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What is Servitization in Automotive industry

 

Remember when the value of an automobile was all about horsepower, torque, and perhaps a swanky stereo? Well, those days are in the rearview mirror. Fasten your seatbelt, because today Servitization in the automotive industry is rewriting the rules of the road. This rapid transformation is driven by consumers, who are demanding more than just a vehicle.

 

Servitization in the automotive industry involves car manufacturers offering not just vehicles but also services like maintenance, repair, leasing, connectivity, mobility and other solutions to meet evolving customer needs and preferences.

 

Basically, it's less about the vehicle itself and more about the total experience and value it delivers. Owning a vehicle itself is fading as a perceived value by consumers; flexibility, convenience, personalization, mobility, connectivity, and sustainability are the new benchmarks shaping the automotive industry's landscape. In such a landscape, servitization in the automotive industry is a response to this evolving demand, offering various benefits and opportunities to both car manufacturers and users.

Servitization Opportunities for Automakers and the Consumers

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What servitization brings to the table for car manufacturers and also the users are diverse. From the car manufacturers' perspective, servitization opens up new dimensions of benefits, including:

 

Customer-Centricity: It allows automakers to build closer relationships with customers. It enables catering to specific needs and delivering a personalized experience, significantly enhancing customer satisfaction and loyalty.

 

Diversified Revenue Streams: The potential to tap into ongoing revenue streams emerges as manufacturers diversify from a one-time vehicle sale to an array of services.

Innovation: Focusing on services provides the opportunity to continuously innovate, adapt to changing market trends, and align closely with customer preferences.

 

Sustainability: Services like shared mobility and electric vehicle charging support sustainability goals, projecting the brand as environmentally conscious, a factor increasingly important to customers.

 

From the customer's standpoint, servitization presents exciting opportunities as well:

 

Personalized Services: Customers can enjoy tailor-made services based on their preferences, increasing overall ownership or usage satisfaction.


Convenience and Flexibility: Servitization brings services like car leasing, subscription, and maintenance services to the customers' doorstep, offering unmatched convenience and flexibility, and decreasing the total cost of ownership (TCO) for the consumers. 

 
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Advanced Services in Automotive Industry

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In the world of automotive servitization, the range of services is as diverse as the models on the showroom floor. Some popular ones include:

 

Fleet Management-as-a-Service: Companies like Automotive Resource Internation (ARI) with ARI Fleet Management and LeasePlan offer comprehensive fleet management services, including vehicle acquisition, maintenance, and disposal, significantly simplifying fleet operations for businesses. Ford's Fleet Management is another outstanding example in this area. It offers Ford Telematics and Ford Data Services, which enable businesses to track their fleet's performance, usage, and service needs. Volkswagen also has "We Fleet," a full-service fleet management solution for businesses. Among the truck manufacturers, Scania provides a comprehensive suite of fleet management services that includes Scania Fleet Care, Scania Maintenance with Flexible Plans, and Scania Driver Services. Scania uses real-time data to plan maintenance effectively, handle repairs, and provide driver training, all aimed at optimizing vehicle uptime, efficiency, and performance. Scania’s Dutch competitor, DAF Truck, offers DAF Connect, a fleet management platform that enables operators to monitor their fleet's performance in real-time, maximizing vehicle availability and efficiency. The system provides detailed insights into fuel consumption, mileage, fleet utilization, and idle time, among other metrics.

 

Mobility-as-a-Service: Companies like Uber and Lyft have transformed the concept of personal transportation, offering ride-hailing services that eliminate the need for car ownership. Among the traditional car manufacturers, BMW and Daimler merged their mobility services to create "Jurbey," a joint venture that aims to simplify transportation and mobility. General Motors (GM) also launched "Maven," a platform offering car-sharing and ride-hailing services.

 

Maintenance and Repair Services: Automakers like BMW and Mercedes offer maintenance packages that provide regular service and repairs for a fixed fee. Similarly, Audi offers the "Audi Care" package, which covers routine maintenance for a specific period or mileage. Likewise, Volvo's "Service 2.0" includes complimentary diagnostics, software upgrades, and roadside assistance.

 

Software Updates and Connected Services: Tesla leads the pack here, providing over-the-air software updates and a host of connected services to enhance the driving experience. GM's OnStar system and Volvo's "Service 2.0" offer a suite of connected services, including automatic crash response, navigation, and vehicle diagnostics. BMW also provides over-the-air software updates to its iDrive system and other vehicle components.

