Customers don’t buy products as much as they buy the capabilities and outcomes those products deliver. To them, a perfect world is one in which their equipment never fails.
Unfortunately, some companies spend millions (or billions, depending on the industry) servicing those assets every year, yet still struggle to prevent failures. Such frustration has bolstered demand for Product-as-a-Service contracts. Under these agreements, product manufacturers assume responsibility for keeping their products up-and-running, absolving customers of the costs associated with managing spare parts, creating work scopes, and executing maintenance.
Product as a Service fundamentally changes how manufacturers make money, shifting their focus away from product sales and toward aftermarket service. Why invest in this business model?
When a minerals company buys an excavator, it does so to increase its production capacity. If that excavator shuts down unexpectedly, the mine must allocate resources toward fixing the machine as opposed to producing material, thus hurting the mine's ROI.
There are several tactics manufacturers can employ to prevent downtime from occurring:
Aftermarket service is about four to five times more valuable than product sales because service transactions occur multiple times across an installed product’s lifecycle. The average profit margin for each of those transactions is usually between 15% and 25%, whereas product sale margins range from 10% to 15%.
Frequent service transactions also build rapport between product users and manufacturers. When a product manufacturer anticipates an impending failure and takes proactive measures to prevent that failure form occurring, the customer is likely to not only renew its service contract but also recommend the manufacturer to a colleague.
Providing Product as a Service warrants certain capabilities. When assessing your operations, ask yourself the following questions:
How you implement Product as a Service depends on the manner in which customers utilize your products. Ingersoll Rand’s Trane division serves as a solid example of Product as a Service in action. You can read their story below: