Why OEMs Must Rethink Value Beyond the Purchase Price
For many industrial OEMs and technology providers, the greatest growth opportunity is often hidden in plain sight.
Most manufacturers can tell you exactly what it costs to build their equipment. They know their material costs, production overheads, warranty reserves, and sales margins. Yet when asked a much more important question — what does it actually cost your customer to own and operate your equipment over its lifetime? — the answers are often surprisingly vague, incomplete, or entirely absent.
This gap in understanding matters enormously.
At Si2-Group, we have observed this repeatedly across industrial sectors ranging from Equipment Manufacturers to components, to heavy vehicles, aerospace, energy systems, as well as larger assets such as building infrastructure. The businesses that consistently outperform their competitors are not necessarily those with the best products. They are the businesses that deeply understand their customers’ Total Cost of Ownership (TCO) and use that understanding to shape their service strategy, innovation roadmap, commercial model, and operational priorities.
The most successful industrial organisations do not simply sell products. They help customers improve profitability!
They understand where the real cost drivers sit inside the customer’s operation and identify the hidden risks and inefficiencies that damage profitability. They develop services that reduce those costs and risks and crucially, they communicate this value in a way that resonates commercially and emotionally with decision makers.
This is where TCO becomes strategically powerful.
Unfortunately, many organisations still treat TCO as a narrow procurement calculation focused on acquisition cost, maintenance expense, and lifecycle accounting. While these elements are important, this approach alone misses the broader strategic value of TCO thinking.
Used correctly, TCO is not simply a finance tool, it is a TOOL FOR GROWTH!
It helps organisations develop more compelling service propositions, improve contract penetration, identify opportunities for digitalisation, create outcome-based business models, and align sales and engineering teams around customer value. It supports the shift from product-centric thinking to customer-centric thinking while strengthening long-term customer loyalty and uncovering new profit pools within the customer value chain.
Most importantly, it forces organisations to move from an “inside-out” mindset — focused on their own products and technologies — to an “outside-in” perspective centred on customer success.
As Steve Jobs famously stated:
“Start with the customer experience and work back to the technology…..never never the other way round!”
In industrial markets, this means understanding what makes your customer successful and then designing products, services, processes, and digital tools that support those outcomes.
This article explores how industrial companies can implement TCO thinking effectively and use it as a foundation for service-led growth.
We will explore what TCO really means in industrial markets, why traditional approaches are often incomplete and how leading industrial companies have used TCO to dominate their markets. It also examines the role of what we at Si2 call the “Customer Value Iceberg” in uncovering hidden value as well as providing a practical framework for implementing TCO within industrial organisations.
The central message is simple:
Industrial companies that understand their customers’ economics better than their competitors create stronger value propositions, more profitable service businesses, and deeper strategic relationships.
Understanding Total Cost of Ownership
Traditionally, Total Cost of Ownership refers to the full lifecycle cost associated with owning and operating an asset.
A typical TCO model includes acquisition costs such as purchase price, installation, commissioning, and logistics; operating costs including energy, labour, and consumables; maintenance and support costs such as repairs, spare parts, and software updates; downtime costs associated with lost production and delays; and finally disposal or residual value at the end of the asset lifecycle.
While useful, this traditional definition is still too limited for many industrial environments.
At Si2-Group, we believe two additional dimensions are essential if TCO is to become a strategic growth tool.
1. Business Risk
The cost of failure often extends far beyond maintenance expense.
A machine breakdown may result in customer penalties, contractual fines, brand damage, regulatory exposure, health and safety risks, cybersecurity vulnerabilities, supply chain disruption, and environmental impact.
In many sectors, these risks are major emotional drivers behind purchasing decisions.
For example, the failure of a low-cost component on an automotive production line can stop production worth hundreds of thousands of pounds per hour. In aerospace or pharmaceuticals, quality failures may create catastrophic regulatory or reputational consequences.
Understanding these risks fundamentally changes the value discussion.
2. Business Opportunity
Most TCO discussions focus entirely on reducing cost. However, the most advanced industrial businesses also understand how products and services create opportunity.
For example, faster throughput may increase revenue, better process control may improve quality, improved data visibility may strengthen customer responsiveness, reduced changeover time may increase production flexibility, and improved uptime may support market expansion. In some cases, digital tools may even unlock entirely new services.
This shift is critical.
The most powerful service propositions are not simply cost-saving propositions. They are business performance opportunities!
Why TCO Matters More Than Ever
Industrial markets are becoming increasingly competitive and commoditised.
In many sectors, product performance differences between competitors are narrowing. Customers can source similar equipment globally. Price competition is intense. Procurement departments focus heavily on cost reduction.
As a result, many OEMs struggle to differentiate themselves.
At the same time, customers are under enormous pressure to improve productivity, energy efficiency, sustainability, labour utilisation, operational resilience, asset availability, and supply chain stability.
This creates a significant opportunity.
When OEMs understand how customers make money — and where they lose money — they can move beyond selling products and begin solving business and operational problems. Academics have termed this process Servitisation and have observed that increasingly it goes hand in hand with digitalisation and the integration of AI based technologies into processes.
One of the most common mistakes industrial companies make when pursuing digitalisation is starting with technology rather than value. Many organisations invest heavily in IoT platforms, remote monitoring systems, dashboards, and analytics tools without clearly identifying the customer problem being solved. The result is predictable.
The technology may be impressive, but customers do not buy it because the value proposition is unclear.
TCO thinking helps prevents this trap, as it forces organisations to identify where value truly exists before investing in enabling technology.
The Customer Value Iceberg
Traditional TCO models help organisations understand lifecycle cost.
However, to build truly compelling service propositions, companies must go deeper.
At Si2-Group, we use a framework called the Customer Value Iceberg.
The principle is simple.
The visible product cost is only a small portion of the customer’s total economic reality.
Below the surface sit much larger drivers of value, including direct operational costs, indirect organisational costs, risk exposure, revenue opportunities, customer experience pressures, regulatory demands, and brand implications.
By recognising their customers iceberg, organisations are forced to think beyond the product itself and explore what truly makes customers successful.
The framework typically includes four layers:
- Product or Service Cost: This is the visible part of the iceberg. It includes the purchase price, service invoice, and contract cost. Many procurement discussions stop here.
- Direct Costs: These are the operational costs directly associated with using the asset. Examples include energy, labour, material throughput, maintenance, consumables, and downtime. These often represent the largest operational cost pools.
- Indirect Costs and Opportunities: These are frequently overlooked but strategically important. Examples include engineering effort, quality management, supply chain complexity, training, cash flow, inventory, space utilisation, knowledge and data, speed to market, and customer loyalty. These hidden costs and opportunities often create the strongest service differentiation opportunities.
- Risk: Risk is often the emotional driver behind service purchasing. Examples include production shutdowns, product recalls, cybersecurity breaches, regulatory non-compliance, safety incidents, brand damage, and environmental exposure. While difficult to quantify precisely, risk has enormous influence on customer decision-making.
The Customer Value Iceberg helps service professionals move from superficial customer conversations toward strategic value discussions.
Lessons from Industry: Four Examples of TCO-Driven Success from very different product companies
1. Components:
Textron — Understanding the Real Cost of Fastening
Fasteners may appear to be simple, low-value products, yet the fastening industry provides one of the clearest examples of how TCO thinking can create extraordinary profitability.
While working at Textron Fastening Systems, I was indoctrinated with the fact that the actual cost of the fastener represented only a small percentage of the total cost of fastening.
In many manufacturing environments, the actual fastener represented perhaps only 20% of the total fastening cost. Assembly processes accounted for nearly 50%. The remaining costs came from purchasing, engineering, logistics, inventory management, quality, and production coordination.
Textron recognised that reducing assembly time created vastly more value than reducing fastener price.
As a result, the business focused heavily on application engineering, faster assembly systems, automation, reliability improvement, one-sided assembly solutions and production efficiency.
The sales process itself became consultative. Application engineers worked directly with customer engineering teams to demonstrate how assembly costs could be reduced. The result was exceptional profitability. The business achieved EBITDA levels between 30–40% because it aligned its products, services, organisation, and culture around solving the most important customer cost drivers.
The lesson is powerful:
Customers rarely buy based on the visible product cost alone. They buy based on the economics of their operation.
2. Equipment Manufacturer
Husky: Winning Through Throughput
Another company I worked for which provides another outstanding example of TCO-driven growth is Husky, the Canadian manufacturer of injection moulding systems.
The company became globally dominant in PET preform manufacturing systems by focusing relentlessly on one key customer metric:
Kilograms of PET(plastic) throughput per minute.
Husky understood that the equipment purchase price represented only a small percentage of the customer’s operating economics. The real cost driver was material throughput.
In PET preform manufacturing, material costs dominate economics, equipment availability is critical, production speed directly impacts profitability, and downtime creates enormous operational losses.
Husky therefore designed its products and services around faster cycle times, higher throughput, greater reliability, maximum availability, and process optimisation.
The company’s mantra, “Keeping Customers in the Lead,” reflected deep alignment with customer economics. Although Husky products commanded premium pricing, the business consistently demonstrated lower total operational cost for customers.
This allowed Husky to achieve dominant market share and strong profitability.
Again, the lesson is clear.
The winning value proposition was not “lower equipment price.” It was “better operational economics.”
