The transformation from a traditional product supplier or machine manufacturer to a service provider is keeping many companies busy. What monetization options are there for charging customers for digital services? - A guest article by Nils Arnold
The pure product business with services as a necessary add-on is no longer up to date in many areas today. A change is taking place in the direction of a service area that functions as an independent business segment. Digital platforms are an important cornerstone of this development. However, the question often arises as to how these services can be sold profitably using an accepted payment model. There are a number of variants, each of which has different advantages and disadvantages from the provider and customer perspective.
The expansion of the service business is primarily driven by 5 success factors that service managers and entrepreneurs should be aware of.
1. monetization of business models for digital services using the example of remote support
It goes without saying that the introduction of a digital service business model must be economically viable for a company. To ensure profitability, there are various ways of monetizing digital services. It is not the technology alone, but how a company uses it and integrates it into the overarching business model that determines competitiveness and differentiation.
At this point, four business models and monetization models will be described that are suitable for the digital service business, particularly in the context of the Remote Support can be implemented with a smartphone, tablet or smart glasses. They each have different plus and minus points.
2. the pay-per-use model
From our own experience, the pay-per-use model, together with the annual service contract described below, is the most commonly implemented monetization method for remote support. The pay-per-use model is implemented by companies in particular when a Remote Service-solution without the additional purchase of data glasses and if you want to use existing hardware such as smartphones or tablets.
The pay-per-use model can be divided into two approaches. Many companies differentiate between the approach of paying for a remote session per minute, a fixed basic fee per session plus a price per minute or a flat rate per case, which is charged to the customer for each successfully solved problem per remote session.
2.1 Advantages of the pay-per-use model
The two pay-per-use approaches first mentioned in the previous section have the advantage that customers do not unnecessarily prolong remote sessions, as they pay according to the length of the session. Remote support is requested when it is really needed. Payment per minute creates a certain "inhibition threshold" that prevents customers from requesting the session for "trivialities".
The "inhibition threshold" for requesting a session is greater with the payment method of a fixed basic fee plus per-minute costs than with pure payment per minute. On the other hand, the "inhibition threshold" to unnecessarily prolong calls is greater with the payment per minute approach. With the latter pay-per-use model, on the other hand, this inhibition threshold is not created, but the flat rate per case model offers the service provider simple processing and calculable costs for the customer.
With all three models, customers have the advantage that they only pay for the service when they actually use it. They do not have to pay all year round for a service that they may not even need.
2.2 Disadvantages of the pay-per-use model
The disadvantage for customers when paying for a remote session per minute is that costs for using the service can quickly skyrocket if customers need the remote service very frequently and for a long time - e.g. due to difficulties in understanding or long problem-solving processes.
The disadvantage for the company could be that the purchase of the software for the digital service offering is only refinanced slowly if there are no remote service sessions. However, it must be made clear here that in reality, the absence of service cases is very rare. One disadvantage of all three models is the increased cost of invoicing for the service provider after each remote session.
3. annual service contracts
Annual service contracts are a fixed price that the customer pays annually. The service prices here often vary between the different sectors. Furthermore, this model often includes additional services, such as a 24/7 hotline for the customer, the rental fee for the data glasses, etc.
3.1 Advantages of annual service contracts
In general, an entire contract portfolio can be established within such a contract model. A pure hotline contract, for example, would be the "narrowest" contract. By bundling it with other services, such as Maintenance and repair or discounting of spare parts, the portfolio can then be built up to a full service contract. A further advantage is that the company is able to Service contracts a constant cash flow and can count on secure income. In contrast to the pay-per-use models, only one-time invoicing is required here.
The advantage for the customer is the one-off payment for the service, which they can then use "indefinitely". They do not have to worry about how long and how often they use the remote service. The included services, such as round-the-clock service, can also be attractive for customers. The more often a customer uses the service, the more profitable the contract is. As a rule, such service contracts can be terminated at the end of each year. Depending on the flexibility of the provider, the customer can agree with the provider on the exclusive monetization of purchased remote services. Overall, this service model gives the customer immense security.
3.2 Disadvantages of the annual service contract
If the annual service contract is not limited to a number of remote support sessions or support minutes, the frequency of customer calls may well increase. Customers are aware that the service has already been paid for and can use it at any time.
Service providers are therefore advised to limit the number of remote support sessions, even with an annual service contract. The restriction can be decided for the respective month or the entire year. If the limit is exceeded, the customer pays a surcharge per session or per minute exceeded. It is important to implement the limitation of sessions in such a way that the high value proposition of the contract is maintained for the customer.
The disadvantage for the customer is that they pay for a service that they may not have used at the end of the year, or only to such a small extent that they have not really benefited from the contract. For this reason, it is of course also important for customers to carefully consider which monetization model makes sense for their own company - e.g. based on past experience of using services.
4. commissioning package for a limited period of time
With the commissioning package for a limited period, the company provides its customers with, for example, data goggles and corresponding services (ramp-up support, application support, etc.) that go beyond mere repairs for a period of 6 months after installation of the machine. This is offered independently of the warranty (repair work is of course carried out free of charge within the warranty period) for the accepted machine. The package is invoiced to the customer once at a favorable price.
