4. Servitization for OEMs: Value-Based Models
Opdateret: 8. apr.
Value-based models are a type of servitization model where customers pay based on the value created by the product or service, typically through cost savings or revenue generation. In this blog post, we will dive deeper into value-based models, exploring what they are, successful use cases, benefits for customers and OEMs, and how they can enable sustainability.
This post is part of our series on equipment-based servitization models for Original Equipment Manufacturers (OEMs) and Value-Adding Resellers (VARs).
What are Value-Based Models?
Value-based models are a type of servitization model where customers pay based on the value created by the product or service, typically through cost savings or revenue generation. In this model, the OEM works closely with the customer to understand their specific challenges and goals and develops a solution that delivers the most value.
While value-based models are typically enabled through the use of advanced analytics and data collection technologies, it is not critical for the model to have access to equipment data. Measuring value-outcomes typically does not happen at the operational level. However, data allows the OEM to gain insights into the customer's business operations and identify areas for improvement. This data is then used to develop customised solutions that address the customer's specific needs and deliver the most value.
According to the TSIA 2019 MaaS offer & pricing survey, only 30% of suppliers have value propositions aligned to outcomes and only 35% of suppliers are able to measure the outcomes. Compared to the customer's desire for achieving value and outcomes, there is quite an opportunity space for the OEM to get this right.
Successful Use Cases
There are several examples of companies that have successfully implemented value-based models, including:
The company offers a value-based model for its construction equipment, where it works closely with customers to develop solutions that maximize productivity and reduce costs. Customers pay based on the cost savings and productivity improvements achieved.
IBM: The company offers a value-based model for its technology solutions, where it works closely with customers to develop customized solutions that meet their unique business needs. Customers pay based on the revenue generated by the solution.
Siemens Healthineers: The company offers a value-based model for its healthcare solutions, where it works closely with healthcare providers to develop solutions that improve patient outcomes and reduce costs. Customers pay based on the cost savings achieved.
Benefits
In addition to the benefits discussed in the previous posts, value-based models offer unique advantages that are not achieved through the former. In this post, we will focus on the specific benefits of value-based models that differentiate them from other servitization models.
Customer Benefits
Customised Solutions
Value-based models allow customers to receive customised solutions that meet their specific needs and challenges.
Maximised Value
Customers receive the most value for their investment/engagement as the solution is tailored to their unique business operations and goals.
Improved Business Performance
Value-based models help customers to improve their business performance by addressing their specific challenges and identifying areas for improvement.
OEM Benefits
Increased Revenue
Value-based models provide an opportunity for OEMs to create more value for customers, leading to increased revenue and profitability.
Improved Customer Relationships
Value-based models help OEMs to build long-term relationships with customers by providing solutions that meet their unique needs.
Upselling Opportunities
As the OEM develops new products and services, there is potential to upsell customers to higher-value value-based models.
Sustainability
In value-based models, sustainability improvements can be the value delivered or "sold" to customers. By focusing on delivering customised solutions that reduce waste or increase energy efficiency, OEMs can help customers achieve their sustainability goals while also delivering the most value. By incorporating sustainability outcomes into their business models, OEMs can differentiate themselves from competitors and attract customers who prioritise sustainability. This can lead to increased revenue and profitability while promoting a more sustainable future for all.
Similar to outcome-based models, data analysis plays a crucial role in identifying areas where improvements can be made in equipment design, maintenance practices, and service delivery to achieve sustainability outcomes. By designing and manufacturing equipment that delivers better outcomes with fewer resources, OEMs can contribute to the sustainability of the customer. Additionally, by taking a more proactive role in equipment maintenance, OEMs can extend the lifespan of their equipment and reduce the need for new equipment to be produced, further reducing the environmental impact.
Furthermore, value-based models incentivize OEMs to create products that promote sustainability improvements as the value delivered or sold. This approach can lead to a significant impact on sustainability by focusing on the outcomes achieved, such as reduced waste, lower energy consumption, or fewer emissions. By leveraging data analysis to identify areas for improvement and designing customised solutions that deliver the most value while minimising environmental impact, OEMs can create a sustainable business model that benefits both customers and the environment.
In summary, value-based models can promote sustainability by offering customised solutions that reduce waste, increase energy efficiency, and achieve sustainability improvements. By incorporating sustainability outcomes into their business models, OEMs can differentiate themselves from competitors and attract customers who prioritise sustainability. The data analysis and proactive role in equipment maintenance that are critical for the success of value-based models can also help OEMs to create products that promote sustainability improvements and contribute to a more sustainable future for all.
Data utilisation
Data utilisation, at the equipment/operational level does not play a crucial role in the operationalisation of value-based models, as measuring the value-outcomes does not happen at the operational level. However, data utilisation plays a crucial role in optimising the performance of assets and ensuring that the desired value is delivered to customers in value-based models, while keeping taps on residual value. Here is a breakdown of the benefits of data utilisation:
Optimising delivery and performance - 4/5
Access to production data is crucial for ensuring that the equipment is operating efficiently and delivering the expected value to the customer. By monitoring the performance of the equipment and analysing the data, the OEM can identify areas for improvement and make necessary adjustments to optimise delivery and performance.
Developing new products and services - 4/5
Production data can provide valuable insights into customer behaviour and usage patterns, which can inform the development of new products and services that better meet their needs. By analysing the data, the OEM can identify new opportunities for innovation and develop customised solutions that deliver the most value to the customer.
