I recently had an interesting conversation with a customer of a large tire retail chain in Brazil. He told me, “You know, all the time I ask my colleagues, ‘what do we sell?’ And they always reply, ‘tires’. My answer is similarly always no, because we sell services.”
This company is really selling not just a tire, but in reality is selling a tire plus all the knowledge about that tire. If I am a regular car owner (and I am), I would be grateful to not only get a much-needed tire, but services that can add value to my experience. For example, when do I need to change my tires? What is the best manufacturer and model for my car? When a tire rotation is due?
And beyond the basics, what if this company could also track the vehicle itself? Imagine if you sell your car and the new owner arrives at this retailer. Thanks to their ability to track data, they are able to diagnose any issues with the car, be well-versed in its service history and offer the best services based on that information.
If a customer is only buying a tire, price is everything that matters – mine or my competitor’s. But if I can offer him/her a better experience—like a valuable service—the game changes.
In a play on Shakespeare’s famous words, nowadays a rose can be smell very different indeed—in other words, a physical product can be more valuable if you name it (and treat it) as a service.
Transformation requires new business models
This trend is called “product as a service.” Heather Ashton, IDC’s research manager, shared some very interesting insights about it. She states:
“By 2018, 40 percent of the top 100 discrete manufacturers and 20 percent of top 100 process manufacturers will provide product-as-a-service platforms. Leading manufacturers have seen the potential that after-sales service revenues hold, with some generating up to 50 percent of their profits from after-sales sources. As manufacturers apply service innovation to their efforts, the product becomes a platform to deliver business outcomes and tangible value.”
Despite this trend, in their white paper, Product as a Service: Enabling Physical Products as Service End-Points, professors Runhua Xu and Alexander Ilic declared that “a wider range of products like consumer goods are not intelligent enough and they are not closely bundled with services during selling processes. Instead of providing services proactively, most manufacturers have to wait until being reached by consumers.”
Ashton points out that companies will need new business models to address “the transformation of service from a stand-alone function within a manufacturing organization into an integrated product and service offering that delivers value in use.”
Besides that, they will require new IT capabilities to support it. In other words, it is not a simple change, but a necessary one. It’s a matter of better businesses and more satisfied customers.
