Become a more valuable company by following a servitization strategy
For companies like MAN, Rolls-Royce, and many other early manufacturing adopters, there are many advantages to a servitization strategy. It enables them to generate more revenue and profit by delivering a competitive, productive customer experience that gives customers a rich context to deepen their connection with a company. In order for servitization to succeed, the quality of the customer experience is paramount.
Controlling costs, reducing risk, and generating stable recurring revenue
Servitization mitigates much of the volatility and risk in doing business with your customers. For them, it reduces the risk and cost of doing business with your company. For one thing, your recurring services revenue is predictable and steady, unlike the spikes and valleys you experience when your sales team closes significant deals on high-value equipment that alternate with periods of prospecting and selling when no concurrent revenue generation takes place. That can make it easier to rely on your servitization strategy when you plan your entry into new markets where, for example, prospects might not be able to budget for an equipment purchase, but they can well afford your service contracts with their manageable monthly cost.
Businesses finding it difficult to achieve stakeholder approval for a large capital expense may find it a relative snap to secure buy off for the operational expense of a service contract: They may not be ready to purchase a truck or extrusion machinery outright, but within a service with guaranteed uptimes, those become affordable. On the other hand, if you miss a sales target, you don’t face risks such as not being able to make payroll, because services and their revenue give the business a sound financial foundation.
Becoming more valuable to customers
When your services deliver reliable, undisrupted operation of critical machinery and equipment customers need, you are more strategic to their business and find earlier and greater inclusion in their planning than a vendor operating under the more traditional “deliver and disappear” model. The likelihood of customers shopping around and considering a wholesale replacement becomes very low. From a customer perspective, the cost/benefit ratio of a monthly service fee is often far more defensible and affordable than a one-time capital expense.
Under the service model, you gain the leverage to enhance the customer experience by creating more touchpoints and high-quality, timely interactions, such as proposing design enhancements or innovations based on IoT data about the workloads and performance of the machinery you placed on their sites. Or, you can create and offer additional services. A servitization strategy thus helps you increase the lifetime value of customer accounts and gain a greater share of their spending.
Higher-quality revenue and a better company valuation
Servitization is to your advantage when you want to attract investors, or want to sell the business or spin off parts of it. Recurring revenue is considered as higher-quality revenue than one-time revenue, and typically results in a larger valuation of the company. Everything else being equal, the business based on recurring revenue will be valued by investors as much as 16 times higher than the one based on the one-time revenue model. Your earnings before interest, taxes, depreciation, and amortization (EBITDA) will also increase under your servitization strategy’s recurring-revenue model.
Other posts in this series:
- The case for servitization: Improved revenue generation for manufacturers and a better experience for their customers
- Transitioning to a service business: Meaningful servitization planning, healthy cash flow, and proven trajectories
- The quality of the servitization customer experience is what ultimately moves customers to your services model—or not
- Servitization sales present many more opportunities, but require a more customer-centric approach
If you’re interested in discussing servitization strategy and any of the issues the transition brings up, or have questions and feedback, I would love to hear from you. Get in touch with me or contact To-Increase.
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