Pricing
models and PSS
The figure
hereafter illustrates the change of focus when tangible products are sold as
services i.e. servitized or intangible services are productized. When you stop
selling investment products with relatively large price tag, there are many
changes that should be recognized prior making such a fundamental change. Like
pointed out in previous posts, the fundamental starting point in case of true
PSS is in customer requirements rather than in some technical product or
service. This is true also in terms of business model. Traditional
manufacturing companies must re-plan their business model because the value
gained by the customer is in the focus point and that should be visible also in
the whole chain, including the pricing as well.
Business model alone can be a competitive advantage.
Amazon is a
good example of the disruptive business model with great effect into
traditional business. They did not change the product (book), nor the actual
end result for customer. They changed the process how customers are being
served and thus the value chain was replanned.
Figure 1 Change of focus
PSS and value based pricing models
There are
researches saying that companies utilizing vale based pricing are capable of
gaining even 30% more profit than compared companies utilizing traditional
models. This is possible when the price tag is based on customer gained value
rather than the cost of some equipment. After customer value is estimated, it
is relatively easy to set a price tag. Whenever the value is estimated, it must
be communicated to customer. With estimated value and a payback calculation it
is a safe move from customer to make the purchase decision. Important is to
understand that actually pricing is highly important strategic function. Typically
value based pricing is present when instead of investing into production
equipment, customer is paying for act, e.g. copies, lifts, sets, running hours,
inspections or then availability of the equipment, like hours, monthly fee with
SLA or such. However, keep in mind that value based pricing can be utilized also
when customer is investing into equipment.
Effects of the value based pricing models
In order to
gain good profitable business with value based pricing models and true PSS, one
must know and understand the customer business very well. There must be an
understanding of the performance level of own products in the operation – how much
the equipment must be maintained, how often they are in service and what are
the typical defects etc. This is of course available information if the company
is mature with established service business. For those and for young companies
there are luckily technology enabled possibilities to monitor and gain data to
make preventive and predictive maintenance to avoid uncontrolled down time.
Also when changing the base of the pricing from investment product to pay per
use, common marketing need is created. If I invoice washes instead of a car
washing machine, it is my benefit to gain as many washes as possible – happens
to be my customer goal as well. There is common marketing need created and also
I should learn as much and as deeply the business of or customers as possible.
I should change my mindset
from leadership of technology to leadership of use
For my
organization this means that more people in various functions in several levels
of our organization should be in touch with customer’s daily issues. In practice
it means our performance will improve and also our focus in R&D should be
driven by real customer needs. PSS and value based pricing often leads into a long term business relationships. They are likely to be more profitable than one offs. That is also logic, when gaining more information from customer operations, the company becomes an expert of precisely that customer business. It is natural for customers to ask help from the ones that they know and they have already made co-operation with. Going into PSS and value based pricing should help in competition, internal expertise and profitability.
