Over the past decade, manufacturers from appliance makers to automakers have seen prices drop and margins erode, demonstrating that making things and selling them to customers in a single transaction is a risky business model. At the same time, companies offering subscription services with recurring revenues have grown revenues approximately six times faster than S&P 500 companies (17.8% versus 3.1%). Subscription service companies have also seen their share price outperform the S&P 500 by three times.
Manufacturers have realized that to survive and thrive, they will need to become an “as-a-service” company. Here are five principles for manufacturers to remodel their internal processes and customer relationships to successfully transform themselves into exponential organizations.
1. Build services
The reason subscription services have been successful in recent years is that, when done well, they offer a win-win to both sides; customers receive ongoing support and the latest offerings while providers receive recurring revenues and low dropout rates.
But subscription services must be designed with the customer in mind and we have seen how to do them badly before, for example with cable companies. In 2019, customer satisfaction with Pay-TV and broadband were again in “last place among all [46] industries” tracked by the American Customer Satisfaction Index.
Becoming an effective service company means turning customer relationships from a one-off sale (often through a retail intermediary), into a direct, ongoing, and intimate dialogue. Manufacturers must listen to what customers are saying and services need to constantly evolve for the better. This is far from the traditional, long manufacturing cycles with a hard launch date.
A service-based mindset encourages manufacturing companies to become partners with their customers. This means sharing risk, and benefitting from a higher customer lifetime value. A good example of this approach is Philips providing services such as Light as a Service and Value-based Care.
2. Build software
Manufacturing companies have a competitive advantage in their ability to produce and sell vast numbers of products which can be made smart and connected. However, for these smart products to be made into services, software is required. Software is not a core competency of manufacturing companies and is instead a new competency that they must build. This requires not only software engineers, but expertise in UX/UI and service design, too.
Smart, connected devices can collect a huge sea of data that can give new insights into how customers use the products. The challenge is then not only gathering and making sense of the data, meaning manufacturing companies will need to build data analysis capability, but also turning this data into actionable insights which evolve the product and service. That is where programmers, service designers, data scientists, and product people will need to work together to build the connected services that customers find compelling.
A good example of a manufacturer using software to power services and increase its value is Tesla. In July 2020, it overtook Toyota as the world’s most valuable carmaker, even though it sells less than 4% of the number of cars that Toyota sells. Rainer Mehl of Capgemini explained that this value comes from Tesla cars being a “shell around the software and applications inside”. And The Economist said: “Thanks to vertically integrated manufacturing, its systems have been interlinked from day one [making] its software and mechanics seamless. […] All this software means Teslas improve with age, thanks to regular “over-the-air” updates with new features, bug fixes and even performance upgrades.”
3. Build partnerships
The fourth industrial revolution has led to an acceleration of industry convergence, with companies entering seemingly unrelated markets. To compete in this environment, manufacturing companies need to make alliances and collaborate with organizations where there is a win-win opportunity. This has given rise to the term “Co-ompetition”, where companies cooperate with organizations that they may also be in competition with. A good example is Sony and Microsoft’s partnership to help the two long-time gaming rivals see off the challenge from industry newcomers Amazon and Google.
This trend is especially evident in the auto industry where many partnerships that would have been unimaginable 10 years ago are now a reality. Automakers are working with each other, as well as with chipmakers, start-ups, MaaS companies, consumer brands, and tech giants. In order for these partnerships to be effective, those involved must keep in mind the value that customers want and the service that the company needs to build.
4. Build platforms
Whereas in the 20th century linear growth could be achieved by selling one more product, now exponential growth lies in enabling your product with services and letting anyone make use of it as a tool. Manufacturers can connect buyers and sellers of services, or even enable other organizations to make money from their hardware, opening the door to exponential revenues.
This can be shown in the rumors that Tesla will be allowing other companies to use their advanced EV powertrain and battery “skateboard” chassis as a base platform for any vehicle, which would instantly increase potential demand. The same goes with Toyota’s e-Palette concept, which would put any service provider (think restaurants and clinics) on wheels.
5. Build interoperability
One barrier to the adoption of services and a source of frustration for users is the difficulty of connecting devices and having an individual app for each connected device. To reduce barriers, companies should explore open interfaces to allow applications to ‘talk’ to each other and collaborative industry standards, among other means. The old, closed, siloed approach limits growth compared to the exponential opportunity offered by working with partners and making products and services into a platform.
A service being narrow and fragmented represents a barrier to adoption. This is the reason that there has been such a slow uptake in smart home solutions, where customers do not see value from many devices and apps for narrow use cases, and are confounded by the lack of interoperability between them.
Designing customer-centric services and working with partners will require making pragmatic choices about using existing platforms, creating new ones, or co-creating standards.
Manufacturers can use these principles to avoid becoming commoditized and having both their prices and margins eroded. They must seek to own the customer relationship through customer-centric services which will require new design capabilities and increased collaboration among stakeholders, moving from linear growth to exponential revenues.
Maruan El Mahgiub is Director of Business Strategy at Mormedi
© IE Insights.