 

Car Leasing and Subscription: Companies like Volvo and Toyota offer subscription models (Care by Volvo & Kinto Flex) where you can get a car with insurance, maintenance, and roadside assistance included in a monthly fee. Similarly, Porsche launched "Porsche Passport," a subscription service that offers on-demand access to a variety of Porsche models. 

 

Car Sharing: Toyota’s car-sharing platforms in different countries (Hui, KintoShare, Yuko, etc.) use Toyota's proprietary global mobility service platform to offer mobility on demand to consumers. Daimler's former car-sharing service "Car2Go", later merged with BMW's similar service, DriveNow, to offer on-demand mobility under the 'Share Now' brand. Similar to these well-known car manufacturers, other companies like Zipcar also offer car-sharing services, allowing people to use cars on a need basis without owning them.

 

Vehicle Telematics Services: Companies like Verizon Connect provide telematics services that enable businesses to monitor and manage their vehicle fleets effectively, optimizing efficiency. BMW ConnectedDrive offers telematics services too, including vehicle tracking, emergency call, and remote services. Mercedes's "mbrace" is another system that provides vehicle telematics and hands-free connectivity.

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Maintenance, Repair, and Overhaul (MRO) Services: Apart from traditional automakers like GM, Volkswagen, and BMW, companies like Jiffy Lube and Midas offer specialized maintenance, repair, and overhaul services. In this category, Tesla stands out with its remote diagnostics and over-the-air updates, which can solve some maintenance and repair issues without a physical garage visit.

Servitization Challenges for Car Manufacturers

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The drive towards servitization presents significant challenges for car manufacturers. It requires an extensive shift in mindset, business models, and operations. However, recognizing these challenges can be the first step to transforming them into opportunities:

 

Understanding Customer Needs: An in-depth understanding of customer needs is critical. This includes keeping a pulse on evolving trends and predicting future demands.

 

Digital Transformation: Embracing digital technology is a must. Digital platforms can help in offering personalized services, efficient operations, and creating a seamless customer experience.

 

Strategic Partnerships: Collaborating with technology providers, service providers, and even competitors can help in enhancing the service portfolio and achieving the required technological advancements.

 

Infrastructure Challenges: Setting up charging infrastructure for electric vehicles, ensuring high-speed internet for connected services, etc., can pose challenges, particularly in emerging markets.

 

Regulatory Challenges: Autonomous vehicles, data privacy, and vehicle safety are areas of regulatory concern that manufacturers need to address proactively.

 

As we move further into the servitization journey, we can expect the automotive industry to redefine the meaning of owning and using a vehicle continually. With advancements in technology and evolving customer needs, more innovative services and solutions are likely to emerge.

 

Despite the challenges, the potential benefits make this journey worthwhile for the manufacturers. To successfully navigate this transformation, automakers need to invest in understanding customer needs, embracing technology, and fostering strategic partnerships. In this rapidly evolving scenario, companies that can swiftly shift gears towards servitization stand to gain a significant competitive edge. Hence, servitization isn't merely an option; it's a critical strategic decision that is shaping the future of the automotive industry.

 

Conclusion

As the automotive industry accelerates down the path of change, the age-old metrics of horsepower and torque are gradually giving way to more experience-driven value propositions. Servitization is not just transforming the automotive industry; it's redefining the relationship between automakers and consumers. The new benchmarks of flexibility, convenience, personalization, mobility, and sustainability have taken the driver's seat.

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Diving into servitization might feel daunting; but with Avrogan as your partner in smarter business, it becomes a powerful tool. Avrogan's specialized consulting combined with its state-of-the-art service contract management SaaS solution (Avrogan Service Excellence™) for configuring, pricing, monitoring, and managing advanced service contracts ensures that the leap into servitization is both strategic and seamless. Our dedication isn't merely about providing services but weaving them into your organization, maximizing value at each interaction.

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From fleet management to mobility-as-a-service, from software upgrades to vehicle telematics, the range of services provided under the umbrella of servitization is expansive. And while the road ahead may be filled with challenges, from understanding ever-evolving customer needs to addressing regulatory concerns, there's no turning back. The future of the automotive industry, with the guidance of partners like Avrogan, looks to be one where driving is not just about the car but about the holistic experience it provides. It's a world where servitization steers the industry towards greater innovation, deeper customer engagement, and sustainable growth. The journey of transformation has begun, and there’s no looking back.

  • Does Avrogan support pricing excellence initiatives?
    Yes, any manufacturing company requires to establish processes and methodologies to achieve pricing excellence in Product pricing, Spare Parts pricing, Service pricing (both legacy and digital services), and data monetization. Avrogan’s team can support the operational deployment of such initiatives.
  • What is high-quality pricing?
    High-quality pricing is pricing that is easy to explain and defend to the customer. Such pricing is in proper alignment with the brand positioning within the market and in comparison, with other competitors. Customers can easily relate to the prices and there is a willingness to pay for the prices.
  • What is the main pricing methodology that Avrogan can support our organization with?
    We support the operational transformation to Value-based and market-driven pricing as the main methodology that can properly reflect customers’ perception of value to make sure no business is lost due to over-and underpricing. Over-and underpricing is the common result of cost-based pricing or blind following of competitors.
  • Why should we focus on price improvement rather than cost reduction?
    Pricing is the strongest lever in business to improve profitability. Within the manufacturing industry, 1% price improvement can result in 3 to 7 times margin improvement in compare with improvement in other levers such as Cost, Volume, etc.
  • What is pricing power?
    In simple terms, it is your ability to increase prices without losing a considerable number of customers. If you are scared that many customers will leave you due to your price increase, your pricing power is probably low.
  • Why pricing power is important?
    “Pricing power is the most important factor in evaluating businesses…” Waren Buffet
  • How can we improve our pricing power?
    By improving your pricing quality. High-quality pricing is easy to defend and explain. You don’t need to give away in discounts to persuade the customer to pay the price. In other words, your price should be in harmonization with customers’ value perception in the market.
  • Why cost-based pricing is not the best option?
    Direct reliance on cost for pricing will increases the chance of low-quality pricing. Cost levels are usually defined based on factors that are not in your control and customers cannot relate to them if you pass the cost by adding a constant margin on top to the customers. It is also hard for the sales teams to defend such prices towards the customers and usually being crushed by customers’ urge for discounting.
  • How Avrogan’s way of working can support the transformation toward high-quality pricing?
    While we have a look at market conditions, competitors, and cost as guidance metrics, we try to measure and grasp customers’ value perception and willingness to pay with the help of various quantitative and qualitative studies and analyses. The aim is to put the pricing into the context of different products and offerings of the business and draw a harmonized pricing logic across each category of offerings to create a consensus across the organization about the value that is offered and the value to be captured.
  • Is value-based pricing about increasing the prices?
    No, the goal is to make sure all prices are in harmonization with customer perception of value. In this process, some prices will be increased, and some will be decreased. Therefore, businesses can expect improvement both in margin and volume for the whole business
  • What is the typical gain out of pricing excellence initiatives?
    We have seen companies can easily achieve 5% to 15% gross margin improvement as a result of pricing excellence initiatives for products and spare parts. The ultimate gain depends on the readiness and the effort deployed by the business in realizing the profitability impact.
  • What is a typical project length?
    Depending on the scope, operational pricing projects take between 3 to 9 months. For a more detailed estimation please contact us.
  • We have deployed a pricing excellence initiative couple of years ago, but we lost the knowledge during the years. How Avrogan can support us?
    It is a challenge that some companies lose track of their achievements over couple of years, as the knowledge is not passed on properly within the organization. We always suggest and provide easy-to-maintain documentation, plus we suggest the usage of pricing management solutions. ERP or excel are not proper tools to maintain and manage sophisticated pricing frameworks and logic.
  • Can Avrogan support our pricing solution acquisition process?
    Yes, Avrogan’s team has high knowledge of existing pricing solutions in the market for the manufacturing industry. We can support your required documentation and selection process.
  • What are the steps in value-based pricing for spare parts?
    We start with creating a pricing-focused product structure where we can put together similar spare parts into groups. Then we defined value drivers together with your product specialists and marketing teams. In the next step, the data values of these value drivers are gathered. In the final, step a pricing logic is defined based on the value drivers and with the look at market conditions, any available competitor data, and of course margins. This logic creates a central reference price. This reference price is then transformed into suggested market prices by applying the market price level adjustment factor. When prices are ready, feedback will be gathered from marketing, product management, and sales teams to assure the acceptance of the new prices before market implementation.
  • We have bad data quality; can we still apply value-based pricing for our aftermarket business?
    You are not alone. We have seen such challenges over and over and we have different solutions to still navigate through such challenges. Contact us to discuss a detailed proposal for your business.
  • Why cross-border business happens?
    Cross-border business happens when there is enough price gap (list or net) between two market regions where a trader can sell the product at a lower price in the landing market while they realize an acceptable profit. As a rule of thumb, a trader should have a minimum of 15% of margin after all costs for the trade to start doing the trade.
