Pricing models and PSS

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.

About PSS

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 discussing about the total offering and productization related at some point the discussion goes into services. Often additional services around the core product. This is typically the starting point for servitization. But when we talk about true Product Service Systems there is a difference. The fundamental starting point is in customer requirements rather than in some technical product or service. That has some major effects in company strategy and in operational model and thus personnel. Probably the best-known example of PSS is:

·       Rolls Royce power by hour

It is anyway difficult to separate Servitization and PSS. Actually there are researchers who claim these two things are the same and the naming is the only differentiator. The operation of the true PSS requires high technical skills and understanding of the customer needs and requirements as well as knowing the features of own offering in detail.

Figure 1 Change of focus

PSS benefits

Some research say that there are companies starting to do PSS sales even before they have properly defined all the facts they should know, including the pricing of their PSS offering. They do it because there is so much value in the feedback data enabled by the model. Example: If I would sell container moves instead of container handling equipment, I would need to know or learn fast the customer operation in much greater detail if selling only the equipment. Then I would really gain deep understanding of customer processes and operations. At the same time, I should understand my responsibility then. The customer business would be on my shoulders. Thus, deeper co-operation with customer in all level of organization is a must thing to do – again a great benefit. Once I had started this, it is really difficult for customer to change the supplier. The mindset inside the company should also change 

from leadership of technology to leadership of use

It is such a change that I should execute a critical evaluation and gap analysis of available skills and resources. The change would become visible in marketing as well. I should make sure the marketing focuses on relationships marketing and the performance rather than the equipment. This is again paradigm change.

The bad news

When the change is done in marketing talks – no more equipment, rather the performance figures or equipment availability numbers etc. It is obvious that some part of the personnel would not anymore have perfect fit or they should be replaced with different set of skills and mindset. Company management structure may also require somewhat different weighing than previously. That all said, the change has wide effect to many parts in the company which means there must be many people rowing the boat with equal pace. It is even more important than in traditional equipment sales because now the operation of the product has straighter forward effect to revenue.

This is also seen as the number of people in direct contact with customers is likely to increase when moving into PSS model.

PSS and digitalization

Technology enables things today that has been the dream of many operations managers in the past. Thus, the business developers have great tools in their hands. Previously it was often mentioned that if we only would have the data online enabling live monitoring of a device or it would be great if there were a system enabling easy and fast established communication with customers and suppliers. Technology is there, now it is just about the people and creativity. In the next blog, there will be some ideas related to PSS benefits and barriers to enter.

Servitization

The figure hereafter illustrates the change of focus when tangible products are sold as services i.e. servitized or intangible services are productized. When discussing about the total offering and productization related at some point the discussion goes into services. Often additional services around the core product. This is typically the starting point for servitization. In real life there are several examples of Servitization. Some of them are clearly already Product Service Systems which means that he fundamental starting point in design of the offering has been customer needs. Examples of servitized products:

·       Rols Royce power by hour

·       Gasum monthly payment for unlimited amount of gas for driving

·       Tammermatic sales of car washes instead of washing machines

In fact, from these three, Gasum is clearly a servitized product but the other two examples are more close to true Product Service Systems (PSS). It is anyway difficult to separate Servitization and PSS. Actually there are researchers who claim these two things are the same and the naming is the only differentiator. The operation of those true PSS require high technical skills and understanding of the customer needs and requirements as well as knowing the features of own offering in detail.

