Part 2 of 8: This is the second blog post of this series of 8, focussing on ever-present topics impacting the technology world.
What can we learn from the likes of Amazon, Netflix or Caterpillar about the power of personalising services for customers?
Many successful businesses today are travelling on this servitization journey which is ultimately all about delivering outcomes (from your product or service) for the customer. That journey also increasingly means getting much closer to the customer and finding out exactly what outcomes they are deriving from your products.
Ideally, businesses need to build much more direct relationships with individual customers to understand how their products are being used in the field. You can read Tien Tzuo seminal book entitled ‘Subscribed’ if you want the low down on making this change.
So, for Caterpillar, it was the realisation that the ‘outcome’ for customers of their large earth moving vehicles was movement of tonnes of earth. So, Caterpillar made its largest trucks fully autonomous – it sold these trucks ‘as a service’ via subscription – fixing prices based on the number of tonnes of earth moved over a given billing period.
Because the customer only paid for the active usage of these vehicles, there were considerable savings to be made as they neither needed to own, maintain, or pay for the trucks when idle. Caterpillar today has 600,000 ‘connected assets’ which it’s garnering insights from in terms of usage levels, maintenance issues and predicted future needs. Naturally, Caterpillar has much closer working relationship with its customers. Indeed, its activity and success is intricately bound with their customers – they must do right by them.
Amazon was a pioneer of this idea that each customer needs to be treated as an individual who must be served as an individual. Each customer’s browsing and buying history within their Amazon account became the basis for insight which could be put to work to recommend other content which fitted that customer’s preferences based on their Amazon transaction history. Netflix went down the same route as ‘hyper personalisation’ came of age.
Building personalised insight about your customers, rather than just your customer segment is key to success for businesses being paid via outcome or usage-based subscription. If you get this right, customers will be much more loyal than they ever were before. If you get it wrong your customers will hang you out to try via their social media brick bats. It stops being about mass production and swamping the market with products which may or may not work for the end customer – and starts being about customising the product to fit the individual needs of that customer at any point in time.
Of course, we now pay for everything via subscription from our Apple Music account to our Amazon S3 data backup service, Netflix, Sky and all the Software as a Service (SaaS) subscription which we use in our offices.
Pay when you consume
The subscription model can now be extended to support most hardware. So, vendors selling printers instead can sell ‘Printing as a Service’ which binds you into purchasing that printers’ ink cartridges and other consumables when you need to replace them. This payment for consumption could even be extended to payment for outcome in this market. Xerox did this, charging customers based on how many pages they successfully printed from the printers which Xerox supplied and maintained- even bundling this service with guaranteed uptime promised for all your connected printers.
This sort of service is possible because of remote diagnostics. Xerox know when one or other of your cartridges are running low, and they know when parts are wearing out and need replacing. They fix issues before they stop your print job. You can pay for the convenience of never being unable to print a document in your office, again via a monthly subscription which is directly linked to your consumption. This is great for the vendor. They command your loyalty. It feels good for the consumer as well as they no longer have the inconvenience of running out of ink in the middle of that vital print job. You may even be prepared to pay a little bit more for that convenience.
The vendor has much more certainty in terms of revenue predictions because they have their customers tied in on printing as a service subscription models – as long as they honour their service agreement they should hold onto that customer through several generations of printers.
They will also find out fast when that consumption changes and pre-empt a switch to an alternative product or service by offering a deal to secure them for longer. Customer lifecycles can be extended from perhaps 12 months to 10 years or longer if vendors get servitization combined with their subscription models right.
This model is so successful that there is barely a hardware business anywhere that is not actively exploring the subscription model today. The race is on to get closer to the customer, work out what benefits they are deriving from their products and then, based on this intelligence, wrap subscription-based advanced services around all that to secure their customers regular subscription payments for all time.
The only snag is that if they have mature channels, in the IT world that may include distributors and integration partners, the vendor must bring them with them on their servitization journey as far as is possible. These integrators need to become the foot soldiers which enable these new advanced services contract terms to be met consistently. Take a look at the backlash against car manufacturers trying to relegate their dealerships to agent status to see what happens when you don’t take your channel partners with you.
CAPEX versus OPEX
Businesses’ are generally gravitating away from owning expensive assets to leasing them. It’s all to do with the finance department’s obsession with reducing unpredictable overheads. If you own your own premises you also have to maintain them and that will periodically require significant capital expenditure (CAPEX) to bring them back up to specification every few years. You’ll also have to write off disposals as equipment you’ve acquired reaches obsolescence. However, if you do a ‘sale and lease back’ deal on your commercial premises for example, the uneven costs associated with keeping the building in a good state of repair become the responsibility of the new owner.
