Pattern description

A product's price is not based upon the physical value, but on the performance or valuable outcome it delivers in the form of a service. Performance based contractors are often strongly integrated into the value creation process of their customers. Special expertise and economies of scale result in lower production and maintenance costs of a product, which can be forwarded to the customer. Extreme variants of this model are represented by different operation schemes in which the product remains the property of the company and is operated by it.

Inventive problems

Application examples

In the chemical industry, BASF Coatings has been using it since the late 1990s for ‘cost per unit’ models. The cost of vehicle coatings is calculated per item (or module) coated, rather than by the amount of paint used. BASF has taken on some of the responsibility of finishing cars by lending its support to customers in situ and assisting them in improving their efficiency. Any savings achieved from using the finish more economically are split between customers and companies, resulting in a win–win situation.

Xerox is an American manufacturer of printers, photocopiers and other peripherals which also offers a wide range of document management services. Printers and photocopiers are distributed to customers, but remain the property of Xerox. The company’s vast resources and expertise in maintenance reduces costs and increases efficiency. Put differently, Xerox supplies and maintains the printers, photocopiers and other devices, while customers pay per page printed. Xerox’s superior experience in this field enables it to operate with lower operating costs and increased profit.

Smartville is a manufacturing plant based in France for the motor car brand Smart, a joint venture established by Daimler (at this date: Daimler-Benz) and Swiss watch manufacturer Swatch. Smartville provides a modern, highly efficient manufacturing process for the Smart car, a popular compact vehicle available in electric and petrol versions. All essential suppliers of components for the Smart car are located at the cross-shaped production plant. Smartville has the lowest depth of in-house production, accounting for just 10 per cent (although most of the external suppliers are located in or around the Smartville plant). Smartville’s production concept allows for efficient integration of suppliers into the manufacturing process. Vehicles are manufactured to order with a modular delivery of systems from suppliers, whose close proximity allows for greater communication and rapid testing and delivery without the need for long-term storage on site. The efficient integration of companies allows for a shorter production time, lower costs, more efficient collaboration between the suppliers and ultimately leads to higher revenue.

References

The Business Model Navigator: 55 Models That Will Revolutionise Your Business