Updated: Jun 8, 2020
One of the best-known examples of successful business model innovation is the “power-by-the-hour” business model of the British aircraft turbine manufacturer Rolls-Royce. Before the introduction of the innovation, the construction of engines for Rolls Royce was exclusively a product business: For a comparatively large one-off sum, the engine became the property of the aircraft manufacturers.
The new business model does not sell engines, but thrust hours to the airlines: The airlines pay only for the operating hours of the engines and are no longer obliged to buy the turbine engines. The engine remains the property of Rolls-Royce, and the company is also responsible for the maintenance and repair of the engines.
The Rolls Royce business model is based on a performance-based contracting approach, i. e. performance-related remuneration. It is not the value of the engines per se that is calculated, but the flight performance hours that can be achieved with the engine. Cost factors such as operation, maintenance and repair are already included in the price. With this innovation, Rolls Royce has not only created advantages for itself and its customers, but also made it possible for low-cost airlines such as Southwest Airlines.