Defining your value proposition to generate recurring revenues and launch new business models
Many companies used to selling one-time projects or products are realising that they can leverage their know-how and digital technology to analyse the many data gathered from their clients’ usage of their products, and out of those analysis of those data offer a wide range of new, recurring services to help those clients improve their usage of the products, optimise their output, reduce energy or raw material consumption, …
The issue is that setting up new recurring business models when one is used to selling one-time projects or products come with specific challenges:
1- The company culture and the impact of recurring business models: how to move from being a project or product-driven company to an innovative company delivering digital services for ongoing client success.
2- The organisation: how to understand and anticipate the long-term impact that new business models would have on the company: new revenue streams, creation and design of new roles to sustain a new type of recurring services and ongoing client relationship.
Using the SaaS software world as a comparison, we can offer suggestions on how the organisation has to evolve and which new roles, with which skills, have to be created in order to sustain the development of the new recurring business models, and which tasks had to be managed to be successful. Setting up such new business models will have a significant impact on the organisation, with brand-new roles and functions to enable the development of new client relationships, but it will generate a new stream of recurring revenues and improve the company’s results.
If we want to define what is a transformative business model, it includes some or all of the following characteristics (as explained in The Transformative Business Model, HBR, 10/2016 accessible here): it offers a more personalised product or service, it works as a closed-loop process, it shares assets, the pricing is usage-based, it enables a more collaborative ecosystem, and it is built upon an agile and adaptive organisation. At the end of the day, the aim is to ensure innovation respond to the key market trends that focus on a mix of regulatory and cost pressure, coupled with a greater demand for personnalised service, while companies need to rationalise their own product line to remain profitable.
Now the main challenge for product- or project-driven organisations is to move from traditional project-based business model to a recurring model. There is a significant cultural change necessary to shift from one to the other. A project-based business is linear, clearly defined, with a beginning and an end, potentially followed by a series of one-time services such as spare parts or maintenance. With a recurring service offering, customer engagement is constantly fed by a regular stream of product/service upgrade, an ongoing communication to clients to ensure they benefit from the flow of innovation, a focus on client success, and a high level of automation in the service delivery.
This has various impacts on your company. The first one is the need for a structured process to drive the creation of those new types of services. The second one is the impact on the organisation as it requires a constant engagement at all levels (sales, project, product, marketing) with the client.
Since the digital projects you want to put in place will require new business models, it becomes necessary to analyse their value realisation, looking at their value proposition, value architecture and profit equation (see Odyssey 3.14 model, accessible here).
From a value proposition point of view, the main areas would be to reduce price for clients, reduce clients’ hassles, anticipate trends modify revenue streams.
- If we want to focus on recurring services, it seems clear that cost reduction will focus on post-sales costs such as maintenance, repairs, running costs such as energy or raw material consumption, or training costs when applicable. This applies to the objective or reducing client’s constraints: how does the technology interface with other solutions, and are there any ways an ongoing service could reduce client’s challenges?
- Anticipating trends is also a clear topic for your company. Which future technology could disrupt your industry? Which competitor, even a small one, is offering a brand-new type of product or service that you don’t have?
- Modifying revenue streams is actually one of the main goals of your whole project, as the general concept is to develop recurring services that will increase client retention and avoid being too dependent on 1-time projects. This is obviously linked to the new services that will be offered, based on the elements previously mentioned: reducing costs and hassle for clients, creating new services.
With regards to value architecture, the main focus is the introduction of your new technology or service, but other elements can be taken into account such as the association with a partner, and the optimisation of the value chain.
- New technology introduction is the core element of the whole project, which needs to target data-driven innovation. It can be through the analysis of existing data available in systems that are already in production, but it can also relate to data that aren’t collected yet, but could be, for example with the installation of sensors. This should also include the data collection. Generating information is one thing, gathering it in a secure way that satisfies the strictest security and privacy requirements is another, which shouldn’t be neglected.
- Associating with a partner is a topic that can be critical if you want to expand the solution selling beyond your own R&D capabilities. It may be a strong factor of success if your client wants to limit the number of people to speak with.
- Optimisation of the value chain could be critical for you to expand activities both technically and geographically to serve more clients.
Your focus should then be to think about your new business model as a way to bring in new intelligence to your clients, helping them be more efficient with your products and services, and with a clear focus on the ongoing quality of the relationship.
Part 2: Generating profits through new business models with recurring revenues
Part 3: Managing new client relationships in a recurring business model
