What is Servitization?

Servitization is a business model where companies transition from solely selling products to offering integrated solutions that combine products with supplementary services like maintenance, support, and performance optimization.

For example, in the automotive industry, manufacturers like Volkswagen and Renault offer subscription-based access to insurance, maintenance, and roadside assistance through a monthly plan. Bundling these services makes it easier for the customer to access everything they need to drive safely and legally, without the hassle of dealing with multiple vendors.

Similarly, in the manufacturing sector, companies are implementing servitization by providing equipment-as-a-service models, where customers pay for the functionality or output of machinery rather than purchasing the equipment outright.

Synonyms

• Product servitization
• Servitization business model

Why the Shift to Servitization?

A study by HSO indicates a consistent increase in servitization over recent years, with 58% of companies having a servitized offering in 2020, 64% in 2021, and 68% in 2022 (with 72% actively developing one).

This evolution reflects a broader trend towards a service-oriented economy, where a company’s value proposition extends beyond the product itself to encompass comprehensive solutions tailored to customer needs.

Now, there are four reasons the servitization strategy works so well in today’s markets:

• Evolving customer expectations
• Product lifecycle management
• Competitive advantage
• Recurring revenue

Evolving customer expectations

Being able to offer full-fledged, personalized solutions is one of the most important differentiators for the modern customer. According to McKinsey research, 71% of customers expect personalized interactions and solutions, and more than three-quarters get frustrated when an experience is not personalized.

If they have to look to one source for the product, another for maintenance and warranty, a third for repairs and upgrades, they will be far less likely to want to deal with your brand. Servitization means partnering with customers through every stage of their product’s life cycle (which brings us to our next point).

Product lifecycle management

One of the biggest challenges of product lifecycle management (PLM for short) is keeping track of and supporting a product through its entire life cycle. This includes, at minimum:

• Design
• Production
• Distribution
• Maintenance
• Replacement
• Retirement (or recycling)

Servitization means taking responsibility for your products beyond just selling them. When third parties are the primary sources of maintenance and repairs, there is a greater chance of inconsistencies because you have no control over the results.

Offering services like regular maintenance, repairs, and upgrades ensures products remain functional and efficient over longer periods.

And servitization technology facilitates operational upgrades, allowing you to enhance or modernize your products without a complete redesign. For example, a smartphone can get software updates to improve its functionality and extend its lifespan, rather than being replaced entirely.

Competitive advantage

The servitization of business models enables you to differentiate yourself from competitors and build stronger relationships with your customers. For them, the ability to handle everything through the same vendor is convenient. For you, it means more income per customer.

By providing services and maintaining your products, you can offer a comprehensive solution that is tailored to the specific needs, and they get better results because of it.

Recurring revenue

One of the most significant benefits of the servitization of products is the fact that individual product sales are transformed into long-term service contracts. If you offer the service on a month-to-month basis, you can generate recurring revenue from it, which increases stability, customer lifetime value, and revenue predictability.

Predictable revenue is remarkably powerful because it makes financial planning and forecasting easier. When you know you have X amount of money coming in each month from subscriptions, investing in growth is safer and easier. You can take risks that you might not have been able to with just one-time sales.

Not to mention, each customer continues to bring in revenue every month, quarter, or year, making them more profitable.

How Servitization Enhances Product Value

We can define product value in a few different ways:

• The tangible monetary or functional worth of a product
• The emotional or psychological satisfaction that comes from owning and using it
• How much it costs to produce and market the product
• Its ability to meet customer demands compared to competing options

Servitization can help you increase product value in all of these categories.

Increased customer satisfaction

Whether you realize it or not, customers will associate third-party support, maintenance, and other services with owning your product. If those providers are bad, your customers won’t want to deal with them, even if your product is good.

Around one-third of your customers will leave after one bad experience. While the bad experience might not necessarily be with you, it will be associated with owning your product.

Proactive maintenance and customer support, along with the added features and benefits of service contracts, contribute to increased customer satisfaction. On top of that, customers are more likely to stick with a product if they see tangible improvements or additional value from the service aspect.

