Product-driven companies adding service revenue streams to business models

A recent Industrial and Financial Systems study of 200 North American manufacturing and industrial executives outlines the extent of servitization

Whenever a megatrend happens, there is usually multiple forces at work. Servitization is driven in part by limited opportunity for many product-centric companies to grow product revenue and profits due to factors such as downward price pressure, volatile demand and increasing prices for inputs and raw materials. But the stable, recurring revenue of servitization may be more attractive over the lumpy year-over-year business of machine tools markets.

Aftermarket services make the customer more dependent on the supplier for important value-added services like maintenance, operation and asset life cycle management. This may insulate the vendor from competitors. It also enables a vendor to access deep insights on how their customer is using their products, which can in turn drive a consultative selling process.

But enabling technologies are also making servitization more feasible. The internet of things (IoT) is enabling companies to sensor products they sell and use the resulting data stream to automate everything from re-order to dispatch of a service technician.

A recent report from the global management consulting McKinsey & Company suggests that while margin on new product sales is typically 10 percent, aftermarket service margin averages 25 percent. But actually realizing that revenue poses some significant management and enterprise software problems.

Executives will need to live increasingly in the mental future — planning around not only the product life cycle but the service cost and revenue cycle. When the service agreement is sold, a company is committing to deliver against a contract that they could make or lose money on for years.

“To gain clarity and remain competitive, they must undertake a more detailed examination of aftermarket lifetime value — the total revenue they receive from servicing their installed base,” the McKinsey report states. “This measure, which is typically calculated for each product line, provides a more comprehensive view of aftermarket value than commonly used metrics, such as service revenue captured per customer.”

A recent Industrial and Financial Systems study of 200 North American manufacturing and industrial executives outlines the extent of servitization, its impact on profitability, the extent of their adoption of service life cycle and field service management technologies. Here’s what we found:

Current progress towards servitization

Among respondents to the IFS study, the majority had some type of aftermarket revenue stream, even if that revenue stemmed strictly from aftermarket parts sales.

38 percent sold only products, with no aftermarket or other service revenues
19 percent sold products and some aftermarket service parts
15 percent sold products and aftermarket field service through break-fix repair
16 percent sold planned maintenance contracts with service level agreements (SLAs).
4 percent reported

The smallest segment were those who had full servitization — essentially doing away with product revenue and charging for a product by duty cycle, usage or some other metric. Companies operating in this fully-servitized business model include: