Servitization in the Energy industry
As the term 'servitization' echoes throughout the business world, the energy industry can't help but pay attention. With the constant quest for efficiency and sustainability, servitization in energy is no longer an option - it's a necessity. This paradigm shift can help the energy industry generate value through integrated solutions and build more resilient revenue streams.
In essence, servitization in energy refers to transforming from merely selling energy as a product (electricity, gas, etc.) to offering a combination of energy and service-based solutions (like energy management services, energy efficiency consulting, and maintenance services). It's a way for energy companies to cultivate stronger, longer-lasting relationships with their customers, thereby driving continuous revenue streams.
Benefits of Servitization in the Energy Sector
Servitization can be a game-changer for energy companies, unlocking numerous benefits that have a lasting impact:
Customer Centricity: Servitization allows you to shift your focus from transactions to relationship-building. By delivering tailored services that meet their unique needs, you can enhance customer loyalty and satisfaction. This customer-centric approach provides greater value to your clients and strengthens your business relationships.
Financial Stability and Diversification: The consistent revenue streams from service contracts offer an antidote to market volatility, leading to more predictable and stable financial performance. Plus, by diversifying your revenue streams beyond the traditional sale of energy, you become less vulnerable to fluctuations in energy prices and demand.
Competitive Edge: Servitization allows you to differentiate your offerings in a crowded market, gaining a competitive edge. By providing unique and valuable services, you become more than an energy provider; you transform into a comprehensive energy solution provider.
Sustainability: Offering services like energy management and efficiency consulting not only helps your customers optimize their energy usage but also significantly contributes to environmental sustainability. Servitization allows you to play an active role in promoting energy conservation and reducing carbon footprints.
Enhanced Customer Value and Loyalty: Servitization fosters a deeper connection with your customers. By understanding and meeting their needs beyond energy provision, you increase customer value. This comprehensive customer care can lead to increased loyalty and long-term customer retention.
Operational Efficiency and Resource Optimization: Implementing servitization can lead to improved operational efficiency. With a service-focused model, there's a constant drive to deliver the best, motivating you to optimize processes and resources. Furthermore, the use of advanced technologies for service delivery, such as IoT and AI, can enhance operational efficiency and resource optimization.
By reaping these benefits, an energy company can enjoy not only increased profits but also a stronger, more sustainable position in the energy market.
Advanced Service Types in Energy Industry
As the process of servitization deepens, more sophisticated and customer-centric service types emerge. They aim to provide a full suite of solutions that cater to the holistic energy needs of customers. Let's diver deeper into some of these advanced services:
Energy-as-a-Service: This model removes the burden of energy management from the customers' shoulders. Instead of having to worry about sourcing, efficiency, and maintenance, customers simply pay for the energy they consume. The service provider handles the rest, from infrastructure to performance management, making it an end-to-end solution. Companies like ENGIE and Schneider Electric are pioneers in this field, offering comprehensive energy management services.
Cooling-as-a-Service: This innovative service model provides cooling services in return for a regular payment, removing the need for customers to invest in their own cooling systems. This approach is beneficial for both businesses and households, providing them with reliable cooling without the hassle of ownership, maintenance, and upgrading. The Basel Agency for Sustainable Energy (BASE) and BACnet have championed this service, providing cooling without the customers having to invest in their cooling systems.
Lighting-as-a-Service: This model sees companies providing not just lighting equipment, but a complete service including design, installation, maintenance, and continuous improvement. Customers enjoy the best possible lighting solutions for their specific needs without upfront costs and ongoing maintenance worries. Philips Lighting and Zumtobel Group are examples of companies that provide end-to-end lighting solutions.
Energy-Storage-as-a-Service: In this service model, customers can leverage energy storage solutions without the need to manage the systems themselves. Service providers ensure optimal storage performance, system upgrades, and necessary maintenance, offering customers a hassle-free solution to their energy storage needs. Stem Inc. and Fluence are two companies offering energy storage services, freeing customers from managing these systems themselves.
