Rethink your approach to servitization in manufacturing

Manufacturing companies are now at a critical juncture. Emerging technologies have given rise to new and attractive business models, such as servitization and subscription services. But adoption requires great care. Otherwise, a company aiming to increase its revenue in one domain may suffer significantly in another.

Subscription service models have proven to be more than just a trend. They are an effective strategy for creating new revenue streams, delivering tailored customer experiences, and building brand loyalty. With 80 percent of consumers today having at least one subscription to something, their tremendous impact on the economy is clear. Manufacturers have taken note – but they must overcome unique challenges.

Why subscription services are not always the answer

Ambitions are high in this industry, with many setting targets to double or triple aftersales or service revenues in the next few years. But while a subscription service approach is the key for some OEMs, it is not always tenable. It depends on the products and how they are built, bundled, and supported after sale. The issue is most legacy products lack the digital integration needed for servitization, and this often cannot be simply tacked on to the hardware. Redesign is often needed to implement the required software.

This effort makes sense for some products but not for others. Ultimately, the traditional pricing method will likely be more lucrative in situations when considerable reengineering is necessary. Items and new designs not needing an overhaul, however, can benefit more from digital integration. This equips them with product intelligence and data-capturing capabilities from the onset, making them more suitable for servitization.

Transition to a servitization model – but at the right pace

An opportunity of this scale cannot be ignored, but companies in a position to try servitization often need to break free from the prevalent industry mindset of shifting units above all else. This legacy approach has often been successful, but it has gaps which are becoming wider in this digital economy. For instance, OEMs often have not provided aftersales services for their products, such as repairs or feedback on their condition. That leaves a potential for customer engagement unexplored.

Companies that want to pursue servitization have to proceed at the right pace, to preserve the core revenue stream – even if that means a large part of it must continue functioning on a legacy pricing model. The transition is a balancing act: pivot away from the traditional mindset, but gradually. Take care of what has generated value for so long, even if the promise of higher profits if tempting.

The model also needs to be approached correctly: bottlenecks need to be resolved before launching services for the chosen products. For example, a low customer satisfaction score identifies a fundamental problem that should be addressed prior to offering maintenance support in a subscription bundle. And without built-in telemetry in devices, it will take longer to diagnose issues for repair. Do not create friction or other problems which could jeopardize the whole effort.

Can you relate to these challenges? In the subscription economy, every manufacturer is in a different stage of adoption and digital maturity. Realizing the value of servitization in manufacturing requires more than just a willingness to innovate – a risk-management approach is essential, and success hinges on the quality of the transition.

We would be happy to hear from you about the hurdles your company has faced in entering the subscription economy. Let’s discuss your experience in approaching and adopting subscription service models and where you are on your journey to servitization. Tell us where you want to be in the future – we might be able to help you get there.