What is Servitization?

Dr. Arsham Mazaheri . July 30th 2023

What is Servitization?

Servitization is a business strategy where companies shift their focus from selling products to providing a combination of products and services to create more value for customers and strengthen long-term relationships.

Servitization could be the differentiating factor, enabling businesses to stand out in the face of the fiercely competitive modern business environment. Servitization is catalyzing a fundamental shift in how businesses interact with and serve their customers because it serves as an essential component of contemporary business strategies.

How does Servitization work?

The process of servitization takes place along a spectrum, ranging from simple service enhancements to complex, value-focused arrangements. The process can take the following forms at various points along this spectrum:

An Original Equipment Manufacturer (OEM) creates a high-quality product from conception to completion and then adds services to it in order to provide the customer with additional layers of value. This may include maintenance, repair, or other after-sales services that are bundled with the product at the point of sale.
As we progress along the spectrum, the business development team may plan comprehensive service contracts in addition to tying these services to the product. These agreements include comprehensive services that increase the value of the product and are tailored to meet the needs of the customer.
On the more complex end of the spectrum, the OEM uses the product as a means to give customers outcomes or performances (in other words, values) rather than the physical machine or the product. This means that the OEM while maintaining ownership of the product, assumes full responsibility for all of its operations and functions, focusing solely on providing the customers with the value and outcome. In these circumstances, the pricing strategy can be based on the value provided to the customer rather than the value of the product or used labor.

The goal is to integrate these services into your overall offerings in order to shift from a product-focused to an outcome-based strategy. This enables your company to offer complete solutions that are tailored to the needs of your clients. In this context, servitization transforms from a straightforward business model into a strategic alliance for mutual success.

Servitization in Practice

Servitization is transforming a diverse range of industries, from automotive and robotic manufacturing to business, healthcare, and even agriculture.

Example #1
Take a look at the automotive industry for instance. Major car manufacturers like Volvo Cars and Toyota are breaking away from traditional norms. They are not just selling vehicles anymore; they're venturing into providing comprehensive mobility solutions. “Volvo on Demand” and "Care by Volvo" subscription services, as well as the similar offerings by Toyota as “Kinto Share” and “Kinto Flex” are perfect examples of this shift. Instead of just selling a car, Volvo Cars and Toyota now offer packages that include insurance, maintenance, and even roadside assistance. They’re a one-stop solution for all mobility needs, delivering unprecedented value to the customers.

Example #2
In the realm of manufacturing, particularly robotics, companies like AutoStore are embracing servitization with open arms. They've adapted the concept of "pay-per-pick", allowing customers to pay based on the usage of their innovative warehouse management solutions. This model opens up opportunities for a wider customer base to leverage AutoStore's cutting-edge technologies, without bearing the upfront cost of owning the robotics system.

Example #3
Healthcare is another sector where servitization is making a significant impact. Medtronic, for example, has transitioned from just selling medical devices to offering comprehensive health solutions. Their "Integrated Health Solutions" package includes not only their world-class medical devices but also operational and consulting services. This approach aims to optimize healthcare systems and improve patient outcomes, offering tremendous value to healthcare providers.

Example #4
Agriculture isn't left behind either. Companies like John Deere have incorporated servitization into their business model. They're selling not just farm equipment but also data-driven services. By leveraging advanced technologies such as IoT and AI, they provide farmers with real-time insights into their operations. This helps farmers increase efficiency, maximize yields, and ultimately improve their bottom line.

Across these examples, one common theme stands out: the strategic shift towards creating value through the integration of products and services. It's not just about the product anymore; it's about the comprehensive solution that delivers lasting value and creates a robust customer relationship.

Servitization Benefits for your Business

Servitization can offer a plethora of advantages, including increased revenues, improved profit margins, enhanced customer satisfaction, and expense reduction. It allows for the diversification of your offerings, fostering consistent revenue streams, and can amplify customer loyalty.

With servitization, customers gain access to services that are precisely tailored to their needs. This strategy empowers companies to not only meet but also anticipate customer needs, thereby boosting satisfaction and fostering loyalty.

The adoption of servitization can unlock several benefits for businesses. Here's a list of key advantages:

Increased Customer Satisfaction: By proffering services that complement the core product, businesses can elevate the overall customer experience. Catering to customer needs through comprehensive solutions can result in higher satisfaction levels and foster enduring relationships.

Competitive Advantage: Servitization equips businesses with the means to differentiate themselves from competitors who focus solely on products. By offering additional services and support, a company can carve out a unique niche in the market, gaining a competitive edge.

Recurring Revenue Streams: Instead of depending solely on one-time product sales, businesses can establish long-term relationships with customers through service contracts, subscriptions, or usage-based models. This leads to the creation of recurring revenue streams.

Improved Profit Margins: Diversification into service offerings can tap into more profitable revenue streams, potentially augmenting overall profitability.

Extended Product Lifecycle: Servitization can elongate the lifecycle of products. By offering maintenance, repairs, upgrades, and other services, businesses can enhance the lifespan of their products, thereby maximizing value for customers.