3. Mid volume industrial asset:
MAN Trucks UK: From Trucks to Performance Services
One of the most compelling TCO case studies comes from the UK truck market.
MAN Truck’s UK distributor transformed itself from a traditional vehicle supplier into a service-led business by understanding customer economics.
A major breakthrough came through collaboration with the logistics company Hoyer.
At the 1st Servitisation Conference held by the Aston Business School, I listened to a senior executive from Hoyer challenged the traditional truck sales conversation directly.
Their message was simple:
“The truck purchase price is only a small percentage of our operating cost. Fuel and drivers are the major cost drivers. Please focus on this”
Ironically his co-collaborator and strategic partner, Des Evans, the MD of MAN UK was in the audience and this insight had been part of their fundamental shift in strategy to leading with a service business model.
Instead of competing primarily on vehicle discounts, MAN UK focused on reducing fuel consumption, driver inefficiency, downtime, insurance costs, and maintenance disruption.
Using telematics technology, MAN developed preventive maintenance programmes that improved fuel efficiency significantly. Driver behaviour monitoring created further savings. Video systems reduced insurance exposure. Eventually, MAN moved toward leasing and pay-per-kilometre business models.
This transformation enabled extraordinary growth, with revenues increasing from approximately £55 million to over £550 million over a 25-year period.
In talking at length with Des, I slowly realised that this is not just an example of added services sales, a new business model enabled MAN to enter a whole new market of Truck maintenance services, which was not only larger than the Truck sales, but more profitable as well. You can read more about his management challenges in this Si2 article.
The success did not come from selling more trucks. It came from understanding customer economics better than competitors.
4. Complex long life assets
Rolls-Royce Aerospace: Power by the Hour
In complex asset industries such as aerospace, TCO thinking becomes even more important.
Airlines care deeply about fuel consumption as it is upto 40% of their cost base. High asset utilisation is critical making engine availability a fundamental success factor. Rolls-Royce and others recognised this early. Both these factors directly influence the profitability of an airline.
Rather than simply selling engines, the Rolls Royce began to develop “Power by the Hour” service models where airlines effectively paid for engine performance and availability.
This changed the commercial conversation completely.
The value proposition shifted from purchasing equipment to buying operational outcomes. This required deep understanding of lifecycle maintenance, reliability engineering, predictive analytics, operational planning, and risk management. The service model aligned Rolls-Royce directly with customer operational success and indeed they aligned their internal metrics against the customers.
Again, the critical insight was understanding the economics of the customer operation rather than focusing solely on product specification. It is interesting how this fact permeates through the organisation. I lecture to many Rolls Royce Managers on MSc programmes at Cranfield University. Whether they are from the defence or the Civil part of the business, you will hear that Fuel and Availability are the key success drivers for their customers. Listen to this interview with Rolls Royce Snr Director Dave Gordon.
Indeed for complex assets such aircraft, defence systems , power generation and trains, so important is the notion of TCO, that in the UK, the capability of Through Life Engineering Services has been coined, and a British Standard , PAS280 created to define the management processes required to develop these complex service propositions. (Note Si2 was part of the team managing the development of this standard)
Implementing TCO Inside Your Organisation
Understanding TCO conceptually is one thing. Embedding it into an organisation is another.
At Si2-Group, we believe successful implementation requires organisations to rethink business development through a customer-focused lens.
A practical implementation process typically involves four stages:
1. Identify Customer Segments and Value Pools
Different customer segments experience value differently. One customer may prioritise throughput, another energy efficiency, another compliance, and another operational flexibility.
The first step is therefore understanding where the major profit pools exist within each customer segment. This requires the use of techniques such as customer interviews, operational analysis, lifecycle cost understanding, ecosystem mapping, and risk assessment.
The goal is to identify what truly drives profitability and success for each segment.
2. Develop Value Propositions Around Customer Economics
Once value drivers are understood, organisations can design propositions that directly support customer success.
These may include preventive maintenance contracts, remote monitoring services, performance optimisation, energy management, application engineering, training services, process consulting, predictive analytics, and outcome-based agreements.
The strongest propositions address the largest customer value pools. This is critical.
Many industrial service strategies fail because they focus on services the OEM wants to sell rather than services customers truly value.
3. Enable the Value Sales Process
We can then start to develop value propositions and deliverables which are compelling for customers. An important part of the process is co-creation and collaboration using principles such as Design Thinking to ensure alignment with customers needs. A second aspect is to provide the organisation with the sales tools and skills to be able to communicate these propositions, managing the customer through their lifecycle so that they remain loyal.
4. Build Operational Capability
Strong value propositions require operational delivery capability.
This typically includes service process design, service operations manuals, escalation procedures, technical training, digital tools, CRM systems, performance metrics, customer entitlement rules, and strong data and analytics capability.
