From CapEx to OpEx Part 1: Making the Transition from Product to Services

Published: 2021-11-04 Updated: 2022-05-03
Subject: Manufacturers Sell spare parts Digitalization Spare parts catalogue

Over the last few years, the concept behind after-sales has completely changed – at least on the part of providers. Customers have always been interested in comprehensive service packages, whereas product suppliers often used to see providing replacement parts and services as something of a chore. In today’s digital economy, services subsume the product; new business models virtualize the product and replace it with a service provision, all of which is highly dependent on the quality of internal servicing departments.

The bad news is that, sooner or later, manufacturers that stick to the traditional after-sales model run the risk of getting into serious difficulties. This is especially the case with providers of sophisticated technical products in the B2B market. However, there are two pieces of good news, too. Firstly, there are significant benefits to establishing a service-based business model. And secondly, advanced software systems enable the company to make the transition, no matter what their current state.

In our 4-part blog series "Services are the new product", we go into detail about these aspects. Stay tuned!

 

So, why shouldn’t a company work according to the principle “out of sight, out of mind”?

Once a product has been sold and has left the building, it becomes the responsibility of the buyer, who is now responsible for ensuring that the product does what it should. There are several arguments against this cold and short-sighted approach. Supporting the customer when it comes to operation of the product strengthens customer loyalty and helps to secure future deals. In addition, sales of spare parts and maintenance can generate extra revenue. In the digital world, services even form the basis for new business models. Depending on the industry there are vastly differing takes on the idea of generating income after the product has been sold. Some companies used to see it more as a chore to provide customers with advice and assistance or even with spare parts. Others recognized very early on that there was money to be made from the customer’s desire to keep the product running. For example, car manufacturers established authorized workshops for repairs and maintenance very early on. In aviation, the manufacturer continues to provide input into the aircraft throughout its entire service life.

 

 

 

Der Service entwickelt sich vom notwendigen Add-On zum eigentlichen Produkt

The more complex, the more expensive, and the more unique a product is - and the greater the disparity in knowledge between the supplier and the customer - the more important the service is. For example, while Lufthansa largely maintains its own aircraft, other, smaller airlines will make use of the manufacturer’s services.

 

Is it worth the effort of having an in-house service organization?

But even corporations like Lufthansa are now considering whether it is worth the effort to operate such a complex in-house service organization which requires such intensive expertise and investment. This is another great opportunity for the manufacturer to obtain more business.

When you really think about it, in many cases it is pointless buying a machine at all if all you need is the product itself. Rolls-Royce, for example, has not sold its aircraft engines for many years. Instead, they are installed in the airline companies’ aircraft, and the operators pay according to the number of kilometers flown or hours in operation. In other words, the customer pays for the propulsion rather than for the propulsion system.

 

Service and maintenance as the basis for new business models

With this shift from selling a product to selling a service, manufacturers find themselves in a new position, whereby they now have to guarantee the availability of the service. This is completely changing the meaning of service and maintenance, which have now become the basis of the new business models. They are no longer deemed as ‘after-sales’, as the product is not sold as such, but rather offered as the basis for the service promise made by the manufacturer.

Service and maintenance have come a long way – from an unpopular necessity to a way to increase sales, to the basis for future success.

Manufacturers and users have different requirements and approaches, however, these can ultimately be added to and consolidated. In this regard, new service models such as preventive maintenance or predictive maintenance are particularly important.

 

 

 

 

What can manufacturing companies do?

In part 2 of our blog series "Services are the new product", you will learn how manufacturing companies can optimize spare parts storage and reduce capital commitment. Stay tuned!

 

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