How innovative companies are increasing customer loyalty and creating long-term revenue streams
Product as a service (PaaS) is a story that’s been told for decades. Potentially pioneered by the folks at Rolls Royce Aerospace in the 60’s, who coined the term ‘power by the hour,’ this idea of long-term service programs replacing fixed-price product sales has sparked long-standing questions for many manufacturers.
By definition, PaaS is a business model that allows a customer to pay for a desired result (the service) rather than purchase the equipment that delivers the result (the product). In the case of airplane engines, the traditional model was to sell, well, an engine. In the PaaS model, the customer may pay for things like ‘time on wing’ or ‘time in the air’ where the product (the engine itself) is simply a means to a performance end and the manufacturer manages the rest.
The telecom industry was also an early pioneer of PaaS, leasing the necessary equipment (telephone) to receive their service as part of the consumer’s monthly invoice. This mindset continued in the wireless industry with the introduction of pagers and later cellular telephones. It was in the wireless carriers best interest to ensure consumer devices were in working order, therefore they built business processes to manage exchanges, extended warranties, upgrades and repair programs.
But, PaaS is more than just migrating from a purchase to a lease and offers significant value to manufacturers. For one, It can create a consistent premium revenue stream leveraged through customer demand of not only products, but also of value-added services offered across an elongated customer life. A PaaS offering allows consumers to pay less up front and, more importantly, normalizes the cost of maintenance which is also beneficial for the OEM. In essence, a PaaS customer becomes an investor in the brand rather than merely a buyer that would require re-engagement months or years later.
In a Siemens-sponsored report presented by engineering.com, PaaS veteran and senior vice president of Strategy at Aras, Marc Lind shared his thoughts on the future of products designed to be serviced. In the article, Lind points out that traditional product sales are likely to decline over time for one main reason: revenues. He also says, “selling an asset, ‘one and done,’ is increasingly not the way to ensure long-term profitability—I have to keep pumping out more units and selling them in order to make revenue. This is not a particularly predictable revenue model. Whereas with selling a subscription, now I have a backlog of revenue that I can count on coming my way and I can look for opportunities through the use of data analytics to enhance the value my customer receives and provide additive revenue for myself.” (engineering.com, n.d.)
Yet even as manufacturers are sold on the business model, they still face exceptional obstacles to getting there. The migration of traditional products to services looks daunting because it is. Many issues face product brands in the transition including the financial means to move from a cash to collections model, the implementation of IoT sensors that monitor product usage and the processes to analyze the data to provide the service needs. In particular though, the most elusive transition may be building a world-class service structure to support growing, perpetual product service needs.
Just over a decade ago, the ridesharing company Uber, now a household name, found a new form of as a service delivery and reinvigorated the PaaS model. Uber isn’t your classic product seller but, using technology, they revolutionized the service model providing a direct path to consuming as-a-service through the distribution of local 3rd-party providers (drivers). The model was quickly coined Uberization and became a new aggregator for ideas of how the decades old conversation of selling services over traditional products could be sustained.
So what can traditional manufacturers who are reconsidering product as a service learn from Uber? One possible solution to brands in transition may be first an expansion of their service model. Reconsider Uberization for a moment. What if the path to PaaS didn’t start with a total transformation of your product offering, but rather with the introduction of continued service offerings? And, what if these ongoing service offerings could be distributed among a workforce of hundreds of thousands of independent professionals? Such a plan could create a bridge leading to the desired long-term end result PaaS offering. But even in the near-term, manufacturers would see the additional revenue, extended customer lifecycle, and stronger loyalty with an expansion of their current service models. In essence, leveraging new services today to create the feel of PaaS does not require complete business restructuring. It is possible to create a new premium for customers while building service revenue, product loyalty, and bridging the gap by selling product plus service.
Classic product delivery looks like this: engage, sell, warranty, then upgrade. In a product plus service model, post-sales engagement could expand and extend the classic warranty and upgrade stages of the product life cycle. The expansion and upgrades lead to continuous engagement with customers. Even if an organization is already practicing continued service after sale today, re-engaging customers when warranties are difficult to understand and upgrades are expensive leads to improved customer retention and to a unique opportunity for value-added service. Creating a distributed network of service providers, whose customer care representatives know your products and who are available within your local customer markets, can become a means to deliver on either a premium after sales service offering or at least provide customers with an out-of-warranty continuation of service endorsed by your brand.
In summary, the product as a service model succeeds in delivering premium, ongoing revenue streams for businesses. It’s also a proven means to strengthen customer loyalty and generate repeat business. For consumers, this model lowers up-front costs and makes returns, repairs, and upgrades easier. Pivoting to this model requires significant innovation but success doesn’t mean going it alone. Partnering with multiple service providers who are local, know customer service and who will deliver premium service on behalf of their brand, gives OEMs the time and agility to focus on their product innovation and their bottom line.
The Next Product You Design Might Be a Service Thanks to the IoT, engineering.com, sponsored by Siemens PLM Software, n.d.