How Servitization changes the game

Servitization enables companies to create new sustainable revenue sources, keep up with the competition and improve relationships with their customers. Curious about service-based business models?

A description of servitization

Transition to service-based business models has recently been receiving renewed attention from business due to its economic and competitive advantages. The advances in technology, such as industry 4.0 and digitalization, have further reinforced the process of adopting service-centered business models and introduced new opportunities.

Despite the lack of a common definition among scholars, Servitization can be described as “transformational process of shifting from a product-centric business model and logic to a service-centric approach.”[1] Generally, it allows businesses to build new revenue streams by adding services to the product. Here are just a few examples of how big players have successfully transitioned from product to service:

• Xerox does not rely any more on physical sales to generate revenues but offers “pay-per-page” printer subscriptions. The company has separated its service business by creating an independent firm, which showcases success of their service transformation.[2]
• Microsoft has shifted their focus to “Office 365” service and sells access to their software, and not software itself.
• Schiphol airport lands the lights and accommodated services from a supplier instead of purchasing them.

Benefits provided by the “Product to Service” transformation

Servitization provides a variety of benefits for both companies and customers, that could be generally allocated into three broad categories.

I. Improving customer relations

• According to research[3], customers do not search only for the product itself, but for the value it provides. Services help to deliver value to the customer
• Servitization enables long-lasting relationships with the customers and increases customer satisfaction and retention
• Customers benefit from Servitization by avoiding costs of ownership and having higher flexibility to adapt to changing needs

II. Staying ahead of competition

• Services ensure company`s competitiveness. Unlike products, the intangible “know how” behind a service makes it harder to imitate
• Services help overcome lower-cost competition
• Bundle services help create differentiation

III. Ensuring sustainable growth

• Market for services, according to research, is larger than market for products
• Generally, services have higher margins than products
• Services create recurring stable revenues

Three types of servitization can be identified

There are different approaches to classify Servitization types. For the purposes of this article, we have selected the following one: product-oriented, use-oriented, and result oriented. The difference is based on the relative “importance of goods” as compared to “importance of service”.[4]

I. Product-oriented

This model is not new – the “product to service” in its simple form has been existing for decades. A familiar example is after-sales services. The product is owned by the customer and the service is sold in addition. Popular examples are warranty, maintenance, or consultancy about a product.

If the idea is not new, then why is the topic of Servitization still so relevant nowadays? The answer lies in the fact that there are more complex types of Servitization that have emerged in the last years. Digitalization, Industry 4.0, data processing advances – it all has accelerated the disruption in both b2c and b2b sectors and introduced possibilities for the new types of “Product to Service” business models.  They put the customer in the center of their business model and focus on delivering value through the product, rather than on the product itself.

Let’s take a closer look at Use-Oriented and Service-Oriented models.

II. Use-oriented

Use-Oriented    Servitization       stands   for business        models where   a company provides customers with access to a product. Subscriptions and shared economy phenomenon fall into this category. For example, Uber has used digitalization to disrupt traditional taxi business and provide Mobility-as-a-Service; Airbnb has changed the hotel industry; Netflix, Spotify, Audible – they all sell Media-as-a-Service. The user gets access to a media collection without ever owning a CD or a video tape.

III. Result-oriented

Companies directly deliver value to the customer. For example, a robotics supplier helps a company reduce lead time, and is paid for this outcome.

To achieve a successful transformation, companies need to address change holistically

Transition toward service-based business models requires a holistical approach. Not only do the companies need to develop a service-oriented offerenig, but to also adjust the organizational structure, workforce and technology.

Organization

• Redefine the organizational strategy
• Create new departments specialized in services

People

• Build new capabilities and skills
• Undergo a cultural shift supported with change management

Technology

• Invest in becoming a data-driven company
• Build a supporting IT ecosystem within a company and with partners

Capgemini Invent as transformation partner

Capgemini Invent Switzerland combines a wide range of industry knowledge and skills, thus being able to offer 360-degree support through all stages of organizational transformation by offering E2E expertise and in-depth experience with market leaders.

Authors

Felix Herrmann, Senior Manager and Sofiya Leleka, Senior Consultant