Industry Insights

The Digital Revolution in Manufacturing, Part Two: Driving Customer Retention

By James MacTavish / March 21, 2018

A key success metric for companies in any industry are repeat buyers, and manufacturers are no different. Not only do repeat customers often spend more money, they are easier to sell to and don’t drive up the cost of customer acquisition.

In the digital economy, however, customer retention can be even more valuable. Many digital products and services are offered as subscriptions; that means when a customer buys, it’s not just a purchase but a steady, sustainable source of new revenue. Last week, we looked at new digital business models that are transforming manufacturing. This week, we’re exploring why customer retention is such a vital component of Industry 4.0.

Moving Away from the Break/Fix Model

Traditionally, hardware manufacturers have used the break/fix model to retain customers. In this model, manufacturers make money from the initial purchase but only have an opportunity for additional revenue when the hardware fails and needs to be upgraded, patched, or replaced. Beyond the hardware, manufacturers have also been selling software alongside hard goods for years, but again, these sales have been one-off opportunities.

The break/fix model gives manufacturers limited ways of interacting with their customers.

Even more problematic, many manufacturers rely on consultants, distributors, and systems integrators to provide the “fix” services. This means that manufacturers have limited ways of interacting with their customers, and the limited exposure they do get only occurs when something negative happens.

In fact, the traditional break/fix model can constrain manufacturers and leave them with:

• Few insights into current or future customer needs, or purchasing habits
• Few opportunities for upselling customers
• No potential for scalable revenue growth
• Limited ability to bring new innovative services and software to customers to stay competitive
• Limited opportunities for positive customer interactions
• A negative reputation for poor customer service

Retaining Customers with New Digital Business Models

In general, manufacturers’ customers care about two things: 1) Having working products that don’t lead to any downtime; and 2) new ways to be faster and more efficient. Digitization offers clear advantages in both of these areas. With a digital channel for software, services, and upgrades, manufacturers can deliver a range of features designed to retain customers, including:

Preventative maintenance and analytics: With connected devices that can signal when they are at risk of failing, manufacturers can monitor and provide preventative maintenance on equipment. When issues are taken care of long before hardware breaks, customers are happier and overall satisfaction improves. In one example, Rolls Royce allows airlines to buy “thrust” from their jet engines with the maintenance and services already covered and built into the cost.

A digital ecosystem: In a digitized model, hardware no longer needs to be updated at a customer site. This means customers can visit a digital marketplace to get fast, efficient patches, upgrades, and other fixes in a way that is faster, more efficient, and more cost effective. This type of hub can also centralize the manufacturer's entire digital universe, allowing developers to easily create new services for hardware and enabling manufacturers to just as easily sell those digital products. These ecosystems can offer new value throughout the entire customer lifecycle.

Digital ecosystems offer new value throughout the entire customer lifecycle.

Software-as-a-Service (SaaS) and Hardware-as-a-Service (HaaS): Today’s manufacturers can’t rely on hardware sales alone. For customers, buying costly equipment that is outdated within a year or two is simply not feasible. Customers want the flexibility to use the right hardware for their needs, scale that hardware when they need to, and bring in the right digital services at the right time.

This is the Rolls Royce model mentioned above. In this scenario, the customer “buys” the equipment at no cost and is only charged for usage. This allows customers to only pay for what they use, scale when they need to, and derive more overall value from their relationship with the manufacturer than they did before. Manufacturers also benefit by creating a steady stream of ongoing revenue.

Customer awards and incentives: With a digital platform for software and services, manufacturers have the ability to provide bundles, discounts, and other incentives. This enables manufacturers to be more creative with their go-to-market strategies, and can bring a wealth of value and cost savings to customers.

The Bottom Line: Now Is the Time to Go Digital

In today’s manufacturing climate, the value of hardware is trending downward. With this in mind, manufacturers should be investing in digital business models and all of the opportunities for sustainable, ongoing revenue and a better customer experience that they can bring.

Next week, the final post in this series will explore how digital business models can help manufacturers define a stronger competitive value. In the meantime, you can learn more about how to prime your manufacturing business for digital transformation by downloading our recent white paper, “Evolving Your Business with IoT: Six Steps to Digital Transformation.”

James MacTavish is the Marketing Manager for manufacturing at AppDirect.