Performance-based Contracting 38#
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.
Examples: Iconic Cases
How they do it: The aerospace manufacturer Rolls-Royce achieved success in the 1980s with its ”power-by-the-hour” model for its aircraft engines. What was billed to the customer was not the price of the aircraft engine – the customers did not purchase the engine, and Rolls-Royce kept ownership and maintenance obligations. Rather, the customer was billed for every hour of performance of the engine. This business now accounts for 70% of Rolls-Royce’s revenue.
Learn more about Rolls-Royce →
How they do it: Xerox has been very successful in establishing a service business. The company launched ”Managed Print Services” in which it manages fleets of printers and multi-function devices, even those made by other companies, for enterprise clients. Xerox provides maintenance, upgrades, paper and toner replenishment. Clients only pay for pages printed, for a simpler experience and lower operating cost.
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How they do it: AWS value proposition is that it is supposed to be cheaper to scale once IT architecture by using AWS cloud computing instead of building and owning own physical server farms. The billing model is based on the usage of the cloud computing capacity rather than being based on the cost of the actual servers for AWS.
Learn more about Amazon Web Services →
How they do it: BASF has been using ”Performance-based Contracting” since the late 1990s for ‘cost per unit’ models in their ”Coatings” division. 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.
Learn more about BASF →
How they do it: In its service business for pressure control equipment, GE introduced a condition-based monitoring and maitenance service agreement. This allows GE to shift from calendar and event-based maitenance to condition-based monitoring and maitenance. By sharing some of the operating risk with its customer it can provide a risk-adjusted value proposition to the customer and also has more control over state and maitenance of its equipment.
Learn more about General Electric →
Below, the top industries for the pattern "Performance-based Contracting" are displayed, in order to get insights into how this pattern is applied across different industries. We've collected data from 5 firms using this pattern.
Top Industries
20% of firms using pattern
3% of firms using pattern
3% of firms using pattern
All Industries
Below, the pattern "Performance-based Contracting" is analyzed based on co-occurrence, in order to get insights into how this business model pattern is applied in combination with other patterns within the firms we studied.
Top Co-Occurrences
2 pattern co-occurrences
2 pattern co-occurrences
2 pattern co-occurrences