Enhanced product performance

When complementary services come from the same company, it’s easier for you to integrate them into your product. They could provide turnkey solutions that improve the overall performance of your product, making it more valuable to customers.

A few examples:

• A manufacturer of industrial machinery could offer installation and setup services, ensuring that the product is operating at peak performance from day one.
• A software company could provide training and support services to help customers use their product more effectively and efficiently.
• An electronics manufacturer could offer maintenance contracts, keeping products up-to-date with the latest technology and extending their lifespan.

Remote monitoring and troubleshooting services can also be integrated into a tech product, allowing companies to address issues before they become major problems for customers proactively. That isn’t something you can do if the service is outsourced to a third party.

Reduced total cost of ownership

By integrating services with products, you can enhance resource efficiency. That leads to cost savings throughout the product lifecycle. It also enables customers to maximize equipment performance through tailored services like predictive maintenance and equipment upgrades.

And from a customer perspective, servitization offers a way to reduce operational risk. By providing comprehensive service packages, suppliers assume responsibility for equipment performance, allowing customers to benefit from a more predictable cost structure and improved performance.

Examples of Servitization

Servitization is common in the manufacturing, technology, and auto industries.

Now, let’s take a look at a few of the most prevalent servitization examples:

Manufacturing

Servitization in manufacturing involves offering comprehensive solutions that combine products with equipment leasing, maintenance contracts, remote monitoring, and predictive maintenance.

For example:

Rolls-Royce’s “Power by the Hour”

Instead of selling jet engines outright, Rolls-Royce offers them through leasing agreements that include maintenance services. Airlines pay based on engine operating hours, with Rolls-Royce handling maintenance and performance monitoring to ensure optimal engine functionality.

GE Healthcare’s “OnWatch Predict”

GE Healthcare provides predictive maintenance and remote monitoring for its medical imaging equipment. Sensors collect data to identify potential issues, allowing GE to perform maintenance before problems cause downtime, ensuring continuous operation for healthcare providers.

Caterpillar’s equipment services

Caterpillar offers leasing options for construction equipment, bundled with maintenance contracts and remote monitoring services. This approach ensures equipment is well-maintained and operational, reducing downtime for construction companies.

Siemens’ remote monitoring solutions

Siemens provides remote monitoring and predictive maintenance services for industrial machinery. By analyzing real-time data, Siemens can predict equipment failures and schedule maintenance proactively, enhancing equipment reliability and performance.

Cloud technology

In the cloud technology space, practically every major player offers a mix between (a) their core software product and (b) a range of services. These services can include implementation, integration, customization, maintenance, and/or support.

Software-as-a-Service models

The most well-known example of this type of service is the SaaS model. Chances are, you subscribe to a SaaS product of some kind, and it comes with a few extra perks.

DealHub, for instance, provides implementation services to help our new users get up and running quickly with our revenue platform. We also offer training and ongoing technical support to ensure our customers are getting the most out of their subscription.

Cloud-based solutions with managed services

There are lots of additional services that can be layered on top of a cloud-based solution. Amazon Web Services (AWS), for example, provides a comprehensive suite of cloud computing services, including computing power, storage, and databases, along with managed services that handle infrastructure management, security, and scalability.

Automotive

In the auto industry, servitization services fall into one of two categories: connected car services and subscription-based vehicle access.

Connected car services

Connected car services integrate internet connectivity into vehicles. They offer features like real-time navigation, remote diagnostics, and in-car entertainment. There are free examples of this (like Apple CarPlay and Android Auto), but many require a subscription.

Some examples include:

• OnStar by General Motors, which features emergency assistance, vehicle diagnostics, turn-by-turn navigation, and even more advanced features like remote ignition block and stolen vehicle slowdown.
• Safety Connect by Toyota, which is part of its EnTune package and features emergency assistance, a stolen vehicle locator, and roadside assistance.
• BlueCruise by Ford, which is a hands-free driving technology available on certain Ford models.

Subscription-based vehicle access

The subscription model allows customers to access vehicles without the long-term commitment of ownership. As a driver, you can choose from various vehicle models and switch between them as needed, with services often including insurance, maintenance, and roadside assistance.

