What Are the Key Drivers of Servitization?

In an increasingly competitive global market, almost all industries are in the midst of a servitization transformation. Product-driven companies are embracing services revenue streams and outcome-based business models, transitioning from being pure equipment suppliers to service-based organizations. So what is servitization, and what are the key drivers of it?

What is Servitization?

Servitization is the term used to describe the transformation of businesses from a ‘build and sell’ organization to one that offers ‘Products-as-a-Service’, often pricing around outcomes. In short, companies use their products to sell ‘Outcome-as-a-service’ rather than a one-off sale. 

As Harvard Business School Professor Theodore Levitt famously said: “People don’t want to buy a quarter-inch drill. They want a quarter-inch hole!”

Unlike the traditional service model, where one fixes a broken machine, servitization is an all-embracing service that ensures the equipment performs its intended outcome, consistently and efficiently. This maximizes the value to the recipient and helps produce a measurable value to the service.  

Servitization is often referred to as ‘advanced services’, ranging from multi-year, fixed-fee service agreements through to ‘Equipment-as-a-Service’ offerings. 

Two of the most well-known examples of advanced services are Netflix and Spotify, which deliver media as a service, rather than customers buying the CDs or BluRays that produce those outcomes.

Another example of servitization / advanced services, where the customer buys an ‘outcome’ rather than a product, is Amsterdam-Schiphol airport. Dutch electronics firm Philips provides LED ‘Lighting-as-a-Service’ to the airport. Philips sells ‘light’ instead of lamps, and is responsible for the performance and durability of the system. Through Internet of Things connectivity, each lamp is monitored, and faulty ones are replaced (often before the fault actually occurs, aka. preventative maintenance). 

This servitization agreement enables the airport to save costs and use 50% less electricity for its lighting.

In essence, servitization is about expanding the capabilities of a company to deliver a greater experience for the end consumer.

What exactly are the forces that drive businesses to transition from selling products to selling the output of those products?

Why is Servitization Happening?

We are seeing three key factors driving demand for servitization / advanced services. 

1. Desirability 

Servitization is one of the answers to rising demands from a new generation of consumers, who are getting used to ‘not owning things’. This minimalistic idea of using rather than owning is making its way into the B2B segment, as well. ‘Outcomes-as-a-Service’ is quickly emerging as the way companies buy services from vendors. Increasingly, B2B customers no longer purchase products but rather purchase access to the value or the output these products deliver.

From the vendors’ perspective, instead of pushing more products, they are aligned with customers on efficient operations and preventative maintenance – as seen in the Schiphol example. That reinforces the customer relationship, creating longer lifecycles and more strategic positioning. From the buyer side, non-ownership of assets or outcome-based pricing reduces their risk and preserves cash.  

2. Sustainability 

Environmental concerns are demanding that we eliminate waste in supply chains and aim for the continual use of resources. Servitization offers businesses, particularly manufacturing companies, the opportunity to reconfigure their product lifecycle from a linear model to incorporate more circular principles. 

Conserving the use of resources in production as much as possible, thus making product offerings more refurbishable and sustainable long-term, is all part of the quest to use the world’s scarce resources in a much more efficient way – which is a key pillar of the circular economy.

In the ‘servitization economy’, wasteful sellers will not be tolerated by buyers. And as pressure increases, we may even find they are legislated against. 

Read more: Why the Circular Economy Changes the Way You Go to Market

3. Profitability 

From a business perspective, including advanced services in a company’s core offering can help avoid the steep investments needed to launch new products. Moreover, instead of one-time revenues arising from product sales, servitization delivers a continuous revenue stream and costed correctly, creates higher profit margins compared to only selling products. 

What’s more, selling services connected to the company’s product base helps balance the unpredictability of customer demand and the seasonality of sales. Also, it can bring an opportunity to capitalize on products during the entire life-cycle.

For buyers, advanced services can reduce risk and free up cash. 

Summary

The servitization megatrend is happening right now, as more and more companies adopt outcome-based / ‘as-a-service’ business models. The really great news is that both buyers and sellers see real value in this trend – both commercially and socially. It’s a true win-win model, characterized by more sustainable, predictable new revenue streams, improved competitiveness, and customer satisfaction.