Why Aren't More Manufacturers Adopting 'As-a-Service' Models?

The 'as-a-service' (XaaS) model has transformed various industries by shifting from traditional product ownership to service-based offerings. The tsunami of subscription offers in the business-to-consumer market has at times created subscription fatigue to the point that customers are pushing back.

However, in the manufacturing sector, this transition has not been scaled as rapidly. Most industrial companies have considered the idea of launching product-as-a-service (PaaS) or equipment-as-a-service (EaaS) innovations, but they have not yet seen the full benefits in terms of growth in sales revenues.

In my experience, several factors contribute to this slower adoption, including the need for a mindset shift from transactional to subscription-based models; expertise in go-to-market strategies; understanding implications in IT, finance and legal domains; concerns over sales cannibalization; and the complexities of managing existing channels.

Transitioning from a Transactional to Subscription-Based Mindset

Manufacturers have long operated under a transactional model, focusing on one-time sales of products directly to customers or through trade channels. This model has existed for centuries. Shifting to a subscription-based approach requires a fundamental change in how value is perceived and delivered.

This transition demands not only a reevaluation of pricing strategies but also an emphasis on long-term customer relationships and continuous service delivery. In as-a-service, short-term value turns into lifetime value for the customer.

The challenge lies in transitioning deeply entrenched business practices, mental models and industry recipes, and convincing stakeholders of the long-term benefits of recurring revenue streams over immediate sales. This shift necessitates comprehensive mindset-change management efforts to realign organizational culture and operations. That is not an easy task!

Expertise in Go-to-Market Strategies

Like digital transformation, go-to-market strategies are transformative, requiring upskilling and reskilling existing commercial staff, or bringing new skills into the team. This is not a model, though. There are recipes you can readily access online. I encourage you to visit the Zuora website or read this paper from P2S Consulting.

Implementing an 'as-a-service' model involves more than just offering products on a subscription basis; it requires a complete overhaul of go-to-market strategies.

Manufacturers must develop new sales approaches, marketing tactics and customer engagement models adapted to service-based offerings. This includes training sales teams to sell value over features, restructuring marketing campaigns to highlight the benefits of recurring models and establishing customer-success systems that ensure ongoing satisfaction. A lack of experience in these areas can hinder the successful scaling and monetization of these initiatives.

Understanding Implications in IT, Finance, and Legal Domains

Transitioning to an 'as-a-service' model has significant implications across IT, finance and legal departments. From an IT perspective, robust infrastructure is required to support service delivery, including systems for metering usage, managing subscription billing and ensuring data security. Financially, companies must adapt to new revenue recognition methods, manage cash flow differently due to recurring payments and possibly invest upfront without immediate and incremental returns. Legally, subscription models may involve complex contracts, service-level agreements, and compliance with data protection regulations.

Avoiding Sales Cannibalization

One of the primary concerns for manufacturers considering an 'As-a-Service' model is the potential cannibalization of existing product sales if no proper segmentation exercise was conducted prior to launch execution.

Offering a subscription service might lead customers who would have purchased products outright to opt for the service model instead, potentially reducing overall revenue or creating customer confusion.

To mitigate this risk, companies need to carefully design, package, and price their service offerings to complement rather than replace traditional sales. This could involve targeting different customer segments, offering richer service packages that add value to the product itself or bundling services with products to enhance the overall offering. Some levels of cannibalization might need to be factored in the financial projections for the business.

Managing Existing Channels

Manufacturers often rely on established distribution channels and partnerships for one-time product sales. Introducing an 'as-a-service' model can disrupt these relationships, as channel partners may perceive the new model as competition or a threat to their traditional revenue streams. Effectively managing this transition requires transparent communication, realignment of incentives and restructuring of channel agreements to ensure that all parties benefit from the new service offerings. Failure to do so can lead to channel conflict, reduced partner support and backslash from channel partners that impact the core business.

While the 'As-a-Service' model offers significant opportunities for innovation and growth in the manufacturing sector, scaling it successfully requires addressing these multifaceted challenges. The complexity or misunderstanding of the required transitional work often leads to the lack of adoption of this transformational business model.

Companies must be prepared to undertake substantial organizational change, develop new competencies and carefully manage relationships with customers and partners to realize the full potential of this transformative business model. While the investments and efforts are significant, the impact on profit margins can also be substantial.

For manufacturers already offering service and maintenance contracts as well as spare parts, it is an easier transition with a further boost to their margins. For those who just got started, it might take a while to reach critical mass. You must crawl before you run, but as a late entrant, it has been done before and you can accelerate your programs. It is never too late.