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Wanted: the sweet spot on the price tag

Digital services offer enormous potential for manufacturers in mechanical and plant engineering: a widely spread fact by now. However, the roll-out process of new services brings with it a question that is just as important for the success of innovative services as their original conception: How much may they cost? Companies often struggle with finding a good answer. The usual amount of benchmark data are rarely available for innovative services, hence the basis for making decisions is slim. And yet the stakes are high: If innovative services are overpriced, they are not worthwhile for the customer. If the price is too low, they are not worthwhile for the manufacturer. So what is the sweet spot?

SESOTEC, a German producer of solutions for foreign object detection, material sorting and analysis, was looking at this question when it approached Homburg & Partner. The company had already developed several own, innovative service solutions up to market maturity. With our support, the goal was to ensure that new solutions would actually produce their intended effect: stronger customer loyalty, differentiation from the competition and an increase in sales. It was not simply about finding optimal pricing. It was also important to ensure that the new services fit perfectly within the existing service portfolio and that package solutions would generate synergetic effects.

The most important results of the digital service monetization project described here

Pricing models for digital services in machine engineering: Overview

Hover your mouse over the names of the pricing models to see further details.
Single payment Subscription Flat rate Pay Per Use Freemium Gain-Sharing Dynamic Pricing
Logo von SESOTEC vor grauem Hintergrund
Markus Grimm, Group Director Service at SESOTEC:

“Homburg & Partner has been instrumental in helping us to correctly price and launch digital services. The service packages and price models that came out of our joint project are very well received by our customers. For example, we run numerous remote support tasks for our customers every day and can thereby solve many problems online without having to be on site. The benefits for our customers are evident: High availability of systems, process reliability, productivity and no travel costs for service employees. And that is the case not only during unscheduled downtimes or in times of crisis, but in general.”

Establish bases for making decisions…

At the start of the project, the focus was on creating a database to facilitate making robust decisions for the monetization of digital services. To this end, existing analog and digital services were first catalogued in key working groups. The project team then joined with representatives from service, sales, product management and marketing to carry out customer segmentation. The objective was to use specific use cases to derive targeted needs and willingness to pay per service type and specific business models for dealers.

Subsequently, a variety of options for pricing models and monetization dates were discussed, evaluated and assigned to digital services in workshops. The joint discussions hence resulted in maintenance packages that were sensibly bundled – from purely analog to maximum digital features.

… and determine pricing

Once the service packages were put together, the final prices per package had to be determined. The decisions were made based on four steps: To begin with, the absolute lower price limit was set based on internal costs. Then the added value was calculated in euros – this was done by considering specific use cases.

The next step focused on internal price estimates: Using Van Westendorp’s Price Sensitivity Meter, we captured the prices that key client stakeholders saw as reasonable. In order to accurately reflect the factual willingness to pay on the market, the last step involved validating the previously recorded prices with selected existing customers.

To ensure the long-term market success of the digital service packages, tools and helpers were developed for sales, marketing measures were specified and a core, software-based administration of contracts with an asset relationship management (ARM) system was implemented.

Decision basis for custom-fit monetization: Manufacturer-specific price model ranking

Manufacturer-specific price model ranking for machine engineering companies

The ranking assesses different pricing models based on individual, manufacturer-specific factors and needs. These can then be specifically weighed in a further step. This way, a robust foundation for making decisions is created in order to determine pricing models for digital services that also satisfy the producer’s needs.

The most important results in detail

Our client already had numerous innovative service solutions at the start of the project, including remote diagnosis and predictive maintenance. What was missing was a quantifiable description of uses from the customer’s point of view as well as a structured bundling of analog and digital service features in a package that could be sold.

To change this, we designed a description of concrete use case based on specific customer types and service features. We based the quantification on measurable added benefits for the customer, including reduction of downtimes, optimal maintenance times and decrease of spare part stocks. In workshops, different service levels were bundled into maintenance packages, so that packages or custom options can be booked for each customer requirement.

At the project start, our client already had a rough classification of customer types and a segmentation according to sales volume. However, this was only valid for sales. Therefore, together with stakeholders from the service and sales area, we developed a customer segmentation that is tailored to the service business.

Customers’ operating and service behavior was examined across different dimensions, for example cost or benefit orientation and the level of affinity to IoT solutions. In the course of this, each customer was assigned to one of three service categories: breakdown-driven, operations-driven and performance-driven. The outcome was a customer segmentation that is specifically tailored to the service business and helps our client effectively identify and meet the service needs of its customers.

At the project start, our client had already developed several digital services up to market maturity. Yet their concrete monetization remained unclear. By analyzing benefits, costs and customer value, we determined the optimal pricing models for each digital and analog service feature. Based on the validation of the pricing models by selected service customers, the exploitation of market potential was maximized. This had a direct quantitative effect. In several service cases, a 20% higher willingness to pay could be achieved.

Our client’s goal was to ensure that his digital services are used by as many customers as possible when they enter the market. To achieve this goal, a key factor for success was not only appropriate pricing but also the right marketing. This was ensured by service-specific marketing campaigns, keynote speeches at trade fairs and events and an online “Total Cost of Ownership Calculator” for service customers.

In addition, it was important to our client to continuously promote the success of the new service solutions in their everyday business. In order to steer the newly developed processes as optimally as possible, a central software solution for service relationships mapped the entire service workflow. We developed detailed argumentation and communication guidelines for our client’s sales team to strengthen their basis for negotiating regarding the new service portfolio. The overall result for our client: digital service solutions that are more than digital fleeting stars.

Digital Service Monetization: find out more? Nothing could be easier!

If you are interested in finding out more about our services in the field of pricing for digital services or would like to discuss similar approaches for your company, please do not hesitate to spend a few seconds to leave an inquiry via our contact form. Our partner Daniel Antolin will personally contact you promptly after that. Alternatively, you are welcome to contact us by emailing or calling us!

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Daniel Antolin
Tel.: +49 89 20359-106