Turning Products Into Services

Consider the jet engine industry and the disruption of the business model in the ‘90s. Traditionally the industry competed on product functionality like thrust-to-weight ratio, design, just-in-time delivery of parts and so on. These elements are connected to the actual offering, where features and performance are at the core. The same applies for the computer industry where the vendors compete on speed of the processor, size of disc and GBs of RAM. GE in particular turned the focus away from features and on towards services. The question to answer is what is most important for the customer? Is it horsepower, thrust, weight, spare parts and so on, or is the real customer pain – something completely different? The answer for the airline business is of course flying the airplanes. That easy and also that complex in terms of how the jet engine is delivered. The real issue for the airlines is to maximize their schedule and hence the hours that the airplane is actually flying. That is their core revenue generating mechanism. So instead of looking at the features of the jet engine, GE turned their attention to airlines real pain. Of course the jet engine needs to fulfill the feature requirements, but they moved from selling engines to offering engines as a service. This implies that the offering is we will make sure and guarantee that the engine starts and produces power each time you are flying. The value proposition is therefore focusing on the real customer value: flying. GE was one of the manufacturers that took this position even further and soon became no 1 in the jet engine industry. Their value proposition was your most trusted source for aircraft thrust. If the engine is down you don’t pay, and the offering included all services and spare parts. Even the investment was moved from capex (buying the engine) to opex (leasing the engine). Hence, the industry moved from products to services.

The essence of this story is how innovation changes business models into more customer focused ones. The same disruption applies for the computing industry, moving from products into services. To illustrate this for Cloud Computing we will use an analogy with transportation. Let’s say your aim is to move from A to be B by car. In order to that you first of all need to buy a car. This implies that you have a huge capex expenditure, you are responsible for insurance and for services. This model is an analogy to on-premises software. Your second option is to lease the car. It provides you with the same offering: moving from A to B. But instead of capex your expenditures are opex. Also, insurance and service is included in the offering. This may be regarded as a SAAS model. Your third option is simply taking a taxi. It too moves you from A to B on-demand, but you pay only as you go, and you do not need any expertise in driving (like having a license), you don’t even need to bother with parking. Taking a taxi really focuses on the customers pain, moving from A to B. (I will not argue that I will sell my car as there are so many other sentimental values associated with owning your own car). And this is what Cloud Computing is all about. Leave the expertise to the vendor, focus on the customer pain and move from capex to opex. The winners in the future are those managing to turn products into services (or combination there-of) focusing on the real customer value, supported by an innovative business model.

About

Nils Vold is Director Business Development in Visma Enterprise Solutions. Cofounder and manager in tech startup Deriga which was acquired by Visma in 2006. Holds a master's degree in Information Technology and also a master of Management.
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