Worth the risk? The profit impact of outcome-based service offerings for manufacturing firms

Abstract

Because research on outcome-based service offerings (OBS) is very case study oriented, we lack empirical knowledge of OBS provider profitability in general. Drawing upon an unbalanced panel dataset (n = 1566, N = 14,756), we found that an average OBS provider manufacturer has a 4.40-percentage-point higher gross margin than an average non-OBS manufacturer. In addition, we found that large OBS providers generate lower profits. Since OBS offerings are complex and highly customized, scaling them is a challenge that requires investments in digital technologies and solution modularity. Thus, we tested the moderating role of R&D investments on the scale-profitability relationship and found that for OBS firms, R&D investments moderate the negative relationship between scale and profitability. For managers, these results highlight the profit potential of OBS but also that large OBS providers in particular must be prepared to invest in digital servitization to ensure profitability.