Revenue models of servitized offerings

Solution selling differs from selling products as the final configuration of the solution dif-fers due to the varying amounts of product/service elements represented in the value proposition (Tukker, 2004). Also, according to Bonnemeier et al. (2010), selling servitized solutions usually leads to longer supplier-customer relationships and, thus, that requires adapting pricing practices not only to the duration but also to the intensity of the relation-ship.

Bonnemeier et al. (2010) have proposed a framework, illustrated in Figure 7, represent-ing traditional and innovative revenue models that could suit integrated (servitized) offer-ings. They argue that the main difference between the traditional and the innovative rev-enue models, related to solution offerings, lies in pricing measures taken while setting the price. In case of traditional revenue models, the value proposition is based on con-ventional product or service provided by the supplier while, in more innovative revenue models, the focus is directed on the actual input or output of the customer, i.e., the value-added.

Supplier s amount of work

Usage time, intensity...

Performance level Performance result

Product

Service

Product sales Rent, leasing or licensing

Cost plus Fixed fee

Usage-based

Performance-based

Vaue-based Output for the

customer Input for the

customer Performance parameter

Supplier s value

proposition Revenue model Parameter for price setting Supplier s

cost

Customer value

TraditionalInnovative

Traditional and innovative revenue models (Bonnemeier et al., 2010).

Considering product sales only, Bonnemeier et al. (2010) divide traditional revenue mod-els into ‘product sales’ and ‘rent, leasing or licensing model’. Product sales revenue model simply stands for revenue being generated through property transfer whereas rent, leasing or licensing revenue model is used when only the possession rights are transferred. In case service component is included within traditional offering, the revenue models include ‘cost-plus model’ and ‘fixed-fee model’. Cost-plus model implies that a supplier charges for specific amount of work and adds a mark-up to secure profitability.

In case of the fixed-fee model, a supplier and a customer agree on a certain amount of money to be paid regardless of whether the actual service is fully used by the customer or not.

As in the case of traditional revenue models the base for price setting is the supplier’s amount of work, in the case of innovative revenue models prices are not related to vari-ables internal to supplier but rather to the solution’s performance. Thus, the innovative revenue models are divided into ‘usage-based’,‘performance-based’, and ‘value-based’.

First, the usage-based model reflects a situation when a customer pays for utilization of the solution within the certain time period and the supplier’s solution contributes as an input within customer operations. Second, in the performance-based model a certain level of performance is promised to the customer and supplier is paid a pre-arranged fee for keeping the service promise or can be penalized for underperforming. Finally, in the case of the value-based model, the supplier aims to improve customer’s internal pro-cesses and benefits from the value that the supplier generated for the customer. The costs that the supplier bears are also important when the innovative revenue models are considered but they are not the only price-setting parameter anymore.

While Bonnemeier et al. (2010) distinguish between traditional and innovative revenue models, Tukker (2004) proposes eight archetypical PSS business models, some of which are closely related to the revenue models described above. Tukker (2004) gathers those eight business models under three main categories of PSS, and pictures them using the PS continuum model, similar to the one presented by Oliva and Kallenberg (2003. Figure 8 illustrates the PSS business models proposed by Tukker (2004).

Value mainly

Eight PSS business models on PS continuum (Tukker, 2004).

As the figure above shows, the upper part of the figure is a representation of PS contin-uum while in the bottom part Tukker (2004) divides product-service offerings into three broad categories. First, product-oriented offerings, where the supplier focuses on the product sale and services, are provided to support product business; those services are usually transactional and standardized. In this category, there are two PSS types distin-guished: (1) product-related services, where the supplier not only sells the product but also provides services required over the product’s life time, and (2) advice and consul-tancy in which case the supplier apart from the product provides the customer with the advices related to the most efficient use of the product.

Second, use-oriented offerings aim to achieve the availability of the entire system, and the use of the product is sold accompanied with value-adding services while the product stays under a supplier’s ownership. The three types of business models included in this category are product lease, product renting or product sharing, and product pooling.

When product is leased, the customer pays regular fee and as unlimited and individual access to the product. Then, in the case of product renting or product sharing the cus-tomer pays for the use of the product but does not have unlimited and individual access to the product as it is sequentially used by different customers. Finally, product pooling is similar to renting or sharing with the difference being the simultaneous use of the prod-uct by various customers.

Last, result-oriented represents a set of offerings in which a supplier and a customer agree on a certain result to be achieved, the supplier sells its competency and there is no pre-determined product involved. In this category there are three archetypes involved which are activity management, pay per service unit, and functional result. First, in case of activity management, the client outsources certain activities and as the outsourcing contracts usually include performance indicators this archetype can be grouped under result-oriented category. Second, in pay per service unit model the client pays for the output of the product but not for the product and other related activities. Finally, in case of functional result, supplier and customer agree on the result to be delivered and the supplier has the freedom of how to deliver the promised result.

Bonnemeier et al. (2010) focus on revenue models which greatly simplifies the under-standing of different revenue models applied for any kind of offering. On the other hand, Tukker (2004) connects business and revenue models and, hence, also encompasses the change of ownership and responsibilities of the customer and the provider while pro-gressing across the servitization continuum.