Stop Selling Products and Offer Outcome-based Services Instead
This is a follow-up article regarding a recent post in VentureBeat, “How the ‘Internet of Everyday Things’ could turn any product into a service.”
What is Nest really selling in their smart thermostat? They are selling the outcome of “keeping your home comfortable using less energy and money,” as evidenced by saving customers 10-15% on their annual energy bills. By redefining its product as an outcome, it became clear that Nest needed to augment the thermostat with sensing and learning algorithms that can understand its environment and adapt over time. And other thermostat makers need to redefine their products in order to compete.
Let’s consider another example by looking at extended warranties and premium protection insurance for consumer electronics. What are people really buying? They are buying the outcome of product availability, delivered through repair or replacement in case of failure or loss. Jump! from T-Mobile is an interesting example of a hybrid model combining premium protection with elective upgrades for phones. They define outcome as high availability plus “future-proofing.”
Let’s take this one step further by looking at how this approach might help a particularly struggling industry – television manufacturers. We are seeing commoditization in action, resulting in the industry losing billions of dollars in recent years.
Young people are viewing content on other devices, and recent innovations in TVs (4K and 3D) are not compelling enough for people to spend thousands of dollars for an upgrade. Additionally, consumers can retrofit Internet streaming to TVs through devices. They can buy an Apple TV or Roku and plug it into a 7 year old TV instead of buying a new smart TV. As a result, TV upgrade cycles are longer and demand is not keeping up with supply.
So how can TV manufacturers change demand by redefining their products as a service? Perhaps they could define the outcome they are selling as “access to all the entertainment you want, with the best viewing experience at a certain price point.” With that service definition, for example, consumers would stop buying TVs as basic hardware, and they would pay monthly subscription fees to get a TV installed and configured. The fee could be tiered: a premium level offers a 4K TV, medium offers a smart TV, and budget offers a low-cost TV plus a separate device for streaming. In all cases, a technician would set up the system to make sure that it offered an optimized viewing experience.
The service would automatically upgrade each customer’s TV in order to keep up with the evolution of new technologies to maintain the desired outcome. And perhaps the replacement TVs wouldn’t even need to be new as long as the service levels were guaranteed.
A service could take a one-year old 4K TV in good condition from one customer in the premium tier and install it as an upgrade for a customer in a lower tier who otherwise wouldn’t be able to buy one. The value of this exchange under the auspices of the service outcome would be greater because the provider would know much more about usage.
Over time, the service might expand to include a home theater system, providing upgrades for components on varying schedules based on product lifecycles and customer preferences. For example, a Blu-ray player with agonizing slow startup times might be upgraded more frequently than speakers that tend to sound good for years. By continually focusing on the higher-order outcome and personalizing each experience instead of the product, TV manufacturers might be able to change an entire industry.
B2C Companies Can Learn From B2B Companies
What would be necessary for television manufacturers to implement such a radical new business model? We can look for guidance from B2B companies that have offered managed service business models for years. Ever since Rolls-Royce coined the term “Power by the Hour” in the 1980s, industrial manufacturers have offered performance-based contracts based on product availability or usage. Another example, Xerox created Managed Print Services many years ago in which it manages fleets of printers and multi-function devices, even those made by other companies, for enterprise clients using a simple click-charge pricing model. Xerox manages maintenance, upgrades, paper and toner replenishment. Clients only pay for pages printed, for a simpler experience and lower operating cost.
At the time, it was a radical business model change for Xerox, and required transformation in many functions ranging from sales and marketing to field service to supply chain management, and required multiple innovations in product engineering, data collection, and analytics. But it was a necessary change to mitigate the increasing commoditization in the market. In the end, the shift created tremendous value through aligning incentives between Xerox and its customers. Now Xerox is invested in analyzing data from its managed device fleet and field service staff in order to optimize product availability and service dispatch, while reducing costs (including even helping its clients to reduce print volume) for the benefit of all parties.
The Internet of Everyday Things Changes Everything
With the impending Internet of Everyday Things, where low-cost, even disposable products will have digital capabilities through low-cost sensors via printed electronics and connectivity enabled by Content-Centric Networking, a myriad of consumer products will have analytics capabilities previously reserved for more expensive industrial equipment. How will the product experience change – from household goods to appliances to sports equipment? Will every product come with a mobile app? What new partnerships need to be formed between manufacturing, retail, customer care, and field services? Will we see new services companies appear or will existing companies change their business models?
B2C companies can learn from B2B companies that have redefined products as outcome-based services and transformed their businesses. And conversely B2B companies can learn how to deliver personalized services directly to end users as industries are being disintermediated. Companies will need to challenge long-held assumptions and operate with much greater agility in order to create new product experiences and the analytics and service capabilities to deliver them profitably. We are living in interesting times as the Internet of Everyday Things further empowers consumers with new information and capabilities, and we will see radical shifts across multiple industries.
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