“People don’t want to buy a drill. They want a hole!”
– Harvard Business School Professor Theodore Levitt
What is better: having or using? Owning or renting? Buying a product or buying the outcome? I guess it depends on the use case. But one thing is sure – product to service transformation is too important to be ignored in the industry.
In my previous article, I highlighted what in my opinion are five of the most interesting digital transformation models. This time, I would like to focus on the first of them, namely Product-as-a-Service (PaaS, do not mix it with Platform-as-a-Service).
PaaS is a model that is becoming increasingly popular. More and more businesses are opting for it from both sides of the equation: as providers and as consumers. In a nutshell PaaS is the approach which focuses on delivering the outcomes and results rather than physical products. It focuses on augmenting products with the set of well defined services, at the end removing the need for owning it. It also focuses on minimizing maintenance, development and management activities normally associated with the product. In financial terms it is turning CAPEX into OPEX.
Lets look at the benefits and challenges related to PaaS model.
For service providers:
- Assets Ownership – Ownership of the product behind the service stays with the provider
- Customer Intimacy – Provider has a full visibility into how the product is being used. This is invaluable information which can be used for optimized pricing strategy, new features roadmap and many more.
- Upsell Opportunities – as the provider is in constant contact with customers and knows customers behavioral patterns it is much easier to propose meaningful new features, new products and service extensions… paid extra of course.
- Predictable Revenue – as the customers commit to pay regularly the service fee through service subscription, the revenue becomes much more stable and predictable. In a casual product sales revenue comes and goes based on the number of units sold and it is prone to seasonality and long sales cycles.
- Simplified Maintenance – as customer does not care about maintenance, provider can introduce optimized processes around it, align versions and maintenance windows across customers population and roll out fixes faster than ever
For service consumers:
- Low Entry Barriers – selling product as a service allows for more flexible payment models (e.g. pay-as-you-grow). This removes the need of upfront investment for customers. Now even small companies can use the state of art technology paying only for what they consumed.
- Removing Distractions – for customers leveraging PaaS solutions means less worries. They pay service fee for the outcomes only. They do not have to worry about maintenance, development or unhappy employees. Instead they can focus on the core activities in their business.
- Easy Consumption Model – in many cases PaaS is provided in a very easy, frictionless fashion. Customer experience is optimized to remove unnecessary hurdles. It is possible through standardization repeatability and optimization which help providers to scale their service.
For service providers:
- Obsessive Customer Focus – once you become a service company everybody in your organization needs to focus on the customer. Such shift is not only difficult to orchestrate but also it introduces competing priorities between customer satisfaction and strategic product improvements.
- Continuous Improvements – product as a service model requires that the service is continuously improved. You can forget sitting still, instead be prepared for never-ending, continuous improvement process execution.
- Customer Churn – In many cases it is much easier to resign from service than from product. It is due to prior investment protection, amortization and overall capex management practices. Resigning from service provides far less implications for the customers.
For service consumers:
- Less Influence – as a PaaS customer you have a very limited influence on the new feature prioritization or the strategy and the vision of the underlying product.
- Standard Solution – often PaaS solutions focus on unification of the value proposition. This results in providing exactly the same service to all customers. It is hard to use such service as a differentiation if everybody else can get it too.
- Limited Trust – for customers whose business relies on intellectual property it might be difficult to consume product as a service due to security and privacy concerns. After all PaaS forces us to enter in some kind of partnership with a service provider sharing our data, know how and usage patterns.
It’s easy to talk about the benefits and challenges if we stay theoretical. How can the whole concept be put to practice? It is worth mentioning a few companies where this business approach has worked well.
Michelin Fleet Solutions – selling kilometers, not tires
Many years ago, the market leader in tire manufacturing decided to implement a program for fleets in which, in a way, the tires themselves would no longer be sold. The customer bought the kilometers he would be able to drive on these tires. At the same time, they were given access to reporting systems where Michelin included monthly information on costs and problems. They dealt with any potential problems with the product for a fixed fee from their customers.
Linde Material Handling GmbH
One of the world’s largest forklift manufacturers has launched a Service Up initiative to increase customer loyalty and combat declining product margins. First, they created an internal network of service experts – a group of ten experienced and innovative leaders from seven different countries – and set up a strategy, sneaking in a three-step approach. This involved service work available as part of the service, access to experts not only on-site, but also field experts who were willing to come to the customer’s location to perform the service.
Rolls-Royce – selling flight hours
As was the case with Michelin, Rolls-Royce has implemented its own PaaS business model. With the TotalCare program, they have implemented long-term service contracts that allow them to take care of the product throughout its life cycle in order to achieve maximum flight availability. Among other things, this keeps the engines running longer, and it will decrease the cost of disposing of parts, etc.
PaaS is one of the most interesting business models available today. While it does present some challenges, its benefits are definitely worth looking into as they are mutual for both providers and customers. It does require a profound shift in how provider organization operates. Changing your inner core from product to service company will not be easy. But the benefits might be very much worth it.