Without operational alignment, even strong service concepts fail in execution.
TCO and the Shift from Products to Services
Industrial businesses increasingly operate across a Product-to-Service continuum. At one end are traditional product businesses focused on one-time transactions. At the other end are outcome-based service businesses where customers pay for availability, throughput, or performance.
TCO understanding determines where businesses can successfully position themselves on this continuum.
The progression often starts with warranty and break-fix services before moving into preventive maintenance, remote diagnostics, predictive maintenance, performance contracts, availability guarantees, and ultimately outcome-based business models.
However, not every market is ready for full outcome-based services. The correct position depends entirely on customer perception of value. This is why TCO analysis is essential.
It helps organisations identify which services customers value most, which risks they want to outsource, which outcomes they will pay for, and which digital capabilities are commercially meaningful. Without this understanding, servitisation initiatives often become expensive technology projects with weak commercial traction.
The Role of Digitalisation
Digital technologies have dramatically accelerated interest in service transformation.
Remote monitoring, IoT, analytics, AI, and connected assets create enormous possibilities. However, digitalisation only creates value when linked to customer economics.
The correct sequence begins with understanding customer value and identifying operational problems. Only then should organisations design service solutions, determine the required data and analytics, and finally deploy enabling technology.
Too many organisations reverse this process.
They begin with technology and then search for a problem.
Successful digital strategies nearly always begin with customer value.
Turning Technical Teams into Trusted Advisors
One of the most important outcomes of TCO thinking is the transformation of customer conversations.
Technical service engineers are often the most underutilised commercial asset in industrial businesses. These individuals spend significant time inside customer operations. Yet many interactions remain reactive and transactional. When engineers understand customer economics, conversations become much more strategic. For example, engineers can begin discussing production efficiency, process optimisation, energy reduction, risk mitigation, throughput improvement, quality performance, and operational trends.
This shifts the relationship from supplier to trusted advisor can lead to a substantial impact on customer loyalty and service business growth.
Practical Questions to Start Your TCO Journey
For organisations looking to implement TCO thinking, several practical questions provide a strong starting point:
About Your Customers
Organisations should begin by asking what truly drives customer profitability and operational success. What are the largest operational costs in the customer’s business? Which risks concern leadership most? What operational metrics matter most? What causes downtime or inefficiency, and where are the hidden costs within the operation?
About Your Value Proposition
Businesses should then examine how their products and services influence customer economics. Which operational cost drivers are affected by your solutions? Which hidden value pools could services address? Are you selling products or operational outcomes? What would customers genuinely pay a premium for, and where are the missed service opportunities?
About Your Organisation
Finally, organisations should reflect internally. Are sales teams trained to discuss customer economics rather than product features? Do engineers understand customer business models? Are digital initiatives linked clearly to customer value? Is the service strategy aligned around customer success, and are performance metrics measured from the customer’s perspective?
These questions often reveal significant opportunities for growth.
The Strategic Importance of TCO
The industrial world is shifting rapidly.
Margins on products are increasingly pressured.
Customers expect more value, more insight, more reliability, and more operational support. At the same time, digital technologies are enabling entirely new forms of service delivery.
In this environment, TCO becomes much more than a financial tool. It becomes a strategic lens, a customer insight framework, a service innovation catalyst, a digitalisation guide, a commercial differentiation tool, and a foundation for trusted partnerships.
The organisations that thrive in the next decade will not necessarily be those with the cheapest products or even the most advanced technology.
They will be the organisations that best understand the economics of customer success.
Final Thoughts: Start with Customer Value
One of the recurring themes throughout this discussion is the importance of moving from an inside-out mindset to an outside-in perspective.
Industrial organisations naturally focus on products, engineering, technology, and manufacturing capability. These are important.
But customers ultimately care about their own business performance. They care about profitability, reliability, throughput, risk, efficiency, compliance, customer satisfaction, and competitive advantage. TCO thinking helps bridge this gap.
It provides a structured way to understand what truly matters to customers and how products and services contribute to those outcomes.
The Customer Value Iceberg is a useful tool that pushes us to think deeper by exploring hidden costs, opportunities, and risks.
The result is stronger value propositions, more meaningful customer conversations, better service strategies, and ultimately more profitable growth.
At Si2-Group, we have seen repeatedly that businesses which deeply understand customer value are far better positioned to grow service revenues, increase contract penetration, develop digital services, create differentiated propositions, improve customer loyalty, defend premium pricing, and build sustainable competitive advantage.
The challenge is not simply understanding TCO conceptually. The challenge is embedding this thinking into the culture, processes, leadership, and customer conversations of the business.
That journey starts with a simple shift in perspective:
