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Outcome-based business models: A revolution in customer relations?

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The next major step on the road to transforming customer relationships could be selling outcomes, instead of just products as a service. 

6th Sep 2022
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Over the past five years, companies across most sectors have embraced the transition from simply selling products to providing ongoing services to their customers. This means you can now purchase almost anything “as a service”, from coffee to machine bearings. 

It’s a different kind of business model, moving away from a world where revenue is based on one-off, ad hoc purchases to one where sales are regular and more predictable based on rolling service contracts. 

However, while subscription services reinforce and prolong customer relationships, they’re still based around the idea of delivering a specific product. But what if, rather than just selling products as a service, companies started selling “outcomes” instead?

This is the next major step on the road to transforming customer relationships. Whereas the onus has previously been on the customer to select the right products for their needs, what if companies focused on the desired end results of customer purchases, and anticipated the products and associated services required to meet them? The customer is then sold a personalised solution for what they want to achieve rather than having to come up with this solution themselves. 

What is an OBM?

This next stage in customer relations is made possible by implementing “outcome-based business models” (OBMs), in which customers purchase a guaranteed outcome to meet their needs.

Imagine signing up with a security business that, instead of just selling you alarms and responding to break-ins, guarantees that you won’t be burgled, or a retailer that doesn’t just sell you clothes, but ensures you’ll always be sharply dressed. These are examples of the radical possibilities that OBMs offer to customers – and to companies.

A successful OBM typically provides deeper customer value, greater insights into individual requirements, and longer and more profitable customer relationships compared to traditional online or offline business models. Focusing on outcomes also increases company valuations – companies that rely on digital assets with recurring revenue sources and extensive data-based solutions are valued 2.4 times higher than companies with hard assets that focus on one-off sales.

OBMs also support greater sustainability. Rather than maintaining an extensive inventory, and having a business model based on the replacement and disposal of products, companies focus on “getting the job done” and fulfilling a specific outcome. By enabling a tighter control of product turnover and concentrating only on what’s needed to achieve the required outcome, OBMs deliver both lower environmental impact and higher customer satisfaction.

outcome-based business model

 

OBMs require change

The building blocks for creating OBMs exist right now. Connected products and services enable the gathering of greater volumes of continuously generated data, which can be analysed at scale using AI and machine learning to better understand individual customer preferences. For example, California-based clothing company Stitch Fix delivers a curated selection of garments to customers based on AI analyses of their responses to style questionnaires and previous purchases.

However, OBM adoption is currently in its early stages due to its complexity. While most organisations recognise the transformative power of OBMs, the majority are still only at the beginning of their service-to-outcome journey. 

For example, car manufacturers such as Volvo and Land Rover now offer certain vehicles through subscription models, and have rolled additional costs such as insurance and maintenance into the monthly charge. However, these auto incumbents face competition from pure outcome-based platform players such as Uber and Lyft, which are vehicle-brand agnostic and instead directly address the customer’s “job that needs doing” ie. to transport them from one point to another.

Successfully moving to an OBM requires overcoming three key challenges:

1. Shifting the organisational mindset

Extending the customer relationship to focus on outcomes requires the entire business model and mind-set to be re-engineered – all at the same time. Capabilities have to be developed around collecting and effectively processing data throughout the customer lifetime, building deeper customer relationships and managing a larger, more complex partner ecosystem. The typical number of customer interactions in B2C OBMs grows tremendously, requiring automation of both interfaces and data communication.

Additionally, customers may be suspicious of change and need to see a concrete demonstration of the ongoing value it will bring. And not all will be responsive to an OBM, with some customers enjoying the experience of completing a job themselves – such as driving to a destination or browsing through a physical clothing store.

2. Analysing customer data at scale

Effective collection and analysis of data is at the heart of delivering successful outcomes. This requires both new technology capabilities and a broad range of human and data science skills. Data must first be collected, either through Internet of Things (IoT) sensors or new software capabilities, and then provided for analysis via AI and machine learning. Technology must also span the entire ecosystem – for example, integrating with partner and customer systems across the supply chain to provide a complete view of all data and factors involved in delivering a successful outcome. Automation and robotisation is then needed to enable delivery of guaranteed outcomes at scale.

However, for customers to share this data in the first place, they must see the benefits and be assured that their information is being used responsibly and securely.

3. Embracing higher financial risk and liabilities

By guaranteeing outcomes to customers, companies are selling a promise, not a product. Companies therefore need to achieve a balance – promising realistic outcomes that are attractive for customers while guaranteeing that they have the internal resources and structures to meet them.

OBMs also demand a new approach to predicting and communicating revenue targets. Initially, they can negatively impact profitability and cash flow due to the costs of developing new services, lower initial payments, and the risk of penalties. The shift from an upfront product sale to a model in which payments are made in arrears demands excess cash to smooth over the transition, as well as careful management and investor communication for listed businesses.

Yet for all these challenges, once a company has fine-tuned its promised delivery levels and accounted for development costs, the recurring-revenue nature of outcome-based sales and greater customer lifetime value compensate many times for lower initial profitability.

Put simply, OBMs offer a business revolution, whether measured in higher and more predictable revenues, stronger customer relationships, greater sustainability, or higher valuations. 

 

Replies (1)

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Steven Walden
By Steven Walden
11th Sep 2022 09:38

Rolls Royce Power by the Hour springs to mind.

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