Executives at Pratt & Whitney, one of the largest jet engine manufacturers in the world, were facing several major problems that were proving to be difficult to solve. The most expensive option when airlines are ordering a new fleet of jets is the engines. One of their problems was increasing their R&D budget so they could continue to innovate beyond their innovative competitors, including GE and Rolls Royce. But even with innovative features and functions, customers always want a better deal, and cutting that deal keeps margins down.
Another problem was keeping a major source of revenue flowing, and that's the long-term parts and service business. Global competitors have created knock-off parts that can be used in place of official Pratt & Whitney parts and they can be serviced by non-Pratt & Whitney technicians. And since the lifetime of a jet engine is a very long time, the parts and servicing aspect represents more income than the engines themselves.
In my latest book, Flash Foresight, one of the seven principles that make invisible opportunities and invisible solutions visible is to take your biggest problem and skip it. So that's what Pratt & Whitney decided to focus on. As a result, they came up with a great idea: Give customers the jet engine for free and have them pay a service fee based on the hours flown, with Pratt & Whitney taking care of all the service and maintenance.
This approach gives Pratt & Whitney a very profitable lifelong annuity. It makes sure that all of the parts are going to be Pratt & Whitney parts and that all the service comes from qualified technicians. This helps keep their quality, reliability, and safety high, and the potential problems low. It also gives them more business, because all the other jet engine manufacturers are still charging for their engines. So it provides a major selling advantage to a customer focused on price. It's an innovative way of solving that problem.
Can this approach of giving away the most expensive product to make more money be used in other industries? Of course. Let's say your company installs and maintains swimming pools. This is one industry that's been hit hard by the recession, as customers are deciding to wait on adding a pool.
However, the profits pool companies make from installing the pool is not nearly as high as the profitability of servicing the pool, especially when it comes to all the chemicals needed to keep the water fresh and swimmable. The problem is that today, people with pools are increasingly buying their chemicals from discount stores, not from the company that installed the pool. And they are doing the pool maintenance themselves, cutting out service income. So why not install the pool for free? That's the factor that is keeping people from adding a swimming pool to an existing home or building it when they buy the home. For many, buying a pool is just too expensive. But if the customer doesn't have to pay for it at all--if you install it for free and then charge people a monthly service fee for having the pool serviced and maintained--then you have a major competitive advantage and a long-term money maker.
If someone wants to cancel the contract, then they have to pay the balance on what the pool would have cost. If the house is sold, either the cost of the pool has to be paid in the closing costs, or the service contract gets transferred to the new owner.
By giving away for free the most expensive part of the sale, the biggest hurdle of installing a swimming pool has been eliminated. In other words, the problem has been skipped.
The biggest problem for Pratt & Whitney and the pool companies was not only skipped, but it was also flipped around, which is another principle in my book--and that is "opposites work better." So instead of having your most expensive product stay your most expensive, why not do the opposite and make your most expensive product free? That way you can really make some money.