Changing the Game in Industrial Goods Through Digital Services

Changing the Game in Industrial Goods Through Digital Services

          
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Changing the Game in Industrial Goods Through Digital Services

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    Monetizing Digital Services

    Pricing new digital services is often trickier than expected. Which parameters—for example, equipment usage or output—should a service company use to establish a rate schedule? And if the pricing assumes a boost in the equipment’s productivity, customers may be skeptical, since they think they know their own equipment better than the manufacturer does. Pricing solutions are still developing. In the meantime, service providers should consider several factors when tackling this task.

    The solution to customer skepticism is to make the new services a clear win-win—for the customer and service provider. Service companies that promise a customer a certain level of savings in order to sell a service should guarantee reimbursement to the customer for any shortfalls. Over time, as the customer starts to trust the service, the service provider may be able to drop those guarantees.

    Predictability is essential. Even when pricing is based on a customer’s use, cost predictability matters. In the tire example, the manufacturer charged according to the number of kilometers driven. To minimize unprofitable agreements while still attracting new customers, service providers must develop a new set of pricing
    capabilities.

    It’s also important to remember that the payoff from investments in digital services will come not only directly through increased revenues but also indirectly through improved customer relationships. Whenever a customer switches from a discretionary, as-needed service to an ongoing service package, the service provider gains in lower sales costs, more efficient service planning, and a lower risk of customer attrition. Service packages also increase the number of services provided, whether in the form of spare parts or maintenance, and protect service companies from losing customers to third parties. Earning that payoff requires a clear strategy that supports the service commitments as well as a long-term view of the market.

    Service providers are exposed to significant risk if they get the service business case wrong. Using analytics, they can gain a thorough understanding of the costs involved in the service, both the upfront costs and the recurring ones. In addition, service companies can compare the characteristics of a new customer with those of past customers whose cost savings fit the promised results. Providers should moreover assess the financial and reputational risks of failing to live up to their commitments or of costs generated by unexpected events. Safety risks may be relevant as well. Service companies should therefore develop the skills and tools for comprehensive risk assessments and, if necessary, have an exit plan.

    Finally, service providers should insist on certain commitments from customers, including a minimum duration agreement, in order to recover the often-hefty initial costs. More important are mechanisms to align a provider’s interests with those of its customers’. Without such mechanisms, customers may change their behavior in response to the shift in responsibility.

    A common danger is that customers will no longer care about costs that are fully borne by a service provider. For example, customers may run machinery above recommended levels to maximize production over short periods. To deal with this possibility, a leading gas-turbine manufacturer adjusts the pricing of its maintenance service depending on the length of time that its equipment is used at peak power. Peak power reduces the life expectancy of turbines, so customers pay more when they rely more on this setting than expected.