According to the TSIA, profit margins on “as a Service” offerings are only half that of traditional technology products. Why? The business economics of XaaS offerings are stacked against you. Significant investments are required up front, while revenues trickle in over time. All of that means pricing decisions are even more important to your business success. For the traditional tech company, EBITDA is around 15%, meaning a 1% price improvement can improve profits by 7%. With lower margins, EBITDA from XaaS may be 7%. That means a 1% improvement in price can improve profits by 15%. Pricing has an enormous impact on XaaS profitability.
From our perspective, at least part of the problem is that companies are treating “as a Service” pricing as simply a change in product pricing; as a change in the pricing mechanism by which they capture value. Managers would be better served by taking the “as a Service” moniker to heart. This is more than simply a change in pricing. It is a change in the nature of the offering. It is a shift from a product offering with necessary services attached to a service offering with a product as its engine.
This is a good news/bad news story for Field Services. On the good news side, this change can create great opportunities for delivering higher value services to your customer and becoming a vital part of their success stream. On the bad news side, this means fundamentally redefining the mission of Field Services in ways that are potentially disruptive.
Based on our work with a number of Field Service organizations over the last several years, there are four important steps in rethinking your offers for the XaaS world.
- Focus on Value Drivers – Value Drivers are the top priorities of your customers. The classic one has been uptime, but there are many more. In offshore oil drilling, well quality is vitally important. In specialty chemicals, technical engineering is vital. In imaging it may be image data capture. In healthcare it may be lowering the cost of care.
- Segment Your Market – Because different customers have different value drivers, creating value added Field Services is all about targeting customer segments where you can make a meaningful difference and that have the willingness to pay.
- Conceptualize Offers Around Targets – Let’s say you are focusing a specialty chemicals company where technical engineering is vital. Then your offering design revolves around how your Field Service support can add value by enhancing their technical engineering capabilities. It’s not about your product! It’s about delivering customer outcomes.
- Market Test Your Offer and Pricing – In a recent study of offshore oil producers, some firms indicated they would not pay $1 for services that might improve formation imaging. Other customer expressed a willingness to pay $1M. In 2016, with tens if not hundreds of millions in service revenues at stake, there is no excuse not to invest in research to validate your strategies.
In sum, these four steps involve a shift in management thinking from viewing Field Services as a necessity in supporting the product to viewing Field Services as an engine of growth in its own right.