  • What is the actual damage of cross border business for our company?
    It depends on who performs the trade. If the cross-border trading happens by the company’s sales network, the damage is proportional to lost market value for the landing market’s sales company. If it happens by a third party, the damage is the total loss of market value for the landing market. It will anyway affect the price positioning of the company within a specific market and will put higher pressure on margins.
  • We have a cross-border business issue. How can we improve that?
    Avrogan’s team has experience and tools in assessing the risk and mitigating it by improving pricing harmonization across markets where your business is active. To have an assessment of the potential risk in your business contact our team.
  • How can we increase the success rate of our pricing excellence initiative?
    It is important to share the information about the initiative from the beginning and involve all relevant stakeholders within the project to assure the high-quality results and acceptance of the new prices. In this process receiving proper feedback and involving the sales teams are crucial.
  • Can Avrogan support the change management process and go to market activities?
    Yes, we have the training and a structured sales enablement methodology to support the release of new prices to the market and how sales teams should respond to tough questions from customers.
  • We need support on where to start with pricing. Can Avrogan support that?
    Yes, we have maturity and readiness assessment tools that we can apply to your business. To get more details please contact us.
  • What kind of market research methodology should we use for improving our pricing quality?
    There are different methodologies for different purposes. Some of such market research methods are more qualitative like the VEL study which defines the perceived brand and price positioning of the business in the market, while some others are more quantitative like Conjoint analysis which can support defining price threshold and market share potential through statistical analysis. Please contact us to design the proper market research model for your business.
  • We need to improve and align pricing knowledge across our organization, can Avrogan support that?
    Yes, we have detailed and operational pricing training for products, spare parts, and service pricing. Please contact us to review the syllabus and design the most appropriate educational program for your team.
  • What differentiates a product-centric model from a service-centric model in manufacturing?
    A product-centric model focuses on selling products as a one-time transaction, while a service-centric model, often seen in servitization, focuses on selling the product bundled with value-added services to foster long-term customer relationships and recurring revenue.
  • How does servitization benefit customers?
    Servitization can offer customers greater value by providing a comprehensive solution with lower risk and higher performance that goes beyond the product itself. This can include tailored services, improved customer support, increased reliability, and reduced total cost of ownership.
  • How can servitization impact revenue streams?
    Servitization can diversify and stabilize revenue streams by generating recurring income from service contracts. This is in addition to the traditional one-time income from product sales. Additionally, increasing the service revenue, which normally has higher margins, will increase the profitability and thus improve the bottom line.
  • What role does data analytics play in servitization?
    Data analytics is crucial in servitization as it helps businesses understand customer behavior, predict service requirements, personalize offerings, and make informed decisions. This data-driven approach enables companies to optimize their service delivery and enhance customer satisfaction.
  • What impact does servitization have on sustainability and the circular economy?
    Servitization can contribute to sustainability by encouraging the efficient use of resources and reducing waste. This is because a service-centric approach often includes maintaining and upgrading products over time, rather than replacing them. This can help foster a circular economy, where resources are used as long as possible, extracting their maximum value.
  • How does servitization fit into the Internet of Things (IoT)?
    Servitization and IoT go hand-in-hand. IoT devices can collect and analyze data to provide insights that help companies deliver tailored services, predict maintenance needs, and create new revenue opportunities.
  • How does servitization fit into Industry 4.0?
    Servitization fits perfectly into the concept of Industry 4.0, a term that refers to the fourth industrial revolution characterized by the digitalization and interconnection of industrial processes. In Industry 4.0, technologies such as the Internet of Things (IoT), Big Data, Artificial Intelligence (AI), and cloud computing have a transformative impact on the way businesses operate. These technologies enable businesses to collect and analyze vast amounts of data in real-time, leading to a better understanding of customers' needs, improved operational efficiency, and the creation of new business opportunities.
  • How does servitization impact competitive differentiation?
    With servitization, companies can differentiate themselves by offering unique value-added services that competitors may not or cannot offer, because normally service offerings are connected to expertise and know-how knowledge than a physical product that in many cases can be replicated or have alternatives. This enhances customer loyalty and provides a competitive edge in the market.
  • What is the relationship between servitization and customer loyalty?
    Through servitization, businesses aim to nurture long-term relationships with customers. By delivering a combination of products and high-quality services tailored to customers' needs, they can enhance customer satisfaction and loyalty, and transform them to “clients”!
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Dr. Arsham Mazaheri

Chief Operating Officer

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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.

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