Introduction to innovation
Clayton Christensen, Tony Ulwick, and others have written extensively about innovating using the Jobs To Be Done (JTBD) theory. The basic idea of JTBD is that everyone at work and everywhere else is working to achieve one or more essential outcomes. For example:
- At work, we are trying to increase revenue or reduce costs.
- At home, we are trying to keep the house clean and not run out of food.
Innovation occurs when someone comes up with a solution that allows us to achieve an outcome better (e.g., with a lower total cost of ownership) and with a low enough price to make the purchase attractive. This post describes some innovations in the medical device industry which result in a lower total cost of ownership.
Read about JTBD by clicking here.
Customer’s total cost of ownership (TCO)
Fortunately, we can apply the same theory to service revenue growth by understanding the customer’s total cost of ownership caused by using your company’s products. Let me explain.
I recently saw a neat graphic identifying many costs associated with owning and using a tech product consisting of hardware and software. It could be manufacturing equipment, test equipment, transportation equipment, or almost anything that a B2B customer will use to run its own business. Here is the graphic:
Costs above the waterline are associated with selecting, purchasing, and installing the equipment. Costs below the waterline are the so-called hidden costs. They represent the customer’s out-of-pocket costs associated with using the equipment for the rest of its useful life. These costs must be budgeted and managed and are opportunities to grow revenue while making life easier and less stressful for your customers.
Hidden costs
Some items identified in the graphic are already included in many comprehensive service contracts. These costs include:
- Maintenance costs
- Software costs
- Training costs
- Supply support costs
The challenge is to find a way to bundle the other costs into your support contract. The benefits for the customer are:
- Prices are predictable – easy to budget
- Less P.O.’s – reduce overhead
- No hassle – anything goes wrong, they call you
- Peace of mind – they no longer worry about these items
Adding costs to a service contract to reduce the total cost of ownership
Here are a few “other” costs that can be added to a comprehensive contract to reduce the customer’s total cost of ownership:
- Test and support equipment – analytical instrument companies sell sample preparation equipment at the time of sale to make life easier for the customer and to increase their margin.
- Retirement and disposal costs – if your customer decommissions equipment (yours or competitor’s) and have you install a new piece of your equipment, then you can add the cost of safely removing and disposing of the old equipment. You can do a better job protecting the environment than anyone else because you do it often.
- Technical data costs – many businesses sell products that generate data, which the customer has to do something with before it is functional. What if you offered a custom service of taking the raw data, processing it, and inserting the results into a report that the end user needs to do her job? For example, if your customer uses your product to perform a final product inspection and transfers the data to a “shipping data sheet,” you can automatically create the datasheet. It saves time and eliminates errors.
- Some businesses even provide operations people to run the equipment and can even install it in their facility if it is not inserted in a production line.
- This list is far from complete. Many industries have specific jobs that the equipment owner is obligated to perform. In the Life Sciences industry, software must undergo annual Validation and Verification. In the transportation industry, equipment must experience periodic safety, and sometimes emissions, inspections. Hospitals require that the manufacturer certify biomed technicians who repair and maintain equipment.
If you bundle many of these items into a service, you enter the PaaS – Product as a Service world. Both businesses in the transaction agree on volume and piece price costs, and you take over all aspects of using the equipment as a direct supplier. This approach is becoming popular in many industries like aircraft and automobile production.
Changing to PaaS is not trivial, and the decision to move ahead must gain widespread buy-in across your company. However, some less risky services can be handled without hesitation.
As always, tread carefully but boldly! The future is not for the timid or the rash but for the pragmatic leader.
Good selling.
About Middlesex Consulting
Middlesex Consulting is an experienced team of professionals with the primary goal of helping capital equipment companies create more value for their clients and stakeholders. Middlesex Consulting continues to provide superior solutions to meet the needs of its clients by focusing on our strengths in Services, Manufacturing, Customer Experience, and Engineering. If you want to learn more about how we can help your organization measure and reduce your customer’s total cost of ownership, please get in touch with us or check out some of our free articles and white papers here.