Enhanced Customer Loyalty: The provision of ongoing services and support helps businesses cultivate loyalty among their customers. This loyalty can result in repeat business, and potential referrals, contributing to sustainable growth.

Stronger Partnerships: Servitization often involves collaboration with other service providers or complementary businesses. By forging partnerships and creating ecosystems, companies can leverage each other's strengths and resources, resulting in mutual benefits and an expanded market reach.

It's important to note that the benefits of servitization may vary depending on the industry, market conditions, and specific business strategies. However, overall, embracing a service-centric approach can offer numerous advantages and help drive long-term growth and success.

Servitization as Business Digital Transformation

Servitization and digital transformation are closely intertwined. Businesses can enhance service delivery and customer engagement by leveraging digital platforms and tools. For instance, devices connected through the Internet of Things (IoT) facilitate remote troubleshooting, predictive maintenance, and real-time product monitoring, all contributing to an improved customer experience.

Digital technologies empower businesses to amass and scrutinize a vast array of data their services generate. This data can be harnessed to uncover valuable insights into customer behavior, preferences, and usage patterns, allowing businesses to refine their services, devise personalized offerings, and anticipate customer needs more effectively, leading to increased customer satisfaction.

Digital transformation plays an instrumental role in boosting operational efficiency within servitized businesses. Automation and digital workflows simplify service delivery processes, curtail manual errors, slash response times, and elevate the overall service quality. By utilizing digital tools, businesses can optimize resource allocation, schedule maintenance tasks efficiently, and manage inventory more effectively, thus leading to cost savings and increased productivity.

Moreover, businesses can exploit digital platforms to engage new customers, penetrate new markets, and collaborate with partners, thereby amplifying their competitive advantage. Cloud computing, for instance, offers the flexibility and scalability required to deliver services on a global scale.

Another facet of digital transformation is the creation of value-added services that supplement the core product offerings. Consider a manufacturing company traditionally involved in selling equipment; it can introduce value-added services like remote monitoring, performance optimization, or predictive maintenance, thereby enhancing its overall value proposition for customers.

In conclusion, servitization and digital transformation reinforce each other.

Digital technologies enable businesses to deliver services more efficiently, accumulate insights for informed decision-making, establish recurring revenue models, improve operational efficiency, and create value-added offerings. By embracing both servitization and digital transformation, businesses can unlock novel opportunities, outpace the competition, and provide unparalleled customer experiences in our increasingly digital era.

How to switch to Servitization Business Model

Feeling enticed by servitization? Here are the high-level steps you can take to make the transition:

Identify your customer's goals: Understand their needs and how your solutions can address them.
Create comprehensive solutions: Combine your product with value-added services to create comprehensive solutions.
Provide high-quality services: Ensure your services exceed customer expectations and specifically address their pain points.
Sell outcomes: Rather than selling a product, sell the value or outcome that the product and/or services deliver.

Servitization Challenges

While servitization harbors substantial potential, it's not devoid of challenges. Given that the concept is fairly new, a learning curve exists for both businesses and customers. Here are some of the most prevalent obstacles businesses frequently encounter:

Cultural Transformation: Transitioning from a product-focused to a service-oriented mindset necessitates a significant cultural shift within an organization. Employees may need to acquire new skills and espouse a customer-centric ethos, which can be a time-intensive process.
Complexity of Service Offerings: Incorporating services alongside products can instigate complexity within a business. Handling service contracts, orchestrating maintenance activities, and maintaining service quality demands well-established processes and adept coordination. Investments in new systems, tools, and training may be essential to manage the complexities of service delivery proficiently.
Revenue and Pricing Models: Deciphering suitable pricing and revenue models for services can be intricate. Unlike product sales, services often involve ongoing costs and variable elements. Factors such as subscription pricing, usage-based models, and value-based pricing must be considered to ensure profitability while sustaining competitiveness in the market.
Technological Integration: The effective integration of digital technologies is crucial to successful servitization. Nevertheless, merging new technologies with existing systems and infrastructure can present challenges.
Customer Adoption and Expectations: Enlightening customers about the value and benefits of integrated service offerings can be an obstacle. Some customers, accustomed to the traditional product-centric model, may require time to comprehend and welcome the added services. Articulating the value proposition effectively and addressing customer concerns are vital for successfully assimilating the servitization strategy.

At this junction, Avrogan, a preeminent servitization strategy and solution provider, steps in. We assist in facilitating your transition smoothly and efficaciously. As a leading provider of servitization strategies and the provider of the avant-garde service contract management solution, Avrogan Service Excellence™, we ensure your company stays at the forefront, providing exceptional value to your clients, while enhancing your bottom-line and top-line performance.

Dr. Arsham Mazaheri

Chief Operating Officer

Arsham is a data scientist by background, with 17+ years of industrial and managerial experience in various disciplines. Throughout his career, Arsham has helped many of Fortune 500 companies with their data and requirement challenges and has been involved in many IT solution implementation projects. Arsham has both mechanical and industrial engineering backgrounds and has a D.Sc. in Risk Management from Aalto University in Helsinki, Finland. He is a certified change and problem manager (CCM & CPCM) and holds an MBA in shipping and logistics.