Servitization

What Is Servitization?

Servitization is a strategic business approach that entails transitioning from exclusively selling products to providing a blend of products and services. This shift involves pivoting a company’s emphasis from delivering standalone products to delivering supplementary services that enhance the overall value for customers.  

In a servitized business model, customers go beyond acquiring the physical product and also gain access to associated benefits and outcomes. For instance, rather than merely selling air conditioning units, a company might provide a comprehensive air conditioning service encompassing installation, maintenance, and repairs. 

Servitization aligns with the broader trend of moving from ownership to access and the circular economy. 

 

What Are the Applications of Servitization?

Servitization has applications across various industries and sectors. Here are a few examples: 

Manufacturing 

Servitization allows manufacturing companies to offer additional services such as installation, maintenance, repairs, and upgrades alongside their products. This model can help manufacturers build long-term relationships with customers, increase customer satisfaction, and generate recurring revenue streams through service contracts and subscriptions. 

Technology 

In the technology sector, servitization involves offering Software-as-a-Service (SaaS) solutions or cloud-based services along with hardware products. This approach enables customers to access and use software or applications without the need for purchasing and maintaining their own infrastructure. It also allows technology companies to adapt and update their offerings more quickly to meet customer needs. 

Healthcare 

In healthcare, servitization can involve the delivery of comprehensive healthcare services rather than just selling medical devices or equipment. Companies may offer equipment installation, training, maintenance, and ongoing support services to ensure the effective use of their products. This can lead to improved patient outcomes and customer satisfaction. 

Energy and Utilities 

Servitization can transform the energy sector by moving beyond selling energy products (e.g., solar panels, smart meters) to offering energy management services. These services may include energy audits, monitoring and optimization, energy efficiency consulting, and remote maintenance. By providing holistic energy solutions, companies can help customers reduce energy consumption, optimize cost savings, and enhance sustainability efforts. 

Construction 

Servitization in the construction industry can involve offering lifecycle management services along with construction equipment or machinery. Companies can provide services such as equipment installation, remote monitoring, predictive maintenance, and training to improve equipment performance, increase uptime, and reduce downtime. This approach can help construction companies optimize the use and maintenance of their assets. 

 

What Are the Servitization Pricing Models?

Usage-Based Pricing 

Under the usage-based pricing model, customers pay based on their actual usage of the product or service. The customer is typically charged a metered rate based on their consumption. 

Outcome-Based Pricing 

This model involves charging customers based on the outcomes achieved by using the product or service. The pricing is aligned with the value delivered to the customer and can be structured as performance-based contracts with defined service level agreements. 

Subscription-Based Pricing 

In the subscription-based pricing model, customers pay a regular fee for access to a bundle of products and services. The pricing can be structured as a monthly or annual subscription, providing customers with predictable costs. 

Hybrid Pricing 

This model combines elements of different pricing models to offer a variety of pricing options to customers. 

 

What are the Key Benefits of Servitization?

Continuous Engagement with Customers 

Through the provision of end-to-end solutions, servitization allows companies to remain in contact with their customers throughout the equipment’s lifecycle, which results in ongoing support and customer engagement and can translate into a better understanding of customer needs and problems. 

Revenue Increase 

Through servitization, companies can find new ways of generating revenue streams, resulting in long-term relationships with customers, enhanced customer satisfaction, and brand loyalty. 

Risk Sharing 

Servitization allows customers to share the risks related to equipment ownership with companies that provide end-to-end solutions that cater to the equipment’s entire lifecycle, so customers can focus on their core business. 

Enhanced Product Performance 

Offering services alongside products enables companies to provide ongoing maintenance, repairs, and upgrades. This ensures that the products perform optimally, leading to reduced downtime, improved reliability, and better customer experiences 

Data-driven Insights 

Through servitization, companies can collect and analyze data generated from the products and services they offer. This data, such as usage data, performance metrics, and customer feedback, can be used to gain valuable insights for product improvement, innovation, and personalized customer experiences 

Facilitates Sustainability 

Servitization can also encourage sustainability by introducing new business models that promote the circular economy, resource efficiency and, simultaneously, foster environmentally conscious ways of operating businesses. 

 

What are the Challenges and Limitations of Servitization?

Resistance to Change  

Shifting from a product-centric approach to a service-oriented model requires significant changes in business processes, culture, and employee skill sets. Employees may need to develop expertise in areas such as service design, delivery, and management. 

Complexity and Implementation Challenges 

Servitization can be a complex process requiring careful planning and execution. Challenges may arise in designing and implementing new service offerings, integrating data and technology systems, and managing relationships with customers and partners. 

Limited Product Focus 

By shifting the emphasis towards services, there is a risk of neglecting product innovation and development. Companies need to ensure a balance between maintaining product functionality and supporting services 

Time to Development and Success 

Servitization is not a quick process and often requires a significant amount of time and effort to develop and succeed. Companies need to commit certain resources to build the necessary infrastructure, relationships, and service capabilities. 

 

What’s the Difference between Servitization and Product-as-a-Service?

Servitization and Product-as-a-Service (PaaS) are closely related concepts that have emerged as valuable approaches for businesses to adapt to changing customer demands and reinforce sustainability. 

Servitization entails the evolution of manufacturers from merely selling physical products to bundling integrated products and services. This shift moves beyond a product-centered business model to one prioritizing outcomes and additional value for customers. 

Conversely, PaaS involves providing products to customers as a service rather than individual items. In the context of servitization, PaaS is instrumental, allowing companies to present their products as comprehensive solutions that blend physical products with value-added services. PaaS enables customers to access products when needed, pay based on usage or outcomes, and share risks and rewards with the provider. 

The relationship between servitization and PaaS can be seen as complementary. By embracing the PaaS model, companies can reinforce the shift towards servitization by offering holistic solutions that integrate products and services. This shift from a transactional approach to an outcome-based approach allows companies to deliver continuous personalized interactions with customers, leading to enhanced customer experiences and long-term relationships. 

While servitization represents the transformation of companies from product-centric to service-focused models, PaaS enables the delivery of products as services, supporting the servitization journey by providing a framework for offering integrated solutions that align with customer needs and sustainability goals. 

 

What Are the Current Trends Involving Servitization?

Shift Towards Outcome-Based Models 

Instead of selling products or services individually, companies are focusing on delivering desired outcomes and value to customers. This can involve offering performance-based contracts, where customers pay based on the outcomes achieved rather than the products or services delivered. 

Adoption of Advanced Technologies 

Companies are embracing technologies like the Internet of Things (IoT), artificial intelligence (AI), and data analytics to gather insights, monitor performance, and optimize service delivery. These technologies enable proactive maintenance, remote monitoring, and predictive analytics to enhance the overall customer experience. 

Collaboration and Co-creation 

Companies are engaging in co-creation activities, involving customers in the design and development of innovative service solutions. Collaborative partnerships with customers allow for customizations, continuous improvement, and greater value creation. 

Circular Economy and Sustainability 

Servitization aligns with the principles of the circular economy by focusing on the efficient use of resources, recycling, and reducing waste. Companies are adopting servitization models to achieve sustainability goals, such as reducing carbon footprint and promoting the reuse of products and components. 

 

Relevant Terms

Outcome-Based Service  

Product-as-a-Service (PaaS) 

Service Consumption 

Service Monetization 

Value-Based Pricing