Servitization and Revenue Maximization

The Basics That You Must Master

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One of the first consulting projects that I worked on was for Johnson Controls, Inc. (JCI). Our firm was brought in the mid-1980’s’ to help this company develop a service business strategy. A new strategy was required as result of the company’s decision to create one service organization to service all the building equipment sold by JCI. Up until this time, each equipment division operated its own service organization.

The new service organization was structured as a strategic line of business. The management team was given responsibility for generating and managing service revenue. Prior to the creation of the new line of business, the service organizations within JCI did not have to worry too much about revenue. Basically they had a captive market since the product divisions were responsible for selling service contracts and installation projects along with the products they sold. The new organization was now tasked with the responsibility of marketing and selling services directly to the end-users. This was an entirely new concept for the management team of the new business because they could now offer services to any company regardless of whether or not they owned JCI equipment.

The management team came to us for help with developing a go to market strategy and business plan. More specifically, they needed to become crystal clear with respect to their market, their service offering, and pricing approach if they were going to succeed in building a service business. One of their biggest challenges was determining the size of their market. It was foresighted of them to want to know about the size of their market because they’ve gone on to become one of the largest service organizations to the building industry, and certainly a company that is far along the path toward Servitization. I’ve met service executives who skip over this question about market size in their strategic planning process because they struggle with finding an answer. When asked if they know how large their market is, they give a vague answer likes “It’s big” or “the product market is X billion dollars so the service market is some portion of this”.

In order for the JCI executives to get a precise view of the size and growth of the market, we had to help them determine their total addressable market. This is where JCI’s foresightedness came into play. In defining the total addressable market, we helped JCI understand the market was not just equipment manufactured by JCI but equipment sold by other manufacturers. We also asked JCI to consider what else they could service in a building and what types of services they could offer. This led them to expanding their market focus to include a broad array of value-added services on a wide range of building technologies like fire and safety, security systems, and elevators. The definition did not stop there; it also took into account vertical market segmentation and other demographic factors like square footage and age of building.

As result of this strategic planning process, JCI had a comprehensive definition of their total addressable market (TAM). More importantly, they understood their service revenue opportunity on a very granular level; by technology, by service offering, and by vertical market. The work did not stop there. JCI still needed clarity around its Serviceable Available Market (SAM) and Serviceable Obtainable Market (SOM) or target market. In case you were wondering, SAM is the portion of the TAM that a company can reach taking into account various constraints like breadth of its sales channel and competitive factors. The SOM is the percentage of the SAM that a company can realistically capture based on various assumptions (e.g., sales effectiveness, operating capacity, resource allocations, etc.)

Without the diligence that went into defining the TAM, I don’t think that JCI would have grown into the service behemoth they are today. The level of diligence that went into defining the TAM established the foundation for the SAM and SOM. It also became the basis for them to eventually expand into service of Data Center, Energy Management System, and Security and Fire equipment. More importantly, JCI’s results proved that the more distinctions you can make about a market, the more precise your plans can be for penetrating it. The granularity around the TAM and SAM enabled JCI to ask the right strategic questions about what business they are in and what must happened in order for them to maximize market share.

The key takeaway here is that a service business must pay close attention to how it defines its market. It is not enough to simply say the market is “big” or reference market data from an industry analyst, and leave it at that. Companies who achieve outstanding results when it comes to service revenue growth are those who are able to methodically determine the size of their available, addressable, and obtainable market. This is absolutely critical for any company on the Servitization journey.

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