Made to Serve: Manufacturing business models for services
Over the past year I’ve spent a lot of time at industry conferences and roundtables, spreading the word about servitization and advanced services and talking to business leaders about their challenges in trying to get traction for these initiatives in their companies.
One of the things I often hear they are struggling with is the idea of a business model for advanced services; they ask things like: What actually is a business model?; How do I create a new business model for services in my product-led company?; How do I test this business model to see whether it will work in practice? How do I try out this model when it is totally at odds with the traditional business model of the rest of the company?
My research team and I have dedicated a lot of time to these questions in the past three months. The first thing we found was that the concept of a business model is, in fact, not a single agreed concept at all, Everyone seems to have their own ideas of what it is and what elements it includes. This can lead to a lot of confusion, before we even start to think about how to design one.
All of our examination of the leading work led us to form what we think is a comprehensive description of what goes into a business model, and the fundamental thing that the new business model has to be built on is the customer value proposition; what is it you are going to deliver that will really bring new value to your customer and help them in their own operations?
In order to create that proposition, we look at both the difficulties customers have with the use of the product (what we call customer ‘pains’) and offerings that could help create extra value for the customer (or even the customer’s customer) which we call ‘gains’.
Once you have a potential new offering on paper, with a pricing structure and contract length to go with it, you have a value proposition. Typically, these types of services contracts tend to have pay-monthly or pay-per-use pricing models, and contracts can range from two to 25 years depending on the value of the asset.
The next step is to test your proposition; will it be appropriate to your customer’s needs; is it something they are willing to pay you for; will they pay the price you wish to charge? All of these things have to be tested, and our research has shown that the most effective way to do this is through real-life, carefully designed mini-experiments with customers. Only then can you gauge whether the assumptions you have made in designing your offer were correct. All of this takes time, thought and a fair amount of imagination- and it can be a lonely process for the people I meet who are trying to spearhead this alone in their businesses.
In partnership with Aston Business School, I will be facilitating the Advanced Services Global Forum on 26th April. The forum is an opportunity for you to meet like-minded professionals and develop an advanced services customer value proposition, under the direct guidance of the leading researchers in advanced services, and industry practitioners (such as Des Evans, former CEO of MAN Truck & Bus UK) who have innovated their business models to compete through advanced services. I hope to meet you there, to explore this topic with you further.