The Importance of Service Based Business Models to Manufacturers
Service-based business models have become an important component of the “go-to-market” offering for many high tech and industrial manufacturers. The value they derive is based on providing expertise, labor, and/or solutions to provide customers with an exceptional experience and solving customer problems. What sets them apart is their reliance on human capital, knowledge, and skills as the primary assets.
Service-based businesses can quickly adapt to market changes and customer demands, making them agile and responsive. However, they also face challenges like scalability, as growth often depends on training more staff.
Customer relationships are a key component in service-based models. Building trust, delivering consistent quality, and exceeding expectations are essential for long-term success. Additionally, the rise of digital platforms and remote work has transformed business, enabling global reach and remote collaborations.
What is interesting is that this business model has crept into many different industries and provides the same opportunities for value: Customers pay a recurring fee for access to a service. Examples include streaming platforms like Netflix, software-as-a-service (SaaS) companies like Adobe Creative Cloud, and SAP provide subscription services for their products. This model fosters customer loyalty and a predictable revenue stream, as subscribers often stay engaged for an extended period.
The other benefit is that these on-demand services connect customers with manufacturers in real-time. So, the model capitalizes on convenience and immediacy. Apps and platforms play a pivotal role in matching supply and demand and service providers can work flexibly, and customers can access services swiftly.
But what is the downfall of not moving to a service-based business model:
- Limited Scalability: Product-based businesses often face limitations in terms of scalability. You can only produce and sell a finite number of physical products, whereas services can be scaled more easily to meet growing demands.
- Market Volatility: Product-based businesses are often more susceptible to market fluctuations, trends, and changes in consumer preferences. Services can adapt more readily to these shifts.
- Higher Overhead Costs: Maintaining inventory, manufacturing, and distribution can be costly. In contrast, service-based businesses may have lower overhead expenses. It also allows for the extension of the lifecycle of the product by adding digital services and connectivity that didn’t previously occur but adds value to the customer.
- Reduced Customer Engagement: Services allow for ongoing customer interaction and relationship building, while product-based companies may have fewer touchpoints with their customers.
- Innovation Challenges: Developing new products often requires substantial research and development, which can be riskier and more time-consuming than adapting or expanding services.
- Competitive Pressure: In some industries, the transition to a service model is becoming a competitive necessity, and failing to adapt could lead to market share loss.
- Customer Expectations: Customers are increasingly valuing experiences and outcomes over owning physical products, so not offering relevant services could lead to dissatisfaction.
However, it’s important to note that the suitability of a service-based model depends on the specific industry, market conditions, and business goals. Some businesses may thrive with a product-centric approach, while others may benefit from a blend of both products and services. The key is to carefully assess your unique situation and adapt your strategy accordingly. In conclusion, service-based business models thrive on delivering intangible value through human expertise and problem-solving. They offer agility and adaptability but require a strong focus on building and maintaining customer relationships to prosper in today’s competitive landscape.
Join us for an Industry Week and SAP joint webinar on Tuesday, September 19 at 12 noon central to hear experts from HPE, DigitalRoute and SAP that have executed the move to service-based business models. They will provide valuable insights on how to transition and the benefits derived from such a move.