Should You Change Your Business Model with Connected Products?

Should You Change Your Business Model with Connected Products

The Harvard Business Review article, How Smart, Connected Products Are Transforming Competition, identifies ten strategic choices manufacturers must make to capitalize on the Internet of Things.

In this eighth installment of a series of video interviews, the article’s co-author Jim Heppelmann explains how smart, connected products can impact your business model.

Should the company change its business model?

You might be wondering whether your company should think about changing its business model. For a very long time, manufacturers have focused on capturing value through a product-oriented business model, where they manufacture a product, then sell it as an asset to the customer. Sometimes providing an after-sales service, for example, to help the customer maintain the product in an operational state.

Now, when products become smart and connected, this can improve product performance and dramatically optimize the way the product is operated and serviced. But sometimes that improvement might actually be captured by the customer, for example, in the form of reduced service visits or less need for spare parts.

This can result in what we call “the service paradox” where incremental improvements and service efficiency do incremental damage to the revenue and profitability of your service business. So, when companies see this service paradox, they think about, “Should we shift our business model to a service-oriented business model that’s perhaps outcome-based or usage-based?”

In a usage-based service model, we charge the customer according to the degree of utilization of the product. Which, of course, would encourage the manufacturer to maximize the utilization, perhaps even across multiple customers. An outcome-oriented service business model would result in the customer paying for the utility or the productivity or the functional result of the product, rather than for the actual time spent using the product.

So, either way, shifting to a usage or an outcome-oriented service model has some costs and risks that you ought to think about. For example, it requires new skills, new culture, and in many cases, a new technology infrastructure for processing the orders and the transactions associated with a service business model. Also, services, by definition, are time-bound. This means that at some point, they’ll expire and need to be renewed. But frequently, at that point, the customer has very low switching costs because they don’t have costs sunk into an asset. The walk-away costs, in some cases, can be pretty small.

Recommendation

So our recommendation is to think through the potential impact of the service paradox in your business. Think about how you might leverage this new business model to create differentiation in your market. Remember, in any service-oriented business model you need to ensure that customers continually and increasingly receive good value from your services. In some cases, this might mean a customer success management approach that requires a proactive and ongoing connection between the marketing, sales, and service personnel that engage with your customer.

Learn More:

In their upcoming October 2015 Harvard Business Review article, How Smart, Connected Products Are Transforming Companies, co-authors PTC CEO, Jim Heppelmann, and Harvard Business School Professor, Michael Porter, will focus on the impact of smart, connected products on companies’ operations and organizational structure. Reserve your copy››

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