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The role of servitization in a changing economy
We have talked about what servitization is, its importance and some of its drivers. In the last part of this series we delve a little deeper into some the advantages and challenges of servitization and the types of companies that servitize. To start, why would you want to servitize in the first place?
Advantages of servitization
There are numerous advantages to servitization, for a company these could be:
- Potentially more revenue (and growth opportunity); studies have shown that servitization can enable large revenue growth [i].
- Stronger customer relationship; better alignment with expectations and improvement of product for better product-market fit; lock-out competitors
- Constant or recurring income stream; no one-time payment, but a recurring income. Which enables companies to forecast revenue over time.
- Service is no longer a cost but a value creator; services become a differentiator. Since customers are willing to pay more for services than for a product, you break the race to the bottom of competing on price alone.
- Scalable (for any size of company); this is applicable to large corporates as well as SME companies. Furthermore, good servitization in itself should also be scalable and repeatable.
For the client:
- No initial investment needed anymore; no large upfront costs. Shift money from CAPEX to OPEX.
- Better -or more premium- product; servitization allows companies or clients to get access to higher quality products which leads to a better performance.
- More convenience through increase in services; companies are unburdened by certain aspects that came with ownership. Like maintenance and repair.
- Promoting dematerialization - no ‘planned obsolescence’; companies will make sure their products last as long as possible with the least material input as possible, as it is now their cost factor. This promotes dematerialization and increases sustainability (potential).
- Better alignment with customer needs - no unnecessary features you don’t need. A product specifically designed for the jobs-to-be-done.
- Flexibility; especially for products with infrequent or temporary use. Servitization leads to flexiblity if you only plan on using certain products for a short amount of time, you can cancel your subscription any time when there is a short minimal contract period.
- Repairability through modularity; companies will start designing from a circularity point of view, increasing modularity, making it easier to repair or refurbish products.
Furthermore servitization can lead to products that are better for the environment or society, and that are ‘smarter’ through the IoT applications. Additionally, servitization can lead to more localized value capture and skills development.
Challenges of Servitization
Of course as any other proposition, Servitization comes with different challenges, that if well managed, will become an advantage for companies. These are some of the challenges we have identified:
- A well organized and integrated supply chain is needed; companies will need to discuss with their supply chain partners to optimize the final proposition. Take-back schemes need to be put in place and other agreements need to be made with suppliers, most often new Service Level Agreements (SLAs) are needed.
- Price setting of the service component is difficult; price-setting for a product is relatively easy, however knowing over the total lifetime how much service you will need to provide (on average) remains tricky. It is hard to calculate the price for these services, without overcharging customers or undervaluing your own activities.
- Sometimes large adaptations are needed to be made to a business model; implementation of these can be a challenge. This is more on a operational level. There are a lot of processes that need to change; from (reverse) logistics, billing & collecting, asset tracking, customer support, service, and financial. Firmhouse’ software platform can enable these back-end processes.
One of the challenges is to organize the reverse logistics (especially at end-of-use). This means companies need to build the operational structure to take-back their products and reuse, refurbish or recycle the product in any way. A lot of companies don’t have this organized (especially for a large(r) scale).
- Mindset change is needed from selling products to providing services; big organizational transformation is needed and resistance needs to be overcome (e.g. different sales mentality and sales processes). No one-time sales target; but long-term customer engagement.
- High volatility in income; because of the flexibility in contracts with your customer companies could experience a large change from month to month in income. Especially if companies run a pay-per-use model, and have large changes in intensity of services provided, cash flow management remains crucial.
- Support needs to be proactive instead of reactive; sometimes a whole support structure has to be built in the first place or specific innovative maintenance concepts need to be developed. Companies will need to act preventative instead of reactive to minimize downtime and maintenance costs.
Last but not least,
- The transformation from up-front payment to pay-per-period or pay-per-use is challenging. Because companies have the assets on their balance sheet; pre-financing remains a big challenge. Luckily more and more organizations; like ABN AMRO, are trying to tackle this specific issue.
You don’t need to take on all these challenges at once. At Firmhouse, we like to advise on small scale experimentation and easy stepping stones to transition into a service-based business model. Like take-back mechanisms or increasing the service components. By keeping it small often pre-financing is also easier; and you can organically grow to a bigger customer base with a stable cash-flow.
Companies that servitize
Often bigger companies are able to make the transition to servitization more easily because of their network and their budget. But also for SME-companies there is a large opportunity as they are more flexible in change course. Furthermore, with digitization and IoT, also these companies are able to reap the benefits of servitization.
In general, the more companies are outsourcing their in-house activities, the more opportunity this creates for other companies to take over these services. Nowadays, a lot of clients of manufacturers expect that they provide installation, maintenance, repair and replacement. There is also an increase in demand for asset management (tracking and monitoring), financing, training and consulting/advice.
Servitization enables companies to interact with their clients more and more. Especially in a time with increasing demands from customers, only innovating your product does not suffice anymore. By implementing servitization, companies are also able to innovate on other aspects; such as the business model or the service component. For example, by implementing a pay-per-use model in which the client only needs to pay for what they use. Saving potentially a big investment until such a company starts generating revenue and truly incurs expenses. An example of this could be pay-per-mile-driven logistics providers.
By doing business through these models, customers profit from guaranteed performance, and they mostly commit for a longer period of time. Since these relationships generally require more certainty, sustainability and flexibility, and are often longer than normal contracts.
By monitoring and maintaining the product, even after it has been delivered at the client. A product can be developed in such a way that it improves the performance or the current customer experience or so that tailor-made add-ons can be added. Lastly, companies can start acting on, and are more aware of, the changing needs of the customer in the future. When we look at the rapid technological development in most sectors, this might be an interesting competitive advantage for the future [iii].
Starting your servitization trajectory
Got interested in launching a servitization trajectory or product-as-a-service proposition? At Firmhouse we can help you start your proposition on our platform. We can fully automate all back-end processes and help you launch in no-time. Check our website for more information, or contact us for scheduling a demo.
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Additional challenges, that might arise but we did not go to in-depth on:
- Client expectations changes (often demand more); your customer often has higher expectations of your product and services. If companies servitize, customers also expect a more efficient/effective product. Furthermore, the capacity to utilize the product is now the company responsibility. The burden for the ownership thus shifts. Companies need to be careful with the ‘don’t be gentle to a rental’ philosophy and add incentives for good usage or discounts for longer use.
- Conflict management in retail channels; as companies are increasingly selling direct-to-customers (D2C), existing retail channels could be conflicted. This should be managed well. Companies often launch spin-offs of their company to make sure no channel conflict occurs.
- Provide better products that are more personalized to individual needs and possibly customizable. Companies that servitize will need to adapt to individual needs more often, this can lead to hyper personalization or customization of the product. Most often this is solved by providing limited options (mass customization) that can deliver unlimited possibilities.
- Shifting from just ‘shipment’ to ‘turn-key’ solutions; companies will not have a single one-off payment; but will need to provide a full solution (outcome or functionality based) that is ready to go for the customer. This shifts the focus from the product to so-called: ‘Total Service Quality Control’.