Service rules - Everything is a Service in the Economy of Things (XaaS)

Service is Everything or „Everything-is-a-Service“ in the Economy of Things (XaaS)

16.06.2019 Kathrin Kempf

By Kathrin Kempf

16.06.2019

Connected products are massively changing the classic business models of manufacturers. So far, products have been sold off and passed into the ownership of the buyer. This ended both the transaction and the customer relationship. However, digital products create a permanet link to the customer and thus a long-term relationship. This enables manufacturers to offer additional services tailored to product usage. In addition, product ownership is becoming less and less important for many customers. This is why more and more companies are beginning to offer their own products as a service. Netflix, Car2Go or Dropbox are just a few well-known examples. This new development is called „Everything as a Service“ or „XaaS“.

The way to become a XaaS Company

Digital products only offer real added value if they are equipped with services that are relevant to the customer. For example, many connected car providers offer services in the areas of traffic safety, cost efficiency or connected infotainment. It is important for every driver to be warned in dangerous traffic situations, to save fuel costs or to have personalized messages read aloud. Most of these services require payment. Many of them require recurring payments or, in other words, a subscription. With such offers, companies already have one foot in the Subscription Economy.

Two stages of becoming a Service Provider
Source: iq! Management Consulting

But it also means that OEMs must serve the service relationship with the customer and fill it with „life“. Immediate problem resolution, delivery of updates, further development of the service portfolio and support in operating the functions are just a few examples of what manufacturers suddenly have to do. This requires the formation of service teams that most companies do not have (Salesforce calls this unit „Customer Success“). Only through the collection and analysis of product usage data can service approaches be meaningfully furthered.

However, companies do not completely transform themselves into service providers until they offer their entire product as a service („XaaS“). For example, the cars in car sharing offers such as Car2Go, etc. still belong to the OEM, the customer only pays for the use. His profile is deposited with the OEM and in the best case he pays monthly flat-rate contributions for the fact that he uses the Carsharing Service when needed.

How to earn money as a XaaS provider

As a pure manufacturer, the revenue model is very simple: the product price and the number of products sold determine the turnover. If a company does not have a direct sales force, it has to share this with the participating retailers. The digitization of the products and the entry of many manufacturers into a service world multiplies the revenue opportunities.

The Economy of Things opens up new sales potential

Source: iq! Management Consulting

In addition to classic sales revenues, there are now service fees. These can be collected once, several times or, ideally, regularly. The churn rate, i.e. how long a company is able to keep its customers in a subscription relationship, is the main factor that determines whether a subscription model is good or bad. To keep this rate as low as possible, companies must invest heavily in customer relationships.

The direct connection to the customer can also enable physical service revenues that were previously difficult or impossible to serve. Every OEM who can arrange service appointments via the Connected Car now has a decisive advantage over any independent workshop.

The long-term customer relationship ultimately opens up completely new opportunities for up-selling and cross-selling. The large amount of data that can be collected on product usage and the customer makes it possible to personalize additional offers to meet customer needs and thus increase the number of contracts concluded. Amazon demonstrates what cross-selling power data can have and can serve as best practice here.

Conclusion

Manufacturers must become service companies. More or less far-reaching. This means internal challenges, but also great sales potential. Customer requirements are changing – product usage is becoming more and more important than product ownership. Manufacturers must follow these customer preferences, otherwise they will find it difficult to stand up to the more innovative competition.