Energy-Efficiency-as-a-Service: Energy service providers perform an audit of the customer's energy usage, suggest and implement improvements, and maintain the systems to ensure sustained efficiency. Customers pay a service fee, which is often offset by the savings from the increased efficiency. This service not only benefits customers but also contributes to global sustainability efforts. Joule Assets and Metrus Energy are examples of companies offering this service, which includes performing energy audits and maintaining systems for sustained efficiency.
Grid-Management-as-a-Service: For many power companies, managing the grid's reliability, resilience, and efficiency is a complex challenge. But with Grid-Management-as-a-Service, providers handle all the intricacies of maintaining a balanced and effective grid, leveraging real-time data and AI-driven insights to ensure smooth operations. Companies like GE Power and Siemens provide these services, managing the complexities of maintaining a balanced and effective grid.
Power-Quality-as-a-Service: Power quality is a crucial aspect for many businesses that require a stable and clean power supply for their operations. Service providers manage the power quality, protecting customers from power surges, voltage fluctuations, and other disturbances that might impact their operations or damage their equipment. ABB and Schneider Electric provide solutions to manage power quality, protecting customers from power surges and voltage fluctuations.
Renewable-Energy-as-a-Service: This model supports the green initiatives of customers by providing renewable energy solutions such as solar or wind power. It involves the design, implementation, and management of renewable energy systems, freeing customers from the complexities of owning and maintaining these systems while benefiting from sustainable energy sources. Companies like Sunrun and SolarCity offer renewable energy services, providing and managing renewable energy systems for customers.
Electric Vehicle-Charging-as-a-Service: As electric vehicle adoption increases, the demand for convenient and efficient charging solutions also rises. Providers handle the installation, maintenance, and upgrading of charging stations, ensuring customers have access to reliable charging solutions without the headaches of managing these facilities themselves. ChargePoint and EVBox are examples of companies providing EV charging services, handling everything from installation to maintenance of charging stations.
Demand-Response-as-a-Service: With this service model, providers help businesses reduce their electricity consumption during peak demand periods in exchange for financial incentives. This service helps maintain grid stability and enables customers to contribute to energy conservation while saving on energy costs. Companies like Enel X and CPower offer demand response services, helping businesses reduce electricity consumption during peak periods.
Apart from "as-a-service" models, there are several other advanced services that the energy sector can and is gradually implementing to enhance their customer experience and bring more value to the market:
Energy Performance Contracting: This is a form of creative financing for capital improvement which allows the energy costs savings from the upgrade to pay for the investment. Here, an external organization (usually an Energy Service Company or ESCO) carries out an energy efficiency improvement and uses the income from the energy savings to repay the costs of the investments. ESCOs like Johnson Controls and Ameresco provide these services, making energy efficiency improvements and reaping savings.
Energy Auditing: An energy audit is a systematic approach to decision-making in the area of energy management. It aims to help you understand how your business uses energy and identify opportunities where you can save. This includes assessing the energy consumption of a building or organization and suggesting ways to improve energy efficiency. Schneider Electric and Siemens provide energy auditing services, helping businesses understand their energy use and identify ways to improve.
Energy Management: Energy management services aim to optimize energy consumption, balancing the need for energy with energy costs and environmental considerations. This can involve tracking energy usage, identifying wasteful practices, and implementing changes to improve energy efficiency. Honeywell and ABB provide comprehensive energy management services, tracking energy usage and implementing changes to improve efficiency.
Sustainable Energy Consulting: These services help businesses navigate the complex landscape of renewable energy, energy efficiency, and sustainability. This can involve everything from strategic planning and policy development to project management and implementation of sustainable energy initiatives. Companies like ENGIE Impact (a part of ENGIE Group) and EON, one of Europe's leading energy providers, offer sustainable energy consulting services, helping businesses navigate the complex landscape of renewable energy and sustainability.
