top of page

What is Servitization in Manufacturing?


Servitization is a bit of a buzzword in the manufacturing industry these days, but what exactly is it? Simply put, servitization in manufacturing is the process of shifting from selling products to offering services related to those products. Think of it as a value-added bundle, where you're not only delivering a tangible product but also accompanying services that enhance its use and lifespan. In more advanced phases of Servitization, you may not even sell your product, rather only use your product as a means just to deliver a function or output as the desired value. This strategy is gaining traction in the manufacturing industry, where traditional product-centric models are giving way to service-oriented approaches.

Servitization Levels in Manufacturing


Just like any substantial endeavor, servitization in manufacturing isn't an overnight transformation. Instead, it unfolds as a journey through different stages or levels, which can be broken down into three main tiers:


  • Level 1: Product Provision Only - At this initial stage, manufacturers concentrate solely on creating and selling their products, echoing the traditional model of manufacturing.

  • Level 2: Aftersales Services - Once manufacturers have the product provision nailed down, they can start introducing ancillary services like product repairs, maintenance, and condition monitoring. This marks the beginning of a more customer-centric approach.

  • Level 3: Advanced Services - This is where things truly start to shift gears. Manufacturers build on the Level 2 services by offering more complex solutions, which can include pay-per-use contracts and integrated solutions.

This comprehensive and holistic approach aims to maximize customer value. It is at this stage that manufacturers may retain ownership of their products as their own assets, but use them as a means to deliver function and output to the customers as the final desired value.


Why Manufacturers Should Implement Servitization Business Model


So, you've got the levels down, but you're wondering, "Why should I bother?" Well, let's dive into the enticing benefits of servitization.

  • Financial Stability: Servitization offers a steady stream of revenue from service contracts, providing more financial predictability than the cyclical nature of product sales. 

  • Increase in Revenue: Beyond financial stability, servitization can boost overall revenue, thus increasing the topline. Customers are often willing to pay for the convenience and efficiency that services provide. Moreover, offering services normally have better margin than products, thus improving the bottom line, and bringing better financial stability.

  • Better Customer Outcomes: Through service offerings, manufacturers gain insights into their product's performance, enabling them to better meet customer needs and improve product design.

  • Better Customer Relationships: In addition to having better customer outcomes, services enable regular interaction (and in most cases direct relation) with customers, fostering stronger relationships, loyalty, and repeat business


Increased Innovation: The deep customer insights gained through service offerings fuel innovation, leading to superior products and services. Over time, this can contribute to enhanced business stability.


Examples of Servitization In Manufacturing


If you're still pessimistic regarding Servitization in Manufacturing, consider these real-world examples. Companies like Xerox, Rolls Royce, and Philips have successfully implemented servitization. But it's not just these well-known giants who've embraced the change; there are also lesser-known yet equally successful players in the game.

# Example 1

Xerox didn't just pivot from selling standalone copiers; they undertook a transformation to become providers of comprehensive document management services. By embracing the servitization model, they replaced the traditional transactional approach with service contracts. This strategic move not only ensured a consistent revenue stream but also allowed them to be more attuned to customer needs. Their journey from a product to a service-centered approach has made them a role model for successful servitization in manufacturing.


# Example 2

Rolls Royce has always been synonymous with luxury and sophistication, and they brought these qualities to their servitization journey too. Rather than selling aero engines outright, they innovatively shifted their sales model to 'power by the hour.' This service agreement allows customers to pay based on engine performance time instead of purchasing the physical engines. The result? A customer-focused solution that balances cost-effectiveness with high performance. 

# Example 3

In the era of green solutions, Philips made an eco-friendly and budget-conscious shift by offering 'light as a service' to its corporate clients. Instead of merely selling lighting products, they now provide an end-to-end service that includes installation, maintenance, and updates. This forward-thinking move has allowed Philips to ensure optimal lighting conditions for their customers, reduce waste, and increase their own operational efficiency.


# Example 4

Moving away from familiar names, let's look at MAN Truck & Bus. This German engineering company has expanded its offering beyond the product. They now provide an impressive array of services, including fleet management, driver training, and even telematics support. By ensuring their customers can maximize product utility, they've demonstrated how servitization can drive customer value and create ongoing revenue streams.


# Example 5

Last but not least, Alstom, a French multinational operating in rail transport markets, is another standout example. Alstom offers comprehensive services like maintenance, spare parts supply, and fleet optimization. By focusing on enhancing customer experience and building long-term relationships, Alstom underscores how servitization can foster customer loyalty.


Servitization in Manufacturing: How to Lead the Industry


Now, how can you, as a manufacturer, join the servitization journey and become a champion? Here are some best practices to get you started:


  • Develop a performance-based or outcome-based offering like a "pay per use" model Instead of or in addition to selling products, so you can charge customers based on usage, which is a win-win situation for both you as the value provider and for the customer as the consumer of the value

  • Build solutions and offer maintenance services. This way you shall look at your products as solutions and means for delivering value, so you can provide complementary maintenance and consulting services around your solutions!

  • Use technology to offer real-time support services, enhancing customer experience and satisfaction, and thus gaining your customer trust and loyalty.

  • Utilize cutting-edge technologies like IoT to track product usage, learn more about your customers, and provide services like predictive maintenance, along with productivity and process improvement. Consider using predictive analytics to foresee your customers' upcoming service requirements. By taking a proactive approach, you can deal with potential problems before they become serious, which will help you anticipate customer needs and go above and beyond their expectations.

  • Equip your workforce with the skills needed to provide superior service, and train your team to think from a service perspective when trying to design a solution/product to solve the problem of your customers. This way you will make sure the service-oriented mindset is embraced throughout your organization. This entails putting the needs of your clients first and continuously working to enhance the services you offer.

  • Every customer is unique, and so are their needs. Create and offer customized service packages that fit each customer's individual requirements. This personal touch can lead to stronger customer relationships and loyalty.

  • Provide a wider range of services, and think about collaborating with other service or solution providers. These alliances can increase your customer base and broaden your service offering.

At its core, servitization is a result of digital technology. Take advantage of these technologies to streamline your services and provide value-added solutions, whether it's cloud computing, artificial intelligence, or big data.



Servitization in manufacturing is not just another buzzword; it is an innovation that holds the promise of financial stability, increased revenue, improved customer relationships and fostered innovation. It's a transformative strategy that's been successfully embraced by both industry titans and lesser-known manufacturers alike.


As you consider this journey, remember you're not alone. Avrogan, a leading servitization strategy, and solution provider, is here to help you navigate this transformation. We offer expert advice and our cutting-edge service contract management solution, Avrogan Service Excellence™, to help you lead in this new era of manufacturing.

  • 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”!
Arsham Mazaheri.jpg

Dr. Arsham Mazaheri

Chief Operating Officer

  • linkedin-2166_Avrogan

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.

bottom of page