4.1 Advantages of the commissioning package
For companies, this model offers the opportunity to invest in customer support over the period in which the commissioning package is valid. Trust between the company and the customer can be built up more quickly, particularly in the case of an initial purchase, and the customer relationship is strengthened in the long term. In this way, experience is gained about the customer's needs and requirements for the machine, which can be incorporated into the optimization of machines/products.
Customers can also be made aware of the benefits of remote service through a low-cost commissioning package, so that they may continue to purchase the service under one of the other monetization models once the package has expired. Another important aspect from the provider's point of view is that you can reduce costs during the warranty period through improved remote support, which are incurred by any on-site warranty visits to the customer.
One advantage for the customer is that the commissioning package allows customers to benefit from a low-cost digital service at the outset with regard to operating issues and questions relating to machine optimization, such as more efficient running times for output optimization. At the same time, the customer is not tied to a contract for too long. The customer can gain initial experience with remote support and later decide whether they want to continue with this service offer.
4.2 Disadvantages of the commissioning package
For companies, another disadvantage of the commissioning package can be that customers use services very frequently and call more often than necessary, which can overload the technical back office. On the other hand, companies can use the frequent use of services in this early phase of the joint journey to offer a competent, friendly and targeted service, so that customers continue to use the service with new contracts even after the commissioning package has expired. In this way, the benefits of this monetization model are not lost, but deferred to a later date.
5. inclusion of the digital service offer in the sale of the machine / product
With this model, the customer pays a one-off fee for the digital Remote Service offering with data glasses and optimization services, which they can take advantage of in addition to the warranty. They can then purchase these as they wish. It is similar to the traditional product business in that services are purchased in parallel with the machine, for example.
This is a very rarely used model. It must be emphasized that offering a digital service should be established as a separate business model. In the case of the digital service offer included in machine sales, the service department serves the customer in a needs-oriented manner, but in the "worst case" cannot generate any revenue because the remote service was sold too cheaply or was not properly priced into the machine offer or was heavily discounted.
5.1 Advantages of including the digital service offering in the sale of a product
The advantage for the customer of this monetization approach is the same as that of the annual service contract. Apart from the fact that this model does not include any additional services - the customer pays extra for these. This model would probably be very profitable for customers compared to the models described above.
5.2 Disadvantages of including the digital service offering in the sale of a product
By including the digital service offer in the sales price of a product, companies face the challenge of adding an appropriate price to the product price. If the price is too high, the customer will not even consider buying the product with the service included as it seems disproportionate. If the price is too low, the company runs the risk that the implementation of the digital service offering in the company will not pay for itself - not to mention the lack of profits.
As with the annual service contract, the customer may suffer from paying for a service that they do not use. The customer must be clear about whether they use and need a digital service.
6 What form of monetization of the digital service offering is recommended?
Of course, the right model for monetizing the digital service offering for a company depends on the individual company situation and the customers. It is essential to consider the advantages and disadvantages of the various models and forms of monetization before making a decision. From my own experience with customers, I recommend (without guarantee) annual service contracts at this point. Companies can better plan sales, revenue and services offered with contract models. One-off invoicing means that companies and customers benefit from less administrative work. The customer pays once and can make use of all the services included in the contract at any time.
7. benefits of digital service business models for providers and customers
Even if customers may wonder why they suddenly have to pay for services that were previously supposedly included free of charge with the purchase of a machine, they benefit just as much as the provider from digital business models.
For customers, it's not just the way they pay for services that has changed, but also the service they receive. Digital services such as remote support can reduce response times to a fraction of what they used to be. Customers no longer have to wait for a "first aid" service, but can get in touch with service experts immediately thanks to live video chat. The service technician can get an immediate impression of the problem on the machine with a virtual shoulder view. They can make quick decisions about the need for an on-site visit and pre-order the right spare parts. If the fault is not critical and the journey is not necessary, the expert can resolve the problem directly with instructions to the machine operator or the customer's internal maintenance team. The hotliner's option to solve more problems remotely and without an on-site visit frees up capacity in your service department.
Overall, customers benefit greatly from shorter downtimes and faster problem-solving processes. After all, even a one-hour breakdown of a system can cause costs in the five-figure range. In the case of a one-day machine failure, this would mean downtime costs of several hundred thousand euros. In the automotive industry, on the other hand, the costs of an unplanned line stoppage after one hour can easily run into the millions.
Manufacturing companies, on the other hand, can minimize on-site visits and significantly reduce costs, especially during the warranty period, by using these technologies. After the warranty period, this also has a positive effect on turnover, as the services can be invoiced. In addition, capacity bottlenecks in the service department are avoided by eliminating the need for travel.
It is crucial that each company positions itself optimally for its individual market and adapts the monetization of digital services to the needs of this market. In the long term, customers can benefit from efficient services that ensure the continued optimal performance of the invested machine.
About the author:
Nils Arnold is CEO & Co-Founder of ADTANCE GmbH and Co. KG, as well as CEO & President of ADTANCE, Inc. ADTANCE is a global full-service provider for the digitalization of industrial customer and after-sales service.
To this end, the company offers customers the ADTANCE Smart Service platform including customer-specific software solutions, which is made up of various modules - including the ADTANCE Support module for the Remote Support Service. More information is available at: https://www.adtance.com/de