Decentralized Energy Systems: This involves the installation and management of decentralized energy systems like solar panels or wind turbines. These systems generate energy close to the point of use, reducing transmission losses and providing a reliable, localized energy supply. Tesla and Siemens provide these services, installing and managing decentralized energy systems like solar panels and wind turbines.
Smart Metering: Smart metering services provide customers with detailed information about their energy usage, allowing them to make more informed decisions about their energy consumption. This not only helps to reduce energy costs but also enables more efficient use of energy resources. Itron and Landis+Gyr are examples of companies that offer smart metering services, providing customers with detailed information about their energy usage.
Servitization Strategies in Energy Industry
Pivoting to a servitization model is not a piece of cake. Here are some strategies to guide energy companies through this transition:
Customer Insight: Deep knowledge of customer needs is crucial. Harness the power of data analytics to gain insights into customer behavior and craft services that hit the mark.
Partnerships: Form strategic partnerships to bolster your service offerings. Partnerships can lead to more comprehensive solutions and a more balanced sharing of risks and rewards.
Technology Adoption: Make technology your ally. Leverage innovations like IoT for real-time energy monitoring and AI for predictive maintenance to enhance your service offerings.
Workforce Upskilling: Your team is your greatest asset. Equip them with the skills needed to deliver and support the new service offerings.
Servitization Challenges for Energy Industry
Today, the energy industry is at a crossroads of numerous challenges. The rise of renewable energy sources, fluctuating fuel prices, changing governmental policies, and increasing demand for sustainable and reliable power supply have made it clear: the old way of doing things won't cut it anymore.
With increasing competition and rapidly evolving technology, simply selling energy as a product is an approach that's losing traction. Surviving and thriving amidst stiff competition and rapid technological evolution demands a customer-centric approach. Energy companies need to provide value-added services and solutions catering to their customer's diverse needs. That's where servitization steps in - turning challenges into opportunities and revolutionizing the energy industry one service at a time.
The transformation brought about by servitization in the energy sector is undeniable. As the industry grapples with changing dynamics - from the rise of renewable energy sources to fluctuating market conditions - there's an unmistakable push towards a more service-oriented approach. Servitization, with its myriad benefits from financial stability to fostering deeper customer relationships, is presenting energy companies with the tools they need to navigate this complex landscape.
At this junction, Avrogan, a preeminent servitization strategy and solution provider, steps in. We assist in facilitating your transition smoothly and efficaciously. As a leading provider of servitization strategies and the provider of the avant-garde service contract management solution, Avrogan Service Excellence™, we ensure your company stays at the forefront, providing exceptional value to your clients, while enhancing your bottom-line and top-line performance.
Does Avrogan support pricing excellence initiatives?Yes, any manufacturing company requires to establish processes and methodologies to achieve pricing excellence in Product pricing, Spare Parts pricing, Service pricing (both legacy and digital services), and data monetization. Avrogan’s team can support the operational deployment of such initiatives.
What is high-quality pricing?High-quality pricing is pricing that is easy to explain and defend to the customer. Such pricing is in proper alignment with the brand positioning within the market and in comparison, with other competitors. Customers can easily relate to the prices and there is a willingness to pay for the prices.
What is the main pricing methodology that Avrogan can support our organization with?We support the operational transformation to Value-based and market-driven pricing as the main methodology that can properly reflect customers’ perception of value to make sure no business is lost due to over-and underpricing. Over-and underpricing is the common result of cost-based pricing or blind following of competitors.
Why should we focus on price improvement rather than cost reduction?Pricing is the strongest lever in business to improve profitability. Within the manufacturing industry, 1% price improvement can result in 3 to 7 times margin improvement in compare with improvement in other levers such as Cost, Volume, etc.
What is pricing power?In simple terms, it is your ability to increase prices without losing a considerable number of customers. If you are scared that many customers will leave you due to your price increase, your pricing power is probably low.
Why pricing power is important?“Pricing power is the most important factor in evaluating businesses…” Waren Buffet
How can we improve our pricing power?By improving your pricing quality. High-quality pricing is easy to defend and explain. You don’t need to give away in discounts to persuade the customer to pay the price. In other words, your price should be in harmonization with customers’ value perception in the market.
