Sales & Marketing

Why Industrial Giants Are Giving Away the Products That Made Them Billions

There’s something strange happening inside industrial giants like Rolls-Royce, Siemens and GE. Executives are giving away products and tapping into a new — potentially even more lucrative — revenue source: ongoing, advanced service contracts for those products.

SEE ALSO: Is Servitization the Key to Manufacturers’ Long-Term Survival?

It’s not as crazy as it may sound. By adopting servitization, companies are aiming for big profits by taking a hard look at what customers need to be successful. (Chances are, the answer isn’t just another jet engine.) It’s a novel approach — and it requires leaders to rethink their business. Here, service management expert Michael Blumberg outlines how new technologies make servitization accessible— and the cultural and strategic shifts necessary to do it well.

What cultural shifts do companies need to undergo to offer extended service offerings?

Blumberg: A good analogy is the razor and the razor blade. In the early days, Schick sold razor blades by basically giving away the razor in order to sell the razor blade. Servitization requires a similar mindset. You get to a point where you can give away the technology and generate more profitable income through the price the customer pays for the service.

That’s a difficult concept for many manufacturers to wrap their minds around. The shift that must occur is going from selling equipment with service provided on a reactive basis to selling a bundled product-service solution. It’s recognizing that, over the life of the product, you’ll make more from services than on the initial equipment purchase price.

Asking businesses to give away hardware or technology to sell customers on ongoing service is a big shift. Are most business leaders up to the challenge?

It is a big shift. Instead of making money when you sell a piece of equipment, send out a part or dispatch a technician, think about what the customer really needs — not just tangible aspects but the intangibles like proactive service management, analytics, design changes, upgrades and retrofits. When service leaders take that strategic view, they can find ways to monetize services embedded in, or wrapped around, the products they provide. This is the ultimate goal of any servitization strategy.

What are the key technology trends leaders need to understand to take this strategic view?

One of the keys to servitization is the ability to capture and analyze data about the equipment, and then use that knowledge to predict and forecast service events before they happen — or improve the customer’s environment through upgrades, enhancements and design changes. Strategic leaders can also use the data as part of their R&D process. For example, they can look at what’s going on in their installed base and identify new service offerings that might be needed or, more importantly, plan and manage those service events based on the data.

What role have new technologies played in enabling servitization?

Before the advent of the Internet of Things and wireless technologies, it was difficult to implement those deeper, data-driven service solutions. It took a big investment in hardware, software and communications technology. But it was still a one-to-one relationship because the manufacturer or service company could only monitor one piece of equipment at a time.

The economics have improved with the Internet of Things. Now, companies can connect multiple devices, made by different companies, at the same time. It’s a many-to-many relationship that didn’t exist before. That’s beneficial because more connections create exponentially more data that can be analyzed and folded into servitization offerings.

Can third-party service providers play a role in servitization?

It is possible. These providers are often catalysts for manufacturers to pursue servitization. However, the term implies that a provider is supplying the customer with products and services. This is typically the domain of the manufacturer, and only a select few service providers can make the necessary capital investments.

What’s more, the greater amount of knowledge and information a company has about the full product lifecycle and installed base, the more effective it can be in developing and offering value-added services. Again, this is often a manufacturer’s advantage.

What companies stand out in terms of offering mature, deep servitization models to their customers?

It’s prevalent in industrial automation and information technology companies in the United States. But a lot of the companies, such as ABB Group, Rolls-Royce and Siemens, are based in Europe. They’re bringing their best practices over here. In the United States, GE, IBM and Xerox are examples of companies that have been on the servitization journey for quite some time.

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