Zipcar is the best example of this. As a member, you get access to a variety of vehicles for short-term use, with reservations made via an app. You pay only for the time you reserve, and the service includes gas and insurance.

Challenges with the Servitization Model

Making the transition to a servitized business model poses several challenges — primarily with adoption from your customers and employees, and the inherent organizational complexity that comes with adding several new service offerings to your traditional product-based business.

Organizational culture

You have to consider the fact you’re shifting from a product-centric to a service-centric mindset that prioritizes customer success over transactional initiatives. To effectively move away from the product or service itself to the overall customer experience, you have to reinvent your established structures, which adhere to traditional modes of operation.

A 2023 article from Field Service News emphasizes the importance of effective employee incentive strategies in this process:

“To challenge traditional priorities, organizations must align incentives and reward structures with the principles of servitization.”

Beyond mindset, your team will have to develop new competencies. And you’ll have to hire for new service-centric competencies your organization doesn’t already support. You’ll have to implement a comprehensive talent development strategy that combines internal training, upskilling, and strategic recruitment for new team members with service experience.

Operational complexity

Service delivery is inherently different from product-based models because it’s all about delivering and maintaining customer value. You have to rethink your entire supply chain, determine how much you can automate or outsource in terms of service delivery, develop new service-centric processes and systems, and introduce new performance metrics.

The problem is, it’s not even worth it if you’re going to apply the model lazily. Over half of companies outsource the customer support function, for example, but this poses a significant churn risk (especially if you’re a smaller company, or others in your space offer stellar in-house support).

So, you have to have the means to either (a) invest in these things in-house or (b) have a solid strategy to manage outsourced partners.

Customer education

Customers aren’t always open to the servitization model at first. The auto industry is seeing this left and right.

• BMW faced considerable criticism for implementing a subscription fee for heated seats.
• General Motors (GM) faced backlash after announcing the removal of Apple CarPlay and Android Auto in favor of paid subscriptions to their proprietary software for the 2024 model year.
• A 2022 survey revealed that 75% of car buyers are unwilling to pay monthly subscription fees for features like heated seats or advanced driver assistance systems.

While some of these are blatant money grabs, customers often won’t be able to differentiate between a value-add and non-value-add feature.

Especially considering subscription fatigue (the average consumer already spends $924 per year on them), it’s important to communicate your value prop in a way that demonstrates the value the extra service adds, and how it’s differentiated from something that could simply be baked into the product itself.

Technologies Supporting Servitization

One of the most important aspects of servitization adoption is the technologu that comes with it. You can’t servitize your business without software that helps you streamline your business processes.

IoT (Internet of Things)

IoT devices help you with real-time data collection from equipment. So, they facilitate remote monitoring and predictive maintenance. As a manufacturer or manufacturing products vendor, this enables you to gather valuable data on their products’ performance, usage patterns, and potential issues.

AI and machine learning

AI goes hand-in-hand with IoT by facilitating predictive maintenance. It learns from IoT data (many IoT devices have AI built in or integration-ready) to predict failures. From there, it alerts the manufacturer or service provider that there is a problem.

Machine learning uses AI to improve its own performance, which is a crucial characteristic in industries where downtime can have serious consequences. For example, aircraft manufacturers can use machine learning to predict when an engine needs maintenance, saving valuable time and resources.

Cloud computing

Scalability and flexibility are the two most important aspects of servitization. Whether you’re a tech company or not, some of your infrastrcuture to support servitization will be software-based.

Cloud software is scalable because you can increase or decrease your storage and processing capabilities as needed. This works well with servitization because, as you add new offerings to customers, you’ll need more storage and processing power to support them.

It’s also flexible since you can access your data and applications from anywhere with an internet connection. This is important for remote monitoring and predictive maintenance, as well as giving customers the ability to track their usage and performance in real-time.

Blockchain

Lots of businesses are now using blockchain technology to secure and track service transactions. Blockchain guarantees only authorized parties have access to data and can provide a transparent record of all service interactions. That significantly reduces fraud and improves traceability.

People Also Ask