Why cost-based pricing is not the best option?Direct reliance on cost for pricing will increases the chance of low-quality pricing. Cost levels are usually defined based on factors that are not in your control and customers cannot relate to them if you pass the cost by adding a constant margin on top to the customers. It is also hard for the sales teams to defend such prices towards the customers and usually being crushed by customers’ urge for discounting.
How Avrogan’s way of working can support the transformation toward high-quality pricing?While we have a look at market conditions, competitors, and cost as guidance metrics, we try to measure and grasp customers’ value perception and willingness to pay with the help of various quantitative and qualitative studies and analyses. The aim is to put the pricing into the context of different products and offerings of the business and draw a harmonized pricing logic across each category of offerings to create a consensus across the organization about the value that is offered and the value to be captured.
Is value-based pricing about increasing the prices?No, the goal is to make sure all prices are in harmonization with customer perception of value. In this process, some prices will be increased, and some will be decreased. Therefore, businesses can expect improvement both in margin and volume for the whole business
What is the typical gain out of pricing excellence initiatives?We have seen companies can easily achieve 5% to 15% gross margin improvement as a result of pricing excellence initiatives for products and spare parts. The ultimate gain depends on the readiness and the effort deployed by the business in realizing the profitability impact.
What is a typical project length?Depending on the scope, operational pricing projects take between 3 to 9 months. For a more detailed estimation please contact us.
We have deployed a pricing excellence initiative couple of years ago, but we lost the knowledge during the years. How Avrogan can support us?It is a challenge that some companies lose track of their achievements over couple of years, as the knowledge is not passed on properly within the organization. We always suggest and provide easy-to-maintain documentation, plus we suggest the usage of pricing management solutions. ERP or excel are not proper tools to maintain and manage sophisticated pricing frameworks and logic.
Can Avrogan support our pricing solution acquisition process?Yes, Avrogan’s team has high knowledge of existing pricing solutions in the market for the manufacturing industry. We can support your required documentation and selection process.
What are the steps in value-based pricing for spare parts?We start with creating a pricing-focused product structure where we can put together similar spare parts into groups. Then we defined value drivers together with your product specialists and marketing teams. In the next step, the data values of these value drivers are gathered. In the final, step a pricing logic is defined based on the value drivers and with the look at market conditions, any available competitor data, and of course margins. This logic creates a central reference price. This reference price is then transformed into suggested market prices by applying the market price level adjustment factor. When prices are ready, feedback will be gathered from marketing, product management, and sales teams to assure the acceptance of the new prices before market implementation.
We have bad data quality; can we still apply value-based pricing for our aftermarket business?You are not alone. We have seen such challenges over and over and we have different solutions to still navigate through such challenges. Contact us to discuss a detailed proposal for your business.
Why cross-border business happens?Cross-border business happens when there is enough price gap (list or net) between two market regions where a trader can sell the product at a lower price in the landing market while they realize an acceptable profit. As a rule of thumb, a trader should have a minimum of 15% of margin after all costs for the trade to start doing the trade.
What is the actual damage of cross border business for our company?It depends on who performs the trade. If the cross-border trading happens by the company’s sales network, the damage is proportional to lost market value for the landing market’s sales company. If it happens by a third party, the damage is the total loss of market value for the landing market. It will anyway affect the price positioning of the company within a specific market and will put higher pressure on margins.
We have a cross-border business issue. How can we improve that?Avrogan’s team has experience and tools in assessing the risk and mitigating it by improving pricing harmonization across markets where your business is active. To have an assessment of the potential risk in your business contact our team.
How can we increase the success rate of our pricing excellence initiative?It is important to share the information about the initiative from the beginning and involve all relevant stakeholders within the project to assure the high-quality results and acceptance of the new prices. In this process receiving proper feedback and involving the sales teams are crucial.
