In the past, servitization has helped manufacturing businesses to stabilize during times of crisis but today, even industry titans like Rolls-Royce have been impacted by the outbreak. The company celebrated its power-by-the-hour model for 58 years — until COVID-19 broke loose.
That amount of time on the market creates one of the strongest examples of successful servitization models. But, after the pandemic began, flights have been canceled, airplanes stayed on the ground, and engine hours dropped by 75%, causing Rolls-Royce to forecast and prepare for a significant drop in revenue over the next 7 years.
How can your business avoid the same fate? And how can you prepare for future crisis situations in order to ensure business continuity?
Perhaps creating a common servitization framework around value and pricing will help. But how can you build such a framework and ensure that it is truly value-based, KPI-linked, and sustainable, especially in times of crisis?
Daniel Cho, the Head of Strategic Pricing at Connected Care, Philips Healthcare has addressed these pressing concerns and shared a little of his success strategy during his “Servitization Keynote: Building a Common Framework for Servitization”, which was part of this year’s Aftermarket Virtual Summit.
Drawing from the fear of failure
Connected Care, which Daniel Cho is responsible for, is a 4.7B Euro global business that makes up about a third of Philips and it primarily focuses on solutions, such as hospital ventilators, patient monitors, and healthcare IT, that have come in handy since the COVID-19 outbreak began. In fact, since the outbreak began, Connected Care’s sales growth has gone up by 42%.
Despite this profitable outcome, the journey hasn’t always been smooth sailing for Connected Care. The business bumped into a few challenges, realizing that it needed to find better ways to frame its solutions and ensure that those solutions are well understood not only by customers but also by the company as a whole.
Driven by this realization, Connected Care wanted to succeed at:
- Justifying the price;
- Scaling to support further innovation;
- Building a sustainable business model;
- Creating internal and customer business cases.
Failing at achieving these objectives can have dire consequences for any business, especially during times of crisis. So, how did Connected Care succeed?
Building a successful framework
To build a successful framework and minimize the potential for failure in times of crisis, you should start by justifying the price to your customers. As Daniel Cho explained, when you need to create a profit margin, your customers don’t typically understand why you need to be profitable and set a higher price, so you need to find ways to explain it to them.
To ensure the continuity of a servicetized product and still have your customers onboard, you could try providing it for free until the end of the year, offer a COVID-19-special discount, or charge by the hour with the intent of selling a full license. These methods can be adapted to different products, services, and crisis situations, but they won’t completely demolish your profit as it would if you were to offer it at an extremely low price as a one-time payment.
Next, you should consider that the market, customers, and competitors will change, regardless if there’s a crisis going on or not. So, you must ensure that you are able to adapt and you need to establish exactly how you will adapt.
You also need to find the best ways to ensure sustainability and foster innovation. To achieve this, you must ensure that your product or service has at least a minimum stream of income during times of crisis or deadlock situations. This means generating flexible solutions that allow you to expand in different directions, perhaps even with different purposes than the original one.
To paint a clearer picture, the process of building your common framework should consist of the following key steps:
- Justify the price by linking your solutions to your customer KPIs;
- Scale to support further innovation by linking your solutions to value;
- Build a sustainable business model by delivering your solution as a service;
- Create internal and customer business cases by linking your solutions to price.
Remember to build your price model with the ability to face adversity and think extensively before you commit it to your customers. Also, be flexible enough to include as many of your customers’ KPIs as possible in order to truly deliver on their needs, because, according to Daniel Cho:
“If we only focus on our products, we could be proposing the best A5 Kobe Beef to a Vegetarian. It is not about how great your solution is, it is about how your customer can enjoy and perceive that value. If you do not know their KPI, you are shooting blind. Sometimes you win, sometimes you lose.”
Always take your customers’ KPIs into account
To build a common, customer value framework that is truly value-based, KPI-linked, and sustainable, you must create your solutions with the KPIs of your customers in mind. Think of what they need in order to be successful and link your solutions directly to their KPIs to help supply or improve them. This will enable you to sustain your prices long-term. As Daniel Cho has stated:
“The customer that perceives your value on their critical KPI will be willing to buy a very high-level service with built-in KPI improvement. This allows you to skim them with strong consultancy solutions. The customer that does not perceive the value will allow you to take on offering the lowest cost to serve, which most of the time focuses only on delivering the service without additional value. Understanding what is important for your customers and tailoring a solution based on your framework, will allow you to create multiple segments, price points, and profit. One size fits all is always wrong, no matter what you are selling. My suggestion is to make sure your framework has enough flexibility, and cover enough various KPIs to allow you to discuss in different ways with your customers. You will be surprised that most needs from customers are very similar, the wants are unlimited.”
Considering you’ve found Daniel Cho’s teachings inspiring, you would be pleased to know that his full keynote session can be streamed on demand. Access it today for more actionable insights and real-world case studies that highlight servitization dos and don’ts, especially during turbulent times, such as the current pandemic.