Servitization: From Product to Service

Servitization - What is it actually?

The term servitization describes a business model in which a company offers not only its products, but primarily a wide range of services related to these products. In this model, the focus shifts away from the physical product to the service, which offers the customer added value.

In its pure form, the service itself becomes the product. For manufacturing companies in particular, servitization means nothing less than a complete realignment of the previously established business model.

Servitization was born at the end of the 1970s. In these early days, the first companies, particularly in the Anglo-American region, developed so-called after-sales services. Customers benefited from classic service offerings such as the maintenance or repair of their purchased product and the procurement of necessary spare parts. For the first time, these services enabled companies to build up long-term customer relationships. A typical example of this were business printers, which were on loan to companies and billed to the customer on a consumption basis.

Product = Printer

Services = cartridge delivery plus maintenance

In the course of the emerging digitalization, the service offering increasingly shifted in the direction of digital services around the product, which had an impact in both the B2C and B2B segments. Today, digital services can already extend the lifetime of hardware by predicting upcoming repairs even outside of normal maintenance cycles, thus helping to optimize productivity. Many products are getting their own smart app for this purpose.

The Covid 19 pandemic has made the topic of servitization more relevant to decision makers, especially in the manufacturing industry. According to market research firm Gartner, by 2025, more than 50 percent of equipment manufacturers will offer outcomes-based service contracts that rely on Internet-of-Things connectivity. In 2019, that figure was still less than 15 percent.

What significance servitization has in the modern business world

Companies that rely on the power of a digital service offering can set themselves apart from the competition in a largely saturated product market and differentiate their own brand through suitable individual services. Today, customer loyalty and customer orientation mean understanding customer needs and implementing customer wishes. This makes it possible to increase customer satisfaction. And in the long term.

Today, companies have to develop new business models in ever faster cycles, reinventing themselves time and again. Industrial companies in particular are not immune to this dramatic change. Digital servitization offers these companies the option of making their own service portfolio scalable at high speed.

Without servitization, companies "give up" additional sources of revenue almost voluntarily: This is because long-term service offerings secure long-term revenues that go beyond pure product sales.

The drivers of servitization: technologies, customer expectations and globalization

Servitization is nothing less than an economic paradigm shift. While the demand for service offerings has increased significantly and continues to rise, the purely physical product is now almost obsolete.

Among the most important drivers of this paradigm shift are technological innovations, first and foremost digitization. The Internet of Things, in conjunction with Artificial Intelligence (AI) and Edge Computing, networks, controls, monitors, analyzes and optimizes products with data-driven services that generate added value for customers.

In addition to technological innovations, changing customer expectations also play a significant role in the further development of servitization. In the past, customers bought a product; today, they expect a service portfolio tailored precisely to their needs around the purchased or rented product. Customers' desire for greater flexibility and scalability in their own business activities is also driving servitization. Capital no longer needs to be invested in the company's own production facilities - it is available for restructuring the business model.

Digitization and globalization go hand in hand. The (price) pressure of the markets on products is increasing. This is also massively driving the development of servitization. Only those companies that are able to set themselves apart from the competition by offering individual services will have a chance on the global market in the medium and long term. In this context, it is important to be as permanently innovative as possible and to constantly explore new options and test their feasibility.

With strategy to successful servitization

Companies are still skeptical about the structural change from product to service. It is true that they are enriching their production processes and products with the IoT or big data analyses and are thus working more efficiently (also financially). But only a few are consistently going the last mile in the direction of a service company. The massive change to focus entirely on services as a product requires far-reaching measures that have a significant impact on both personnel and corporate culture.

Regardless of whether a company sees servitization merely as an extension of its product portfolio or relies entirely on services as a product - the customer should always be at the center of the appropriate strategic considerations. Without developing a deep understanding of customer needs and wishes, any servitization strategy is doomed to failure from the ground up.

The first step is to identify possible service potential in the company.

• What services around my product portfolio does the customer expect?
• How do I set myself apart from the competition with my services?
• Which services offer my customers real added value?
• Which services can be scaled at will via digital channels?
• Which services are economically viable for the company?

Once promising services have been identified, the next step is to develop the appropriate service offering. In this process, companies should have the courage to go down previously unfamiliar paths. This requires a strong culture of error in combination with a creative mindset.

New sales channels or innovative technologies cannot be implemented for free. They incur costs, for example in the increase in data volume, computing power or connectivity. It is not uncommon for companies to have to fundamentally rebuild their IT infrastructure in this context. New service offerings can also necessitate changes in the personnel structure, because new offerings require enhanced competencies on the part of employees. This affects, among others, the departments that take care of customer service and support.

In addition to the clean integration of the newly developed services via technologies such as AI and cloud or edge computing and the development of new pricing and payment models, service products require above all a fundamentally new mindset in the company. Without the willingness to overcome traditional thinking about products and instead establish a "culture of service," providers will not be able to score points with their customers. This means always being ready to respond quickly to new customer needs and applies to all levels of the company.

