangible skills, expertise and time. Unfortunately, in product-service packages, services may still be perceived as something premium and not a necessity, although they provide added value and ultimately save cost (e.g. preventative maintenance).
POSSIBLE SOLUTION:
With the right system in place, services can be treated as products. Productized services are just standardized services with clearly defined parameters and pricing. Different service packages are also easier to customize to meet the specific customer demands.
Sticking to the core
Top-management can be tempted to stay with the tried-and-true, after all, why change something that seems to work fine. Managers find it difficult to reimagine business models that have served them well over a number of years. They don’t want to make the risky decision of straying from its core, as it presents both a strategic and an organizational dilemma.
POSSIBLE SOLUTION:
Change always involves taking risks, and sometimes it truly is better to stay focused, even if it means slower growth. Before any decisions companies should carefully assess the risks and revenue potential of new initiatives. On the other hand, management should also be cautious of excessive analysis which can significantly slow down the decision-making process.
Limited knowledge on how to make the shift
Transformation of a business model, even if only partial, means a lot of changes in both internal and external business activities. It involves operational, legal and organizational adjustments. SMEs in particular have been found to have lacking resources and expertise to move from a product-centric model to provision of services and solutions.
POSSIBLE SOLUTION:
Companies that are fully aware of what they can and cannot do themselves are on to a great start for further development. Hiring experts to help with the transformation is highly recommended, and should be well worth the investment.
Providing services through partners
As most manufacturers are present not only locally, but regionally and even globally, the necessity to offer support to all customers becomes difficult and cooperation with local partners may be the only answer. However, the provision of services further complicates the matter, because, unlike with products, the OEM has even less control over the offering.
The quality of services provided depends on the quality of labour. If service contracts and personnel are outsourced to partners, it may lead to loss of control and decrease in quality.
POSSIBLE SOLUTION:
If obtaining foreign representation is a must, more effort should be spent on finding the right partners – it’s better to lose some more time than reputation. Doing effective due diligence before entering into close business relationships is imperative, and companies can hire third-party experts for such activities if they want unbiased information.
Furthermore, in order to maintain a steady level of quality when offering services, key is having a set of extensive and clear Standard Operating Procedures (SOP).
Resistance from existing partners
Manufacturers that launch initiatives to move to a more solution-based model can expect resistance from their partners in sales, distribution and services. Some of their activities will no longer be needed, such as perhaps repairs and maintenance. In the case of cutting the middleman, dealers and partners will want to protect their customer relationships.
POSSIBLE SOLUTION:
If manufacturers have reliable partners with whom they successfully cooperate over the years, it would be logical to let them be part of the process. Some arrangements may involve transformations of the partner’s business model as well, but the end result could be beneficial for both parties. Assessments of risk and revenue potential should precede any decision making.
In some cases, end of relationships may be inevitable, and the outcomes in that case will heavily depend on the terms of the previously signed contract.
Hiring talented labour
Modern initiatives and new types of services may require specialists with new types of knowledge that are not traditionally found in the manufacturing industries. For example, a new type of workforce may be needed, one with the right competence to perform maintenance service on specialized and customized products. However, qualified job candidates are increasingly harder to find, thanks to the skilled labor shortage.
POSSIBLE SOLUTION:
In some cases companies will be forced to lower their hiring standards. In the case of hiring less qualified employees, companies will have to heavily invest in employees’ training and skill development. Training can be a worthwhile investment, if companies can make sure that employees don’t transfer to their competitor.
In order to successfully attract and retain quality new employees, manufacturers can look into and improve their employer branding strategies.
Inert customers
Product-service packages are still not perceived as standard in the manufacturing setting and the customers don’t necessarily flock to them. The problem may also lie in internal resistance to change, as employees are not communicating actively or clearly enough the value of the new offering.
POSSIBLE SOLUTION:
Customer reluctance can be fought with effective marketing. Making sure that the customer as well the staff understands the value and rewards of the new model is essential.
It requires commitment to educating the customers about the value and benefits of the new model. It may be best to start the process with less intricate service packages with rewards that are easy to comprehend, and gradually introduce the more complex offerings.
Despite all the difficulties, the service-focused, customer-centric, solution-oriented business models are here to stay. The customer preferences are changing across all industries.
Looking at the past, some of the most successful growth strategies were driven by the new needs of core customers.
For many companies, it’s not easy to steer away from their tradition and move focus away from their core business. However, growth opportunities always involve taking some risks. Realistic assessment of the new possibilities, as well as connecting with reliable partners that can help with transition and with further development, are imperative.