Servitization: Shifting Towards Service Centricity or Losing Market Share

In a world of internet, online shopping and Amazon, the paradigm shift from product focus to service centricity is evident. The competitive landscape is fiercer than ever and availability of cheap products of less quality is appealing in a world where recession fears are omnipresent. Contemporary technologies such as AI are disrupting the world of manufacturing and the way of doing business has profoundly changed. This “service economy”, as the American economist Victor R. Fuchs called it, is not new. But it has reached new heights with the rising of cloud computing and IoT technologies.

The “Connected Product”

The ever-growing use of that in industries such as manufacturing, and construction has exacerbated the idea of a connected product. The product is not just physical anymore and doesn’t revolve only on its features. Instead, products are defined by their ability to provide an additional value that is represented by the service. The combination of the two into a single offering is called product-service system.

This concept has brought us to the introduction of Servitization as a new business model and revenue streams that center the value proposition around the service that a business is able to offer to its customers. In this new paradigm this ability is the main differentiator, as it takes account of the wide range of customers’ needs at large. For example, when we buy a software to streamline our company’s operation, we are not just looking for a functional product, but also to be onboarded swiftly and get a 24/7 service support.

What is Servitization?

This term “Servitization of business” was coined in 1988 by Sandra Vandermerwe and Juan Rada. This neologism indicates the tendency of modern businesses to add values to their proposition with the addition of services. To give you some perspective in the matter, this article was written before the internet as we know it was even created and a decade before the term “Internet of Things” was invented. What Vandermerwe and Rada were realizing was that the product offerings were becoming “bundles of customer-focused combinations of goods, services, support, self-service, and knowledge”.  

This shift can be seen in the current 500 list, where more and more service companies appear and less and less manufacturers than in previous decades. The old dichotomy between product and service no longer exists and many products transformed into services.

Evolution of the Concept

Though the concept has been around for some time now, it has evolved over time. The phenomenon started in the United States since the 1950s. An interesting example is the “Power by the hour” system adopted by Rolls Royce. In the 60s the British engine manufacturer Bristol Siddeley introduced a fixed price for spare parts for business aircraft. The pricing model was innovative because it was a fixed amount per hour flown, which allowed aircraft operators to not have anything in stock. Approximately 15 years later, the concept has been expanded with the “total care”, which included maintenance and repair.

Now service is an inseparable component of the product. In the manufacturing industry in particular, digitalization has disrupted the modus operandi of customer facing activities. Because put in practice for companies, that’s all it is: focusing on the costumer’s experience instead of the product features. The goal should be to provide them with a complete solution, that doesn’t solve only one problem but accompanies them along the way to reaching their goals.

Key Concepts and Principles of Servitization 

How can you make the switch happen? Servitization is the combination of different approaches and tactics. To give you an example, in the manufacturing industry the transition from product centricity to service centricity could look like: starting from selling the machine and then adding the aftersales service adds-on. While the previous business model would be only about selling the machine, including maintenance, repairs, spare parts availability and training to sell a comprehensive offer is the enhancement customers are demanding for now.

With the help of technology, repairs can be proactively done when needed to insure machine uptime even during high season. For example, AGCO predictive analysis on parts demand reduces inventory waste and extends equipment life.

The Competitive Advantage of Customer Relationships

To be competitive in the market nowadays, having a good product is not enough. What will make your customers keep choosing you over the competition over time is the quality of the aftermarket service you are able to offer them. An important part of the paradigm is represented by the customized offerings. Building a product around the customer is the last mile of Servitization. By doing that you allow for an improved understanding of the customers’ needs and you can develop the relationship and engage more closely with them. Trust and satisfaction are the key elements you should look for. Once you have obtained them, you make sure the customer’s lifetime value will keep increasing.

Establish Recurring Revenue Models

Rather than receiving a single payment for a piece of manufactured equipment, many manufacturers are now receiving a steady stream of revenue for ongoing contracts.  Subscription-based models and flexible pricing structures are emerging as key components of Servitization. Rather than relying on a single payment for a piece of equipment, manufacturers are increasingly adopting ongoing contracts that provide a steady stream of recurring revenue. This approach enhances cash flow predictability and strengthens customer relationships through continuous engagement and support.  

Recurring revenue models enable manufacturers to offer value-added services, such as maintenance, upgrades, and performance monitoring, fostering customer loyalty and ensuring long-term partnerships. Additionally, flexible pricing options cater to diverse customer needs and budgets, making advanced equipment more accessible and appealing. This paradigm shift aligns manufacturers with modern market demands, promoting sustainable growth and innovation in the industry.

Benefits for OEMs and Manufacturers

The shift towards Servitization brings numerous benefits for OEMs and manufacturers. As services are typically repeatable, scalable, and designed for long-term engagement, they have the potential to deepen supplier-customer relationships, making them more intimate and commercially valuable. Key benefits include:

• Product Differentiation: Offering comprehensive service packages sets manufacturers apart from competitors, adding unique value to their products.
• Improved Uptime: Regular maintenance and performance monitoring services ensure higher operational uptime for customer equipment, enhancing overall satisfaction.
• Increased Parts Sales: Ongoing service contracts often lead to more frequent sales of parts and components, boosting revenue streams.
• Higher Customer Lifetime Value: Continuous engagement and support significantly increase the lifetime value of customers, fostering loyalty and repeat business.
• New Revenue Streams: Servitization opens up additional revenue opportunities through services like subscription fees, premium support, and advanced analytics.

By integrating these service-based models, OEMs and manufacturers can achieve sustainable growth and create lasting, profitable relationships with their customers.

Overcoming Challenges in the Shift to Servitization

While the benefits of Servitization are substantial, OEMs and manufacturers face several challenges in its implementation:

• Mindset Change: Transitioning from a product-centric to a service-oriented business model requires a significant shift in organizational culture and mindset. Employees and leadership must embrace new ways of thinking about value delivery and customer relationships.
• Integration: Seamlessly integrating service offerings with existing product lines and operational processes can be complex. This involves aligning various departments, such as sales, marketing, and support, to ensure a cohesive approach to service delivery.
• Value Delivery: Understanding and responding to evolving customer needs is crucial. Manufacturers must continually assess and adapt their service offerings to deliver tangible value, which requires close collaboration with customers and a deep understanding of their pain points and requirements.
• Real-Time Data Processing: Effective Servitization relies on the ability to collect, analyze, and act on real-time data from customer equipment. This demands robust IoT infrastructure, advanced analytics capabilities, and a strong focus on data security and privacy.

Addressing these challenges is essential for manufacturers to successfully transition to a service-based model and fully capitalize on the benefits of Servitization.

The Role of Technology  

Predictive maintenance in the manufacturing industry has been revolutionized by advancements in IoT, automation, and AI & ML. Technologies like IoT sensors gather real-time data from machinery, capturing vital metrics such as temperature, vibration, and pressure. This data is then processed through automated systems that continuously monitor equipment performance, identifying anomalies before they escalate into critical issues. AI and machine learning algorithms analyze these vast datasets to predict potential failures and optimize maintenance schedules, reducing downtime and enhancing operational efficiency.

Comprehensive software platforms like ClearOps transcend traditional data silos by integrating information from OEMs and dealers. This integration ensures that predictive algorithms are fed high-quality, comprehensive data, making predictions more accurate and actionable. ClearOps exemplifies how combining disparate data sources into a unified system can drive the servitization model forward, enabling manufacturers to deliver superior service quality through proactive maintenance strategies.

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