Executive Paper USING TWO USE CASES TO SIMPLIFY THE DESIGN AND PRICING OF SERVICE CONTRACTS BASED ON CUSTOMER VALUE Dr Shaun West & Dominik Kujawski RESEARCH MOTIVATION The motivation for the research originated from the statement: ‘advanced services should be priced on value rather than cost’ (Rapaccini, 2015). Pricing of industrial services has often been based on the supplier costs rather than customer value (West, Kujawski & Schmitt, 2016). The manufacturer’s perspective dominates with pricing being treated more like a cost-plus calculation, rather than focusing on customer value creation. Anderson et al. (2009) states that cost-plus pricing gives away value that the provider does not know it provides to the customer and can also lead to providing services the customer does not value. Nagle and Holden (2002) define customer value as the sum of the price of the customer’s best available alternative and the subjective value of all the differentiating features that distinguish the supplier’s own offering from the customer’s best available alternative. The essential challenge business managers face in industrial markets is converting value offered into quantified customer-specific value to justify the price difference between their own offering and the best available alternative on the market. This is confirmed by West, Kujawski and Schmitt (2016) that value pricing can be successful in a B2B environment. CONTRIBUTION TO THEORY AND PRACTICE This paper describes the process of designing and pricing service contracts in two different markets. The first firm in this study was an established middle-size company in the global market servicing OEM clean room equipment and isolators. The second firm was a small-size company in the global market of offshore wind solutions for bolting. A cross-case analysis of the two firms was performed. An adapted version of Osterwalder’s Customer Value Proposition (Osterwalder & Pigneur, 2014) describes the customer value creation and its delivery; other Service Design tools were used to support the further analysis. The lessons learned were then compared based on different (pricing) dimensions from the Customer Value Proposition that were identified as important to the service customers and users identified from the ecosystem. These are shown in Table 1 that provides an overview of the lessons learnt from the two firms. The dimensions support the different possible situations that the customer may experience – expectations from planned work are different to those from unplanned or breakdown work. Table 1: Analysis of price sensitive dimensions and lessons learnt Dimensions
Firm 1 Planned
Unplanned
Firm 2 Planned
Additional work
Scope
Jointly agreed
Right solution
Jointly agreed
Right solution
Payment
Payment at end
Payment at end
Volume of orders
Discounts with larger volumes Adapt to customer schedules (requests) Spares availability Provide warranty No consequential Response time to scope work For the documents For the work
Discount may be applied For additional work Work done as soon as possible Spares availability Provide warranty No consequential Response time for full response For the documents For the work Know-how Problem solving Communicate with selected person
Flexibility
Risk transfer Lead time On time delivery Employee competence Personal
Know-how Communicate with selected person
Advanced payments Discounts with larger volumes
Payment at end No discount for out of scope work
Lessons learnt Common objectives and solution, clear boundaries Alternative payment options should be discussed Common dimension for value discussions
Adapt to schedules
Adapt to schedules
Important to demonstrate and then change for flexibility
Limited to workmanship No consequential
Limited to workmanship No consequential
Both firms are both very task focused with the risk transfer
Response time
Response time
For the documents For the work Able to respond to questions Communication direct to an expert
For the documents For the work Able to respond to questions Communication direct to an expert
Very sensitive as value can accrue for either party More value placed on documents than physical work Some staff had higher value for the customer Communication considered important by both parties
Proceedings of the Spring Servitization Conference (SSC2017)
Executive Paper Figure 1 provides a possible high-level model for the design and pricing of a service contact based on the experiences of the two firms in this study. Customer identification needs to be undertaken through ecosystem mapping, including the identification of value exchanges between the key actors. Customer value propositions are to be created to provide a detailed understanding of the problem and solutions. Conjoint analysis and estimation of value supports the sensitivity to (pricing) dimensions discovery. The testing of prototypes is performed based on those dimensions. Finally, a cross-case analysis is applied to extract the lessons, as well as the similarities and differences determining the customer value proposition gap and price differentiation.
Customer identification - ecosystem
Customer(s) problem description -job-to-be-done -empathy maps
Sensitivity to (pricing) dimensions -conjoint analysis -value estimation
Design and pricing of services -testing of prototypes
Supplier solution description -CVP gap analysis -pricing differentation
Figure 1: Five-step model to understand and manage the design and pricing process for service contracts
This paper contributes to the service pricing theory by confirming that understanding customer value, rather than simply relying on a cost-plus or market-based approach, is important in design and pricing of industrial maintenance services. It reinforces the need to determine specific pricing dimensions that are important to the customer. This work will support companies that are interested in value-based design and pricing of service contracts based on internal value creation and customer value. Research based on the influence of price relevant dimensions helps identify the customer’s willingness to pay and the development of the ‘fair price’ (West, Kujawski and Schmitt (2016). The study supports the findings of Anderson et al (2009) that service buyers will pay a premium for value and that they will consider it as a cost. KEY DISCUSSION POINTS • • • • •
How well is the value discovery process defined, how can it be better understood and how could it be industrialised? What are the critical value-sensitive dimensions for service contracts? Could these dimensions be used to support both design and performance? Could a modularization approach with more dimensions be expanded to support customer value discovery? What is the best way to prototype and test a new service contract?
AUTHOR CONTACT DETAILS Dr Shaun West, Hochschule Luzern,
[email protected] Dominik Kujawski,
[email protected]
Proceedings of the Spring Servitization Conference (SSC2017)