That new owner will build the anticipated cost of big repairs (like putting on a new roof) into the rent and service charges which will be paid as a regular sum every month or quarter. These costs then form part of operating expenditure (OPEX).
This help reduce corporation tax that you would otherwise pay on additional profits. However, more important than that, it makes your costs of operating predictable – smoothing them out throughout the year. In this way, it’s much easier to manage cashflow and avoid expensive short-term borrowing. As OEMs servitize they find their income streams becomes more even too as they are smoothed over the life of longer contracts. Cashflow management can be improved markedly.
OPEX trend helping accelerate cloud and payment by subscription
The trend towards OPEX is now accelerating adoption of both cloud computing and subscription models which provide IT functionality and capabilities via monthly subscription-based service. None of your own servers have to be maintained. Packed server rooms in every commercial building in the country will slowly be pared back as Infrastructure as a Service providers like Google, Amazon, IBM, and Oracle will run vast data centres running the data management and storage for thousands upon thousands of businesses from each centre.
Speed to market advantage
Subscription models reduce the cost of distribution considerably. The ability to sell services direct is very strong. The focus then is to get the Minimal Viable Product (MVP) into the hands of as many people as possible, even on a ‘freemium’ basis in which many thousands of early adopter customers download the free version of your product.
And then, as adoption rises and the product goes mainstream (think Zoom at the start of the pandemic), you introduce a higher spec premium version such as Zoom Meetings and get hundreds of thousands more subscribing to the £11.99 per month version.
Because the costs of distribution are so low and it’s possible to build market share very quickly through internet-only delivery, IT software development budgets open up for improving your product.
Agile not Waterfall
Here the advent of Agile software development enables rapid, iterative development and testing before rolling out to a ready and eager customer base. If functionality is not well received you can now get feedback from the market very rapidly and simply withdraw the functionality that is not working for your customers, while iteratively improving the capabilities which are. Bugs can be fixed faster too.
Well-funded, disruptive players which can get this right, can knock incumbents out of the rapidly. You only have to look at what happened to major IP video conferencing player Skype during the pandemic to realise this. Notice also that Microsoft chose to compete with Zoom by offering its MS Teams free of charge.
It dropped its requirement for users to have an Office 365 license pretty rapidly when it saw its market share in collaborative video meetings disappearing. Even with that advantage, people who use Zoom often complain about the quality of the experience via Microsoft Teams. Zoom was just more focused and moving faster to fix problems and roll out new functionality for their early adopters to evangelise about.
There are 5 key take-aways from the deep dive of my last 2 blogs – the first on Servitization and the second covering the Subscription Model.
- Servitization needs to be seen as a journey for manufacturers. It’s a journey which starts with providing services like 24/7 technical helpdesk to supports your product users. That journey will eventually lead you to offering Customer Outcome-focused Advanced Services.
- Advanced Services tend to have 4 unique features built into them: a. a pay as you consume element, b. a long-term service-based contract, c. a risk & reward share element possibly extending to a profit share, d. ‘cost-down’ commitment which essentially promises that the cost of running your printers, jets, fleet of trucks, etc will gradually fall through the life of the contract.
- IoT extends the potential for hardware vendors to wrap many more Advanced Services around their products. Big data plays are popping up in most markets with connected IoT devices or sensors are proliferating.
- Businesses that have servitized often get paid by regular subscription. These subscriptions should be linked to the customer’s individual usage and/ or specific customer ‘outcomes’. It might be linked to consumption of power, printed pieces of paper, data storage, tonnes of earth being moved, or numbers of miles travelled from A to B and back.
- The increasing focus on developing technology as a service should make access to technology more affordable and eventually ubiquitous. For example, they talk about the democratisation that the subscription model can bring to markets so that even the smallest companies can gain access today to functionality that a few years previously would have been the preserve of just the largest enterprises with the deepest pockets.
Are you planning to signal to the world that you are no longer just a product business but a ‘customer outcome driven business’? Perhaps you need to launch a Product as a Service offering? Maybe you need to signal a raft of planned changes to the market you serve – making it clear you want to serve them in a new, more engaged manner?
I’ll be hosting the next one-hour live webinar on Thursday 9th September 2021 at 12:00 (BST). It will offer some best practice tips for communicating strategic changes such as Servitization and Subscription Model adoption. Please join here if you are interested in exploring the biggest change to hit the technology market in a generation.
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