Servitisation: why service revenue will eclipse product revenue

After reading this, you will want to disrupt your current sales strategy - or at least consider doing so. Not because you have got it wrong, but because you are probably leaving money on the table without knowing it. Let me explain.

The chances are that, like most machine builders, you are relying primarily on product sales to meet revenue targets. But there is another revenue stream to be monetised - service revenue. And it is likely to eclipse your product revenue.

Time to face the strange servitisation changes

The traditional sales model is to sell a product and the customer pays. But it is not a relationship, it is a transaction. In a globally competitive market, products are commoditised and margins are squeezed, diminishing leverage from such production-centric approaches. It is a dead-end path for growth unless you can significantly differentiate with a specialist or unique product.

'Servitisation' - the delivery of a service component as an added-value when providing products - transforms companies from producer to service provider, shifting them to delivering advanced services such as selection, consumables, monitoring, repair, maintenance and disposal. It also provides the opportunity to increase service revenues even further by supporting existing third-party or competitive products. This creates an ongoing relationship with the customer that effectively locks out competitors. And as we enter the era of the Internet of Things (IoT), your products will be able to alert your service technicians about their service requirements in increasingly predictive ways.

A gold mine under your nose

Speaking of service technicians, there is a strong likelihood either your field service representatives - or those of your distributors and partners - know much more opportunities in your installed base than your sales team. Service reps are usually the only human touch point customers have with your company, coming into contact with them multiple times in the lifecycle of the product. They know patterns and timing of demand for replacement products, drive consumable sales and add to your competitive knowledge. They can also see what competitive equipment is installed on site and identify opportunities. That is why service departments are shifting from cost centres to profit centres.

When my colleague ran a service department at Pitney Bowes, he used to say if he gave a salesperson 10 and said go and drum up some leads, they would not be able to do much with it. But if he said spend the 10 on buying your service rep breakfast, they would find a treasure chest of leads.

By empowering your service technicians with cloud-based, real-time tools in the field, they can do work-orders, request parts, schedule and be scheduled, look up manuals, take payments, renew maintenance agreements, use social channels to communicate problems swiftly and effectively, and upsell and cross-sell products and solutions where appropriate. All of this is done on a smart phone or a tablet. All the data is real-time. And customer relationship management systems pick up the information and ensure that the customer receives future communications, advice, updates and education. And, of course, all of that data is delivering valuable new insights about your businesses and customers.

Quantifying the benefits

Of course, nobody cares about new business models unless they deliver. So let me give you some hard numbers. Average service margins are nearly 11 per cent higher than equipment margins. Servitisation delivers a 5-10 per cent jump in annual services revenue, profits two to three times greater than those on product sales alone, cost reductions for customers as high as 30 per cent, as well as the opportunity to increase service revenues even further by supporting existing third-party or competitive products. This creates an ongoing relationship with the customer that effectively locks out competitors.

And a good field service management system can deliver a 22 per cent increase in service revenue, a 19 per cent decrease in average repair time, and a 12 per cent increase in contract renewals. And according to IDC, 70-90 per cent of the total lifetime cost of heavy equipment lies in maintenance and repair.

How to get there?

So how do you get from here to there? IoT is answering that question for you. With sensors now becoming embedded in almost all aspects of equipment, it is just a matter of time before they make their way into mainstream machine building.

At ServiceMax, we not only provide a platform for managing IoT-enabled field service management, but we also work directly with companies to help them with their servitisation strategy, and we are directly imputing into courses on the servitised business model with Cranfield University.

Five years ago, if you had asked a room full of machine builders if they thought field service management could drive high EBIT and profit levels, spearhead new revenue growth, help outperform the competition, and eclipse product sales through service revenue, almost nobody would have raised their hand. Today, that is all changing.

It is time to take a look at your service department with fresh eyes and harness the significant contribution it can make to your strategic growth.

Visit www.servicemax.com to find out more about servitisation and the software that ServiceMax offers for implementing, managing and monetising servitisation.