For a number of years successful companies transformed their business by shifting focus from selling products to providing services. In 1990s IBM has realized that there is more value in software and services than hardware. The shift achieved steady revenue, higher profit and tighter bonds with customers.
The trend goes beyond computer industry. Many manufacturing companies are offering complete solutions to business problems which are combinations of products and services and coming with innovating way to charge for them.
GE and Rolls Royce are world leaders in manufacturing aircraft engines. GE’s new business model is called ‘‘Power by the Hour’’ and the customer pays only when the plane is flying. They now make most of the profits from services, not the product. The engine itself, increasingly, is just a way of acquiring customers to receive these services. As aircraft engine sales have leveled or fallen off, services have become an increasingly important part of GE Aviation’s business. Xerox went through a similar transition when it moved from selling printers to providing printing services.
In our advanced economy, the shift from products to services is greatly accelerated by Moore’s law, miniaturization of computers, and wide spread of connected mobile devices.
With proliferation of car sharing services like ZIP Car, Car2Go and alternative cab services like Uber and Lyft we witness beginning of transformation from car ownership to mobility as a service.
New generations don’t see a car as a status symbol it used to be for their parents. Instead, they are looking for a convenient way to get from point A to point B. It may be a public transport one day, bike ride during summer, and car sharing for trips to IKEA. Self-driving cars, which are just around the corner now, will complete this process.
Smart products represent another trend that contributes to increase in services. Their smartness comes from a connection to a cloud service that is analyzing and making sense from data collected by IoT devices.
If you are a producer of a regular thermostat you sell a product. On the other hand, a manufacturer of a smart thermostat sells a physical product bundled with a service subscription. It is easier and faster to add value by updating services than replacing physical products. Having a service as a part of your offering opens more business opportunities and ways to please customers. For example, Tesla has recently implemented a software upgrade that increased top speed of its 85D and P85D Model S electric cars.
As a business is moving towards adding services to its offering, it will need to adjust its business model, processes, and tools that support them. Services business requires maintaining a long and ongoing relation with customers instead of “sell and forget” attitude. Sales, services, and consumption need to be blended into a coherent user experience.
Business should also be ready to deal with defining and managing complex combinations of products and services, both digital and physical, supporting recurring and consumption based pricing, and helping customers to select a combination that fits their needs.
Switching from selling products to providing services opens exciting business opportunities and companies need to prepare themselves for taking advantage of them.