Introduction
The servitisation of the economy is a trend that affects all sectors, not only the IT ones but also the industrial, energy and health sectors. The models are certainly not new for companies, but they are expanding to many sectors.
If implementing an As-A-Service solution answers the need of securing predictable revenue streams and retaining customer ownership, implementing a Pay Per Use (PPU) solution is the extra step in the flexibility journey. As a manufacturer, you might be eager to tackle this new step. However, it might seem quite a challenge to implement it within your organisation.
PPU is the advanced As-A-Service payment mode that allows the customer to pay only for the usage. Whether it is defined in “number of hours”, “number of units produced” or any other unit, this payment per usage is now possible thanks to data availability.
Do you sometimes wonder what to do with the data you collected and where to start to actually turn them into a PPU offer?
We suggest a data analysis in a break-even perspective, figuring that all costs occurring during contract duration should be covered by billed usage.
A PPU solution is a new offer amongst several ones in your sales panel. Is it strategically aligned with existing ones? Is it positioned to bring new customers, address existing ones or both?
We propose to review the whole sales proposal strategy to guarantee an alignment of the new PPU model together with existing As-A-Service solutions you have already offered to your clients.
Although you feel that great reward might come from this new PPU offer, it might also bring some additional risks that require a full focus from the start.
Have you properly identified and measured the risks surrounding a PPU implementation offer? Have you adopted any strategy to mitigate those risks? Is this strategy clearly defined and aligned throughout your organisation?
We propose to guide you through a risk analysis that will cover 6 types of risks associated with PPU and that can be avoided, reduced, transferred or accepted.
Unleashing the Power of Data:
The PPU model relies on two key aspects :
- COST = The total cost of a machine during its whole life cycle
- USAGE = The actual usage of a machine (in hours or any other defined unit)
Notwithstanding the “uncertainty” of actual usage by a customer, the pay per use pricing should be defined in order to at least cover costs of the machine during its contract’s duration, in a break even perspective.
Hence data collection should focus on :
Cost aspect
The cost of a machine during a given time T is related to :
- its primary manufacturing cost
- the sum of incidents costs that occurred during T
The usage = production time
The PPU model implies a proper “monitoring” of the usage which directly leads to revenue. Furthermore, a “non usage” would lead to a revenue discrepancy.
Then it is necessary to analyse “reasons” leading to “non usage” in order to anticipate those revenue discrepancies.
Whether the customer does not need the equipment full time, or because of malfunctioning of the equipment, “non usage” has a cost.
The PPU model is now made possible in many sectors thanks to a widely spread digitalisation process. The “Internet of Things” (IoT) provides real time access to much information allowing the monitoring of usage.
By allowing the remote monitoring of equipment status, proactive maintenance can be scheduled to anticipate malfunctioning. Technology has increased the percentage of manufacturing time that is truly productive and hence, truly billable. Overall maintenance is performed so that equipment downtime is globally reduced. This optimisation of effective production time constitutes a primary requirement for the manufacturer to offer its equipment through Pay per Use (PPU).
Hence the manufacturing time that is truly productive should increase together with the related revenue.
As a direct consequence, the list of services included in the PPU offer should at least include the level of maintenance required to optimise the availability of the machine.
The Dos and Don'ts of Pricing Strategies in Pay-Per-Use Sales Proposals
Whether your PPU solution is the result of an analysis of customers' needs or proactively created to counter competitors' offers, this model will surely allow you to increase shareholder value.
Attention though, among the panel of your existing Service offers, PPU should distinguish itself without jeopardising existing ones.
Positioned as an additional flexibility step of an As-A-Service offer, the PPU model has to guarantee at least the basic service level together with any digital solutions required to monitor and minimise downtime of the equipment. A service offering strategy is key to sustain the PPU model implementation.
In addition, in a PPU solution, the customer might “expect” to be charged only when he “produces” units. This raises several questions to address while designing the offer:
- What actually drives customers to turn to PPU?
- What is the “usage” time definition from a customer perspective?
- What is the “usage” profile of targeted customers? What is the risk of revenue discrepancy from one customer to another?
Financial impacts & risk mitigation
Of course, risk and reward are closely correlated, they increase in parallel. Implementing the right risk mitigation measures is required so that the Pay Per Use business model becomes a source of new profitability streams.
Below graph shows that the more flexibility is offered to the customer, the higher the risk is for the manufacturer.
Source: Oliver Wyman analysis
Whereas an As-A-Service offer can be built on a strong relationship with financial partners to share risks, PPU model is based on a variable and hence “unpredictable” portion whose associated risks might not be easily shared.
Below risks are commonly faced and need to be addressed when implementing a PPU strategy :
- Performance risk : whether it is performed by you or a third party, what is your capacity to actually deliver services?
- Obsolescence risk : how do you align the potential mileage of the equipment and its residual value?
- Balance sheet risk : what if the asset has to be registered in your books in a flexible solution?
- Insolvency risk : what if a customer can not meet its payment obligations?
- Cash risk : what if you cannot get the financial partner to sustain your flexible offer?
- Revenue recognition risk : what if you cannot recognise upfront the revenue related to this new offer?
Each of these risks can be mitigated in different approaches taking into account the difficulty to fund the variable portion of a PPU offer : avoidance, reduction, transference, and acceptance.
Conclusion
The positioning of PPU as an extra step in As-A-Service flexibility can seduce many customers. For manufacturers though, despite the promising revenue aspect, the PPU model implementation presents many challenges.
Data availability is required to get an in-depth knowledge of the equipment status and customer ‘s usage profile. It allows you to build tailor made offers , monitor actual usage, predict costly downtime and set proper maintenance service optimising production “billable” time.
Collecting both costs and usage data can help set up a break even strategy assuming that all costs occurring during machine contract duration are covered by billable usage.
Data availability alone is not enough. PPU implementation comes with several risks to keep in mind while designing the offer. Securing the As-A-Service solution sets the grounds of an internal service strategy sustained by a strong and reliable partnership with funders. As it might be difficult though to fund the variable portion of the PPU offer, adopting a mitigation risk strategy is key to success.
Should you not have the in-depth internal resources to set up the PPU solution aligned with your sales strategy, look for Experts for guidance on the subject.
At Black Winch, our team of Experts hold over 25 years of experience in the As-A-Service sector. We are guiding multiple leading manufacturers on flexible solutions (i.e. leasing, As-A-Service, Pay-Per-Use etc.). Reach out to info@blackwinch.eu for an inspiration session on how we can help you develop your most effective and efficient Pay-Per-Use model.
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