Can Avrogan support the change management process and go to market activities?Yes, we have the training and a structured sales enablement methodology to support the release of new prices to the market and how sales teams should respond to tough questions from customers.
We need support on where to start with pricing. Can Avrogan support that?Yes, we have maturity and readiness assessment tools that we can apply to your business. To get more details please contact us.
What kind of market research methodology should we use for improving our pricing quality?There are different methodologies for different purposes. Some of such market research methods are more qualitative like the VEL study which defines the perceived brand and price positioning of the business in the market, while some others are more quantitative like Conjoint analysis which can support defining price threshold and market share potential through statistical analysis. Please contact us to design the proper market research model for your business.
We need to improve and align pricing knowledge across our organization, can Avrogan support that?Yes, we have detailed and operational pricing training for products, spare parts, and service pricing. Please contact us to review the syllabus and design the most appropriate educational program for your team.
What differentiates a product-centric model from a service-centric model in manufacturing?A product-centric model focuses on selling products as a one-time transaction, while a service-centric model, often seen in servitization, focuses on selling the product bundled with value-added services to foster long-term customer relationships and recurring revenue.
How does servitization benefit customers?Servitization can offer customers greater value by providing a comprehensive solution with lower risk and higher performance that goes beyond the product itself. This can include tailored services, improved customer support, increased reliability, and reduced total cost of ownership.
How can servitization impact revenue streams?Servitization can diversify and stabilize revenue streams by generating recurring income from service contracts. This is in addition to the traditional one-time income from product sales. Additionally, increasing the service revenue, which normally has higher margins, will increase the profitability and thus improve the bottom line.
What role does data analytics play in servitization?Data analytics is crucial in servitization as it helps businesses understand customer behavior, predict service requirements, personalize offerings, and make informed decisions. This data-driven approach enables companies to optimize their service delivery and enhance customer satisfaction.
What impact does servitization have on sustainability and the circular economy?Servitization can contribute to sustainability by encouraging the efficient use of resources and reducing waste. This is because a service-centric approach often includes maintaining and upgrading products over time, rather than replacing them. This can help foster a circular economy, where resources are used as long as possible, extracting their maximum value.
How does servitization fit into the Internet of Things (IoT)?Servitization and IoT go hand-in-hand. IoT devices can collect and analyze data to provide insights that help companies deliver tailored services, predict maintenance needs, and create new revenue opportunities.
How does servitization fit into Industry 4.0?Servitization fits perfectly into the concept of Industry 4.0, a term that refers to the fourth industrial revolution characterized by the digitalization and interconnection of industrial processes. In Industry 4.0, technologies such as the Internet of Things (IoT), Big Data, Artificial Intelligence (AI), and cloud computing have a transformative impact on the way businesses operate. These technologies enable businesses to collect and analyze vast amounts of data in real-time, leading to a better understanding of customers' needs, improved operational efficiency, and the creation of new business opportunities.
How does servitization impact competitive differentiation?With servitization, companies can differentiate themselves by offering unique value-added services that competitors may not or cannot offer, because normally service offerings are connected to expertise and know-how knowledge than a physical product that in many cases can be replicated or have alternatives. This enhances customer loyalty and provides a competitive edge in the market.
What is the relationship between servitization and customer loyalty?Through servitization, businesses aim to nurture long-term relationships with customers. By delivering a combination of products and high-quality services tailored to customers' needs, they can enhance customer satisfaction and loyalty, and transform them to “clients”!
Dr. Arsham Mazaheri
Chief Operating Officer
Arsham is a data scientist by background, with 17+ years of industrial and managerial experience in various disciplines. Throughout his career, Arsham has helped many of Fortune 500 companies with their data and requirement challenges and has been involved in many IT solution implementation projects. Arsham has both mechanical and industrial engineering backgrounds and has a D.Sc. in Risk Management from Aalto University in Helsinki, Finland. He is a certified change and problem manager (CCM & CPCM) and holds an MBA in shipping and logistics.