Servitization in various industries

Servitization is not limited to specific industries; it has a cross-industry impact. The IT industry in particular is discovering more and more new ways of developing and designing service offerings. These range, for example, from software-as-a-service (SaaS) to cloud computing and managed services such as Device-as-a-Service, Data-as-a-Service and Desktop-as-a-Service (DaaS), to the topics of cybersecurity and data analysis.

In the SaaS example, the customer no longer buys software, but obtains it as a service via the web. The provider makes the software available and takes care of maintenance, support and updates during its useful life.

In cloud computing, service providers offer their customers to host the complete IT infrastructure as well as enterprise platforms in the cloud.

When it comes to cybersecurity and data analytics, companies use the highly specialized managed services of suitable providers, ranging from network monitoring to access management.

The automotive industry is also increasingly focusing on servitization. Take car sharing, for example. Consumers no longer have to pay high acquisition costs, and manufacturers no longer focus exclusively on vehicle sales but become mobility service providers. Users pay only for the actual time they spend on the road, billed by the minute.

In the energy sector, servitization is also gaining in importance. This is no longer just about selling energy as a product, but about a networked range of offerings, from optimization and savings measures to sustainable energy supplies and virtual storage facilities that guarantee customers a secure energy supply.

One of the industries most affected by servitization and at the same time benefiting from it is the manufacturing industry. Because the former "sell once" business model is gradually changing into the "rent and use permanently" business model. Here, the production machines always remain the property of the manufacturer. The customer then uses the hardware on the basis of a subscription model with a usage fee. By networking the products with the Internet of Things, the service provider can see at any time what condition the products in use are in. He can access them remotely and take preventive action before a machine stops working for the customer.

Thanks to servitization, the one-off sale and delivery is evolving into a dynamic "as-a-service" model that runs continuously and generates ongoing revenue. By 2022, some industrial machinery manufacturers were already generating more than 50 percent of their sales and as much as 100 percent of their profits from services, according to a survey by Bain & Company.

Since (almost) everything is offered "as-a-Service" today, the term XaaS (Anything-as-a-Service) has become established.

Advantages of servitization for providers and companies

Servitization is a digital growth model whose limits are not yet foreseeable. It benefits both companies that see service as a product and, in particular, their customers.

This is how customers benefit:

• Servitization helps companies reduce their own fixed costs - they only pay according to use, no longer for acquisition
• Servitization helps companies to minimize the risks - which are borne by the service company or the manufacturer of the products used
• Servitization helps companies to get fundamentally better quality - they can fully focus on customer needs and effectively control the entire value chain
• Servitization helps companies to operate more sustainably and efficiently - unused machines do not stand as "dead capital" in the production hall

This is how providers benefit from servitization:

• New and especially recurring revenue streams are created
• Customers are bound to the company in the long term and the customer relationship is measurably improved.
• Clear distinctions from competitors are developed, the brand becomes stronger
• Upselling options arise due to the close relationship with the customer

Servitization is a powerful option for all those companies that want to transform their customer relationships from a simple sales process into a long-term and trust-based partnership. The key differentiating factor in the fierce competition is not the product, but the quality of service offered.

These servitization challenges must be resolved

Since servitization involves nothing less than a complete upheaval of the business model, companies must proceed with caution and a critical eye when introducing it. Servitization cannot be implemented at the click of a mouse. It requires time, creativity and the commitment of everyone involved in the process. After all, servitization is a process that triggers far-reaching changes. It has to be initiated. And without the serious will to innovate, it is doomed to fail.

Basically, servitization results in organizational changes in the company. The importance of some areas of the company, including customer service and customer support in particular, will increase significantly due to the significance of data-based, personalized services. In order to be able to take this development into account, employees will have to be further educated and trained in a service-oriented manner. Servitization can also lead to overcapacity in production, for example, which can result in staff reductions. If a company is suffering from a shortage of skilled workers, this can be alleviated. A typical side effect of such change processes continues to be increasing uncertainty among employees, which urgently needs to be countered with communicative measures.

The shift from a product-oriented to a service-oriented business model affects entrepreneurial thinking as such. Instead of selling standard products, suitable services must now be identified, developed, coordinated and managed. This increase in complexity can quickly overwhelm companies.

Important success factors for servitization

For servitization to be implemented successfully, several factors must be intertwined. Without careful strategic planning, transparent internal communication and the selection of suitable IT systems, the complexity of the issue can only be resolved inadequately.

Important levers are corporate culture and leadership culture. Companies that for decades have only thought in terms of products must now focus their thoughts fully on the topics of service and customers. This reorientation must be reflected in every department. To ensure that the company's own employees also follow suit, they must be convinced of the benefits of servitization for the company. The main help here comes from continuing education and training courses that not only impart urgently needed new technical expertise, but also actively involve employees in the process of corporate transformation. For this reason, companies aiming for servitization should definitely invest in the topics of communication and organizational forms.

Partnerships or collaborations with technology companies expand the scope of businesses - from shared infrastructure that can reduce costs and increase productivity, to a broader range of services that can create value for customers.

