Episode #0093 - B2B business moving to an equipment as a service

Pricing College Podcast

In today's episode, we are going to answer a listener's query which was about companies traditional B2B businesses switching from selling components or machinery to more of equipment as a service system whereby equipment machines etc, whatever it is, is provided on a monthly or weekly or whatever basis it is almost like a joined-up solution. Sounds interesting.

It does sound interesting and at the same time, the movement from a pure sort of product to equipment as a service model has been very slow in B2B. In spite of the opportunities that such a model does provide a business. I mean, if you look at it in, in theory, B2B businesses have changeable costs, input prices. Often there are margin constrained industries as highly competitive markets, slim margins. And often when you sell a product, you're selling that product one time and often one time only. Maybe a lot of customers choose not to buy again, reducing the amount of ongoing revenue. Obviously, executives are thinking, how can we increase our margins and ensure recurring cash flows? Well, that service's idea concept comes into play. But the problem really stems in my mind is often customers really still don't understand the value of the offer. Let alone what customers value about the core offer. Which is the fundamental principles of an equipment as a service model. You've got to understand your customers, their needs, their wants. The risk factors they're trying to avoid very, very carefully in order to construct a pricing model. And a service offering that is compelling enough for them to trust you with this shared partnership model. So then often, businesses go into this from a very product-based pricing model to an equipment services model, just hoping for the best. And then it does become just a test of an idea because they really haven't done the hard work in the planning. Understanding identifying the value drivers of their customers.

I'm gonna lighten the mood a bit and I'm going to be a bit more positive about equipment as a service. I suppose some of this has come from the software as a service that sort of trend in recent years in IT. SAAS, I think it's even called. I think there are clear pluses. Companies obviously don't have to buy equipment upfront. They save on the capital expenditure and there are constant improvements in the machinery they're receiving. But the thing I'd also say is, there's a number of pluses from both perspectives. You're getting the problem you want to be solved, whatever that problem is. If that problem is road network maintenance. If their problem is advertising signs at a football game. Whatever that equipment as a service you're getting is. You're ensuring that it's a lot of the work that you would have been doing is outsourced or removed. You're not constantly negotiating over the price for each individual item. You're not constantly in contact to order new things. You're not constantly comparing costs or having that pricing tough bargaining that you're used to. To some extent, you don't have to educate yourself as much about the alternatives that there are right there. As a purchaser, you would still have to be aware of these things but it's the solution that you're buying. You're buying the joined-up stuff arrives on time, stuff is done, stuff has been maintained. Equipment is the highest spec. There will be terms and conditions obviously, to what you signed up to. But that, to me, sounds very positive. From the bank perspective, from a selling perspective, it also sounds very positive. And of course, this isn’t the perfect world as Joanna had mentioned, there are quite a few flaws. But this is the brighter side from a selling perspective. It gives much more sustainable revenue, much more forecast revenue which companies love. It potentially gives you more flattened revenue, month by month, you're not having peaks and troughs. And it reduces the need to constantly be selling pressure to discount reduces that selling on each individual line. Also, reduce the need to articulate what you're selling to really go through those details. And it makes it more of we always say we're delivering a solution but this is getting closer to it.

I don't know, maybe it's because it's the end of the week. I'm sounding a bit pessimistic. But I actually do think it's a great model. I think the caveat is you've got to do a bit of hard work. It's not just purely a model that you just work out there and you go. “oh, from this we're gonna get recurring revenues then we're not”. But it's a shared risk model on both sides. Both from the seller and the buyer. And so you need to know what those risks are and quantify those risks. Because let's look at a case example here with Rolls Royce and the Jet Engine when they change to that model. Actually, they've had that model for quite some time. Whether the customers pay for the amount of time the planes are in the air, then, of course, COVID hits. So, there's been very, very limited planes in the air for the past two years. Which has meant that the risk has all been on Rolls Royce. So, what was a very profitable model turns into quite a risk of bankruptcy for a business. Obviously, they've got scale, they've got credence that they'll be bouncing back with innovation. But you have to take in not just the interaction sometimes between customers. But obviously, that overall economic and societal changes that are occurring right now. As we all know, we're living in unpredictable times. So we got to be very clear, and just safeguard our pricing models with real-life scenarios.

I think what I would say here, we have to be aware of the difficulty in changing the business model. Moving from traditional B2B selling or renting equipment. And then moving to a solution specialist equipment as a service style cell industry. It's a complete transformation of your business model. Most companies find it pretty hard even to operate the existing models they have. Defined pricing systems are hard to implement. Very few companies do it well, nobody does it perfectly. And very few companies do it very well. With the majority somewhere in the most improved next year category in their annual review. So moving to a software or an equipment as a service system, You are moving up to a new level of business approach. You need more skilled people, you need to know the value of what you're selling. Why are you doing it? The additional value you're providing. You need to know your customers. What do they want? I think I said earlier it was one of the positives that decreasing costly sales every day. But it makes the upfront sale probably even harder. And you need to be really able to articulate that upfront sell, the sales and the marketing and all those aspects. You need to transform that in your business to be able to articulate that and get a customer signed up month to month.

I think that's a wise step. I think often though, companies don't understand the offer of the core product range. Just that core range as it was traditional just B2B products pricing. Let alone understanding what equipment as a service business model means and the change in pricing required for that. So in a way yeah, highly recommend what you need to do first go back to first principles. Understand what you've got now. What is the value of your current offer to your customers? And then start evaluating new offers within a new paradigm. Because strangely businesses that have moved to equipment models have actually found that commonly their core offering, their existing offering actually is more profitable. And have more value to their customers than they thought and even more valuable than the new offer. But all the time, but sometimes this can be the case. So really go back and do that planning, do those analytics first. Just to be confident that you're not throwing away value. And that you're going full-heartedly into a business model that potentially isn't as valuable to your customers as you thought. And in the process, you've obviously increased your capital expenditure not decreased it which was obviously your intention. The risk is again more on you and you've got to backpack and pedal like crazy to get back to the starting point. But it can be very confusing if you just do things methodically.

I think understanding your business is vital. Equipment as a service will suit some companies, it won't suit many. And many companies will not be capable currently, obviously companies can improve to look like anybody else. But it's not something you implement willy nilly overnight or rationally without fundamentally digging through that model that you have. It's an interesting one. It's probably easier for a new company to implement, someone who's starting up than an existing company. Obviously changing it is harder than starting afresh. But it's an interesting one. It's one we'll keep you updated on over the next couple of years, I guess, through this podcast and other media. And yeah, it's great to see new business models evolve. We've seen outsourcing, we've seen software as a service, and now we're seeing that implement more as well in traditional B2B. So, hope springs eternal. We'll leave it there today. Have a great day.

Before I just clock off, there is a process that you can follow. It isn't just one go from one model to the other. There is a phased plan and process that can get you there safely. It doesn't have to be one thing or the other. And you can phase each phase in a way that suits your business as you reveal and learn more about your business, your core offer with data and information from your customers. But I think as Aidan quite rightly said, I think it's time to wrap up today. But I think we'll revisit this topic because we've had quite a few questions. It's interesting, it's quite a meaty topic, and we'll come back to a later date. If you have any questions, feel free to email us, give us a call. We're happy to discuss any of the questions or topics that you want to cover. Really appreciate the feedback so far. Thanks a lot.