Move to a output based business model?

The introduction of industry 4.0 technology in the value chain creates opportunities to innovate on the business model. As a result, new technology and the value-based business model can enable a significant competitive advantage. 

A business model defines how a business creates, delivers, and captures value. As we see with Industry 4.0, technological innovation can change how a customer's need is met. To survive the competition from new disruptive players, incumbent companies also need to change their business models. In Industry 4.0, we see that new technology is the main driver for the latest and more "value-based" business models.

“Philips no longer sells input (light bulbs) but the output (lighting) with the “light as a service” business model.”

In April 2015, Europe's fourth-largest airport, Schiphol, entered into a partnership with Philips and Cofely to deliver «light as a service» in the terminal buildings. This pay-per-lux agreement, based on industry 4.0 technology such as sensors, simulation, cloud computing, and cyber-physical systems (CPS), means that Schiphol only pays for the light they use. At the same time, Phillips owns and maintains the infrastructure with an "installed base."

This new business model provides a mutually constructive collaboration, where trust increases and costs decrease. At the same time, it is established that the provider's responsibility is to improve the service to optimize the "output" for both. The changed innovation focus in this out based model provides a much more direct form of customer-oriented innovation. With an increased insight from data and a revised focus on innovation, Phillips has now developed lighting devices that last 75 percent longer, and energy-efficient LED bulbs to help reduce energy consumption by up to 50 percent.

Because Philips has "an installed base" or owns the infrastructure, if you will, it has a higher exit cost, a lock-in effect, and the interdependence with constant optimizations benefits both parties. Other well-known examples are Rolls-Royce's almost 60-year-old "Power-by-the-hour" service and Michelin's "Pay-per-mile."

Philips' business model is possible because you get better control of the product and sell it as a service (PaaS). Customers and suppliers must work differently together and create common goals. Mutual benefit and nurturing of the customer and supplier relationship becomes central. The collaboration will create attractive business models with a low threshold for new customers who want to buy a security for the supplier. At the same time, customers do not have to make capital-intensive investments in machinery and infrastructure. And; the more people who buy the output model, the greater the potential. Thus, the service provider brings home the benefits of more loyal customers, high exit barriers and strong network effects.

Providers with output-based business models are built around the customer value transaction; this positioning creates high entry barriers and leeway to change and optimize the business model. Actors who enter into output agreements with their customers should be particularly concerned with data ownership and regulations, and crafting a futureproof IP-strategy. This is because future customer value will consist of both own and others' input factors and data flows.

Service providers bring home the benefits of loyal customers over time and can enjoy data-driven network effects that create a defensible business model. The data can also be a driver to new and even more attractive services in the future.