Dante Terzigni/theispot.com
B2B sales is fiercely competitive. Companies selling big-ticket products and services to other businesses must design solutions that meet their customers’ specific needs with a provable value proposition. Increasingly, that means engaging in value-based sales, where the benefits to the customer are defined, quantified, and managed by the vendor. That’s a challenging practice to get right: Many industrial companies fail to move on from piloting solutions to delivering them at scale.
Our in-depth research on industrial equipment manufacturers (IEMs) that have embraced this business model has revealed what separates the successful scalers from those who remain in pilot purgatory. Those lessons are useful to any B2B companies embarking on, or struggling with, a value-based sales approach.
Many IEMs are facing a perfect storm as two major trends converge. First, they are encountering intense competition from low-cost players, as their advanced physical products alone no longer confer a competitive advantage. Second, many of their traditional product offerings, which already carry a high cost of ownership, emit high levels of greenhouse gases at a time when customers are striving to comply with stricter environmental standards. With the convergence of these two trends shrinking opportunities for growth and profitability, IEMs are increasingly looking to new business models that might reduce customers’ operating costs and emissions. However, the ability to execute such strategies at scale has been elusive.
To improve their customer value propositions and their profit margins, IEMs are creating value-based industrial solutions.1 We define them as customized and integrated combinations of products, service, and digital technology that allow companies to achieve profitability and sustainability simultaneously by providing value in use. In some sectors, such as construction and mining equipment, solutions like fleet optimization and equipment-as-a-service already account for the majority of total revenues.2
Offering value-based industrial solutions requires manufacturers to shift from selling products to fulfilling complex customer needs — that is, to a value-in-use business logic, where the value created is shared between manufacturer and customer.3 Such solutions have three distinct but interrelated characteristics. First, they are customized to the unique operational needs of a specific customer rather than implemented off the shelf.4 Second, they comprise integrated combinations of products, services, and digital technology that enable greater value collectively than each does in isolation.5 Third, these solutions aim to deliver value in two key ways: by improving both profitability and sustainability outcomes. Profitability may manifest as productivity improvements and reduced operating costs, while sustainability can be achieved by lowering the CO2 footprint of operations and enhancing product utilization.6 Scania’s fleet management system, Volvo Construction Equipment’s site optimization solutions, ABB’s motor-as-a-service offering, Caterpillar’s autonomous solutions, GE Aerospace’s TrueChoice Flight Hour maintenance program, and John Deere’s TimberCare service offering are all examples of such solutions.
The Scaling Challenge
Our research shows that it is relatively easy for an IEM to create an initial value-based industrial solution. Doing so on a one-off basis for a single, key customer limits the scope of financial commitments. The value created for the manufacturer in this case is not primarily about the revenue derived from the customer; rather, it’s about proving technical and operational feasibility, as well as projecting a brand image of proactive, innovative thinking. However, scaling these solutions is much more challenging than delivering pilot initiatives: Offering these solutions across a large and diverse customer base requires a repeatable, structured process and strong, entrenched capabilities.
IEMs that seek to scale these solutions expect higher profits, but that often fails to materialize. Instead, many companies find that the investments needed to deliver value-based industrial solutions more broadly increase both their costs and organizational complexity, without improving profitability.7 In other words, IEMs often struggle with managing scaling in practice, and their customers frequently complain that value-based industrial solutions are not financially viable.8
We studied 19 companies across eight industry sectors to gain insight into where the scaling process breaks down and found that many IEMs overestimate the appeal of their value proposition and their customers’ willingness to pay. Across the cases, the IEMs also found it challenging to properly configure solutions and align with partners. Many were also struggling to implement new revenue models and build sufficient capabilities to deliver promised value in practice, especially when doing so required bringing in third-party services.
There are numerous reasons why these challenges prevail. First, like many manufacturers, IEMs have a deeply rooted culture that prizes developing and improving physical products. This limits their ability to deliver new forms of customer value beyond the products themselves, such as value-based solutions.9 Second, they are often organized for transaction-based customer interaction and lack the organizational readiness for solution delivery and implementation.10 Third, creating a profitable revenue model may be particularly complex because it requires alignment and agreement with third-party service providers and other ecosystem partners, over whom a focal IEM has limited control — and it requires contributions from customers, which magnifies complexity furthe