Last but not least: In servitization, after product development is before product development. The process of further developing and refining services never ends. That's why companies striving for long-term success in servitization should absolutely practice sustainable innovation management. Only those who continuously improve their offering have a chance in a competitive and, above all, fast-moving market.

What role does technology play in servitization?

The future of servitization is closely linked to forward-looking technologies. Personalized services are inconceivable without big data and its secure and fast processing, for example via cloud computing.

This is particularly evident in the Internet of Things (IoT), where physical products are equipped with software and connectivity. The IoT enables networking between products. This results in intelligent and often also automated interaction, with which services can be offered around the product.

The IoT as a technological concept in turn has a decisive effect on Industry 4.0 - which is determined by a networked and largely automated production environment. Production facilities communicate with each other on the basis of real-time data, and production processes can be controlled in an optimized manner. Artificial intelligence and machine learning additionally fuel this system, so that physical and digital systems are connected.

Cloud computing and Big Data enable companies to leverage and expand their analytics and business intelligence capabilities for servitization.

These are future perspectives of servitization

Experts see one main trend in servitization: the even more pronounced personalization and individualization of the services offered. Disruptive technologies such as AI and ML could enable these services to achieve a degree of differentiation that is not yet foreseeable. To achieve this, it must be possible to analyze individual customer behavior so precisely that each customer can receive a customized range of services.

According to trend analyses, sustainability will also determine servitization in the future. More and more companies are striving to develop their service offerings in a sustainable and environmentally conscious manner. Because they know that customer demand is constantly rising. Investments in sustainability drive the innovative power of companies. For example, innovative and sustainably designed products and services can open up new business opportunities, which in turn directly contribute to environmental protection. Examples would be novel rental or sharing concepts that conserve resources. In this context, the circular economy is also becoming increasingly important, ensuring greater independence from global supply chains, especially in times of crisis. Products and the services that go with them are thought of in circular terms here. For example, leasing or renting products or reusing long-lived components in the automotive industry, for example, contribute to a longer product life.

In all the models mentioned, companies benefit from an exchange with other organizations that have already gained experience in implementing new business models. Joining forces with cooperation partners need not stand in the way of one's own entrepreneurial development. On the contrary, when partners bring their respective strengths to the cooperation, synergies and a classic win-win situation are created because the value chain is expanded. In this way, entire eco-systems can be created thanks to servitization.

Summary

Servitization describes a paradigm shift in the global economy. Companies no longer just offer their customers physical products, but expand their portfolio to include services that match the product. Ultimately, companies offer their services as a product. By combining services in this way, they expand their offering and create tangible benefits and added value for their customers. In servitization, the producer becomes a manufacturing service provider and uses the digital transformation to tap new sales potential.

Initially, servitization is always just an expansion of a company's own service portfolio, but it requires a fundamental rethink in the direction of the customer. The business model behind servitization is referred to as "as-a-service" - whereby virtually everything can be offered "as-a-service" (XaaS): Software, hardware, office equipment, etc. Customers pay for these services based on various models such as subscription, pay per use, on demand, etc.

Servitization is based on innovative technologies such as the Internet of Things, artificial intelligence, big data and cloud computing. Such technologies are driving the possibilities of servitization to unprecedented levels of detail in customer centricity.

Customers and suppliers benefit equally from servitization. Noticeable cost savings, increased customer loyalty, new revenue sources and future-oriented business models are the key benefits of servitization.

Frequently Asked Questions (FAQs)

What does servitization mean?

Servitization is a usage- and performance-based business model in which companies not only sell their products, but also offer their customers a wide range of services linked to the product. Servitization is already more than a trend in many organizations today. Customers benefit above all from the fact that they do not have to invest in expensive production facilities or hardware. They use the manufacturer's products on a rental basis.

Why is servitization important for companies?

Companies can clearly differentiate themselves from the competition through servitization. It is not the product, but the associated services that make the difference and offer customers real added value. Customers are given a completely new and, above all, individual user experience. As a result, customers become loyal to providers over the long term. Servitization enables companies to adapt quickly to new conditions and challenges in a rapidly changing business world. Through servitization, companies can tap new sources of revenue that ideally grow dynamically over the long term.

What are the benefits and challenges of servitization?

Servitization brings numerous benefits to both providers and user companies. The most important of these are cost reductions, improved customer relationships, scalability of offerings, and risk minimization. The central challenge is the rethinking and realignment of product in the direction of service and customer. This change takes time, creativity, and investment, especially in employee training.

How can companies successfully implement servitization?

To do this, companies need to know the needs and wishes of their customers. This is the basis for adapting or realigning their own business model. Ideally, companies will develop services that go far beyond today's normal package of maintenance, training and support. Then the service itself becomes the product. With the advantage that it is not just sold once, but offers a long-term revenue guarantee based on usage. In addition, companies must always be on the ball and constantly develop their services further.

How does technology influence servitization?

Massively. Without technological innovations such as AI, ML or the Internet of Things, servitization will remain at today's level. In particular, the ability to offer new, personalized services for a physical product by means of data processing stands and falls with the ability to network and analyze enormous amounts of data and derive new options from it.