Figure 1 Change of focus

Servitization of intangible and tangible goods

Software (SW) products are often sold as a service. Pricing is a monthly fee, or some annual license, pay per use or pay per use. Whatever the metrics, in SW world it is common to approach the SW product as a service – I pay for the company A so that they let me use their wonderful product which enables or helps me to do my business or my personal tasks. People are familiar for this way of doing business. It is also logical because SW tends to be develop continuously with updates and bug fixes. For a long time companies have been talking about SaaS – Software as a Service model. Most likely there is some new nice refreshed word describing that today. Servitized offering of Hardware (HW) i.e. tangible products is not that common, especially in consumer businesses. There are rental services and selling the equipment in lease. Those are servitized business models, but not that common anyway. Sharing economy is a raising trend but yet it is more common to buy the ownership of HW goods than share them. When taking a look at the corporate finance books and how they teach the subject typically in schools or universities, it is relatively common subject to handle payback calculation of investments. This is related to traditional way of buying HW equipment for production of other goods. It is relatively deep in the business minds that equipment are investments rather than anything else, i.e. buying the operation or output of the equipment. However, it seems that the trend is to increase the servitized model of purchasing the equipment or even PSS in order to gain the benefits and sharing the risk of the investment. Time will show us how it will work.

Drivers of the servitization

Drivers for changing the model for servitization are often rooted to market demand. Customers and competition drives into creative models of doing the business. It is also commonly known that the one closer to customer company core business most likely win the next deal as well. Sercives are often good way to get closer and to really understand and learn customer daily pain. Servitized models and PSS can act as competitive advantage if carefully designed. It seems that it is not the prodcts that define the leadership in the markets, rather the competencies. Who takes the leadership position as a true subject matter expert. Servitized models and PSS are also hard to copy and pricing can turn to be incomparable for customer – the root for differentiating in competition. Equipment manufacturers are willing to relocate themselves as more valuable in food chain.

PSS and servitization

As mentioned hereabove the line between servitized business model and true PSS is so thin that some researchers claim it does not even exist. The ones that say they are different justifies the difference with the fundamental starting point. Example, servitized model would be sell equipment with a lease where customer pays monthly fee or such. Still it is transaction based business and has nothing to do with the operation or performance of the equipment. PSS model for the same equipment would be e.g to sell moved tons or operating hours with full service, customer paying only for the tons or hours or such. In order to make latter successful for both the equipment manufacturer really needs to understand the customer business and have that as a starting point for design. Once a company achieves the position as known PSS producer, they are really strong in competition – probably mostly because everyone knows they must understand the customer business well and that is worth money.

Author is Sales Director at Helmee Imaging

Feel free to contact for further discussions about PSS, Sportsdata business or automated visual inspection of high gloss surfaces. Find my contacts from company page or Linkedin.

Change of view

Change of view

For years I have been working with different product service systems. Due to this 10+ years experience I have made some notifications which I am going to open in this blog. During the years technology has develop further with such a leaps enabling things we could not have thought ten years ago. Digitalization of surrounding world is going further enabling new business opportunities and connecting many devices into internet and to other devices. Paradigms are and will be changed like explained in recent PhD dissertation of Mr Sommarberg.

It is not however only the technology that needs to be changed. When we take a look at the well-known business innovations lately, e.g. Über and Airbnb there is enabling technology in the background but the true innovation lies in business model. They have changed the view. The fundamental starting point is to look things from the point of user and use. Traditional manufacturing enterprises talk about the customer focus and customer experience but yet many of those are still selling the equipment instead of selling the use. Naturally there are also forerunners like Power by Hour from Rolls Royce and many others.

Obviously there must be some barriers to move into Product Service System direction as there are still majority of companies operating with more traditional models. Changing the point of view from technology to use has major effects on many fields e.g. pricing, resourcing and customer relationships. It is not straight forward decision made easily. For established traditional companies the change is big due to effects on many levels. Thus it is a strategic decision requiring a top management strong back up. For a start up company it is easy due to agile model and smaller number of staff and operations to handle. Also customers have their word in the game which might not always favor change of view.

The whole blog will be about this change of view and the actions around it. What needs to be done and what are the possible barriers of entering the new model and what are the effects. Due to my experience, I will use examples from my own industrial history as well. I am really looking forward this blogger journey and hope to learn more while writing and hopefully getting some feedback as well.