Improving commercial terms - 3/5
While production data can help identify areas where customers may not be achieving the desired value-outcomes, market demand and competitive pricing may also need to be considered in pricing decisions. While data can be helpful in negotiating better commercial terms, it is not the only factor to consider.
Reducing depreciation risks - 3/5
Access to production data is essential for accurately predicting equipment lifespan and value, reducing depreciation risk. However, in value-based models, depreciation risks are less relevant as customers pay based on the value created by the equipment, rather than the equipment itself. Typically, this create a correlation between revenue and wear & tear. The OEM is better able to manage the equipment and its usage, reducing the risk of depreciation due to misuse or neglect by the customer.
Reducing cost of service delivery - 5/5
Production data is crucial for optimising maintenance schedules and identifying potential issues before they become costly problems, reducing the overall cost of service. This not only provides transparency but also ensures that the OEM is able to develop solutions that address the customer's specific needs and deliver the most value.
In conclusion, access to production data is not critical for the operationalisation of a value-based servitization model as accurate billing is based on value-outcomes typically not measured on an equipment level. However, data optimises equipment performance, reduces downtime, enhances customer satisfaction and mitigates depreciation risks.
Financing need
Value-based models also require financing for similar reasons to previously covered models, but with some differences in emphasis.
Off-balance sheet financing
In value-based models, the equipment or solution is rarely owned by the customer, as they pay based on the value created. In most cases, the OEM retain ownership of the equipment to ensure proper maintenance and upgrades. This can increase risk for the OEM, as they may need to invest capital in producing the equipment upfront. Off-balance sheet financing can help alleviate this risk by removing the equipment from the OEM's balance sheet. This can free up capital for other investments and reduce the impact on the OEM's balance sheet.
Cash flow financing
Financing can also help OEMs manage cash flow in value-based models. Since revenue is generated based on the value created over time, there may be a delay between the upfront costs of producing the equipment or developing the solution and the revenue generated. Cash flow financing can help bridge this gap and ensure that the OEM has the necessary cash flow to sustain the model. This is particularly important in cases where the OEM needs to invest significant capital upfront to produce the equipment.
Revenue sharing
In value-based models, revenue sharing is a common financing option. The OEM may partner with the customer to share the revenue generated by the equipment or solution, and potentially share the upfront investment. This can help to reduce the upfront costs of implementing the solution while providing a revenue stream over time.
Overall, securing financing is an important consideration for OEMs in value-based models, as it can help them manage cash flow, reduce the impact on their balance sheet, and ensure that the model is profitable and sustainable in the long term.
The type of financing needed will depend on the specific circumstances of the OEM, such as the amount of capital required, the expected revenue generated over time, and the length of the value period.
Financing options may include bank loans, leasing arrangements, captive finance companies, or other sources of funding. OEMs must carefully consider the costs and benefits of each financing option to ensure that the model is profitable and sustainable in the long term.
Additionally, OEMs must ensure that financing arrangements comply with applicable regulations and accounting standards.
Succeeding with Valueport.io
Valueport.io can help OEMs successfully implement value-based models in servitization, securing above mentioned benefits such as maximising the value and improving the business performance for customers, creating increased revenue and upselling opportunities for OEMs.
Accurately interpreting the commercial value delivered is a critical challenge for value-based models, as the customer pays for the overall value created, rather than for the product or service itself. Therefore, accurate measurement and interpretation of commercial value - according to underlying agreement - is essential to ensure that the OEM is compensated fairly for the value delivered and that the customer receives the expected value.
Valueport.io capabilities can help OEMs address the challenge of accurately measuring and interpreting commercial value data for value-based models by providing real-time data monitoring and analysis. Additionally, Valueport.io's platform can provide a “one-truth” view of the commercial value delivered by their equipment or service, which can help build trust and long-term relationships, while keeping taps on the residual values.
Conclusion:
In conclusion, value-based models offer a unique approach to servitization, where customers pay based on the value created by the product or service. The success of value-based models heavily relies on data utilisation, which plays a crucial role in optimising equipment performance, reducing the cost of service delivery, and ensuring accurate billing based on value created.
Value-based models also provide several benefits for customers, including receiving customised solutions that meet their specific needs and challenges, maximising value, and improving their business performance. For OEMs, value-based models present an opportunity to increase revenue, build long-term relationships with customers, and develop new products and services.
Sustainability is also a crucial aspect of value-based models, where OEMs can incorporate sustainability outcomes into their business models by focusing on delivering customised solutions that reduce waste or increase energy efficiency. By leveraging data analysis to identify areas for improvement and designing customised solutions that deliver the most value while minimising environmental impact, OEMs can create a sustainable business model that benefits both customers and the environment.
Lastly, financing is an essential consideration for OEMs in value-based models, as it can help them manage cash flow, reduce the impact on their balance sheet, and ensure that the model is profitable and sustainable in the long term. Financing options may include off-balance sheet financing, cash flow financing, and revenue sharing, and OEMs must carefully consider the costs and benefits of each option to ensure long-term success.
Overall, value-based models represent a promising approach to servitization, and OEMs that incorporate these models into their business strategy are poised to create long-term value for their customers and themselves while contributing to a more sustainable future for all.