In its simplest terms, servitization refers to industries using their products to sell “outcome as a service” rather than a one-off sale. Netflix and Spotify are probably the most well-known example of this, delivering media as a service, rather than customers buying the CDs, DVDs et cetera that produce those outcomes.
Although very different to media streaming businesses, manufacturing can also benefit from servitization. Manufacturing businesses can offer additional services to supplement their traditional products such as maintenance, keeping a fleet of vehicles on the road as a service. Servitization is usually a subscription model and can be applied to most industries in one way or another; be that £xx/month for music, £xx/month to keep a fleet of vehicles on the road, or even £xx/month for the fleet – all in!
This developed out of the necessity for businesses to remain profitable and competitive in an age where the financial aspects of design and manufacturing are becoming increasingly challenged by emerging markets and the life-cycle of manufactured products increases and the technology which develops them improves products are tending to need replacing less frequently. The need to include additional services including consultancy, all aim to improve the performance and profitability of a company.
The term servitization was first introduced in 1988 by authors Sandra Vandermerwe and Juan Rada, who argued that manufacturers needed a way to firstly set themselves apart from competitors, and more importantly to retain their customer base and increase levels of differentiation. However, the concept of servitization can actually be traced back to the 1960s, to Bristol Siddeley providing “Power By The Hour” – a servitization plan for their Viper engines. It was a complete engine and accessory replacement service charged at a set fee per flying hour. Rather than buying the engine, you bought the power it provided, allowing operators greater forecasting accuracy and relieving them of capital costs. such as engine stock and accessories.
How Does It Work?
There are three levels of servitization within manufacturing;
Product Provision – You’re already doing this and have been for years! This is the basics of manufacturing business – build and sell. Once it leaves the factory, the product ceases to be a concern to the manufacturer, but it also ceases to be a revenue stream.
Aftersales – Servicing, repairs and condition monitoring. The maintenance of a product provides an ongoing source of revenue for manufacturers.
Advanced Services – Taking aftersales to the next level, advanced services are more relationship focused and customer-centric than just selling and maintaining a product. In many cases, advanced services are delivered on a subscription model in which the consumer pays for the outcome – whether that be hours of jet propulsion or pages printed.
IoT and Sensors
If manufacturers are to become service providers then it is their responsibility to keep the service up and running. Servitization is only a continuous and reliable revenue source for as long as your service is continuous and reliable. The Internet of Things and machine embedded sensors will play a huge role in keeping servitized business models up and running. Sensors within equipment will be able to feed data back to the manufacturer or service provider about the condition of parts and the overall product which (in theory) should mean maintenance issues can be resolved before the problem occurs. Or, should anything break unexpectedly, the manufacturer/service provider will be notified automatically by the broken part.
There are a number of benefits for businesses adopting a servitization model, the first being meeting customers’ demands, leading ultimately to greater customer retention. No longer can a business rest on its laurels and assume that products alone will sustain a business. Customers are becoming more demanding with their requirements and offering additional services that can meet those demands.
With a servitised business model, a customer pays only for the value it receives from a supplier, while a manufacturer builds a profitable business from constant streams of additional, incremental revenue. What’s more, a manufacturer can gain useful insights into future R&D processes by analysing the performance of a product sent to a customer and using this information to strive towards continuous product improvement.
When a manufacturing business makes the decision to adopt a servitization model, there are specific challenges they face, essentially because a service culture is different to a ‘make it sell it’ culture. The design of services is different to the design of products, requiring a shift in corporate mind-set to make the implementation of this model successful.
A further challenge for businesses implementing a servitization model is the uncertainty of profitability. According to Neely (2008), a study of 10,000 companies, shows that while the number of traditional product based companies that have been servitized is greater than traditional manufacturing in terms of sales, they tend to generate lower percentage sales. In addition, the number of servitized companies reporting bankruptcies tends to be higher than amongst non-servitized companies. The key warning to heed here is that servitization takes time to develop, and will not be an overnight sensation.
Light As a Service
Dutch electronics firm Philips offer a fantastic example of a servitization. Amsterdam-Schiphol, as part of their ambition to be one of the most sustainable airports in the world, is now receiving LED lighting-as-a-service from Philips. LED lamps are incredibly efficient however expensive to buy. Under this business model, Schiphol will benefit from a 50% reduction in electricity consumption, but without the upfront cost of buying the lamps. Philips retain ownership of the equipment and instead sell light as the product rather than the units. Add to this the “internet of things” connectivity and Philips are able to monitor each lamp and replace any faulty units often before the fault occurs, providing the complete servitization package.