Understanding Servitization And How It Helps Your Business
Modern businesses realize that gaining a competitive advantage requires more than producing high-quality products. Servitization is not new; however, its adoption is spreading rapidly across many industries. It is crucial to allow market forces to promote efficiency as a profitable business opportunity through Servitization as the world recovers from a pandemic. In addition to lowering operating costs and positively impacting the environment, Servitization can be crucial in assisting cash-strapped businesses to regain momentum.
What Is Servitization Model?
In a Servitization model, the technology provider retains ownership of the system and is still liable for all operating expenses while the customer pays a fixed fee per unit of service consumed. As a result, the model strongly encourages the technology provider, who owns the equipment, to consider the long term when designing and choosing the technology.
By providing cutting-edge maintenance, the provider can reduce operating costs, especially energy use, representing the biggest cost component over the equipment’s lifetime. Maintaining equipment ownership also motivates service providers to reconsider creating modular systems, which is essential to a circular economy.
The Three Types of Servitization
Customers typically purchase and own the equipment that services are provided for in basic Servitization in manufacturing. The burden of ownership falls to the customer, including maintenance, repairs, and any additional configurations. The manufacturer’s services focus on making sure that tools and spare parts are available for procurement and can be used to maintain equipment that has been purchased.
A buyer of produced equipment receives equipment ownership through intermediate Servitization as well. Depending on the Servitization agreement, a significant portion of the equipment management process may be servitized. The equipment’s maintenance and the provision of knowledge necessary to maximize its use could fall under the purview of the OEM’s duties for intermediate services.
Given that it is based on a product-service system, advanced Servitization takes a different approach. For starters, the customer does not acquire ownership of the servitized good. Second, an advanced Servitization contract can involve multiple parties.
Some Servitization Examples
– Online Banking
– Healthcare – Diagnostic Imaging (DI) Services
– Car Rentals
Benefits of Servitization To the Business
Opportunity to Grow
Services become a point of differentiation. Customers are willing to pay more for services than they are for products, so you break the race to the bottom of competing solely on price.
Both large corporations and SME businesses can use this. Additionally, effective Servitization should be scalable and repeatable in and of itself.
Constant/ recurring income
An ongoing income rather than a one-time payment allows businesses to predict revenue over time.
Better Customer Relation
Better product alignment and improvement for better product-market fit; exclude competitors
Benefits of Servitization To the Customers
Save Upfront Costs
You don’t need to purchase any equipment. You can rent it from the business and only pay for the usage. For downtimes of the equipment, there is no charge!
Companies are relieved from some ownership-related obligations, like maintenance and repair.
Specifically for goods that are used infrequently or only occasionally. Suppose you only intend to use certain products for a brief period of time. In that case, service-based economies enable flexibility because you can cancel your subscription anytime when there is a brief minimum contract period.
Tailored to Customer Needs
A product is created especially for the tasks at hand. Therefore, no unnecessary features are added. As your expectations or standards change, the service also evolves accordingly.
Drawbacks of Servitization
Requires an Organized Supply Chain
To optimize the final offering, businesses must collaborate with their supply chain partners to create a well-organized and integrated supply chain. There must be taken-back programs in place, as well as other agreements with suppliers, most frequently new Service Level Agreements (SLAs).
High Volatility in Income
As a result of the customer contracts’ flexibility, businesses may see a significant change in their income from month to month. Cash flow management is still important, particularly for businesses that use a pay-per-use business model and experience significant changes in the intensity of services offered.
No Clarity in Framework
Although many businesses have gone through the Servitization process, there is still much disagreement about the terms and the most effective strategies. This is partial because each business is in a different stage and wants to end up in a position that best suits them. Even if you don’t initially seem all that similar, it’s still worth learning from companies that have done this before you.
Pricing Can Be Difficult
Setting the price for the service component is challenging; setting the price for a product is relatively easier. However, it is still difficult to predict how much service you will need to provide, on average, over the course of years. It is challenging to determine how much to charge for these services without overcharging clients or undervaluing your own efforts.
Support Should Be Proactive
Support must be proactive rather than reactive; occasionally, an entire support structure must be created from scratch, or unique, cutting-edge maintenance concepts must be developed. To reduce downtime and maintenance costs, businesses must take preventative measures rather than reactive ones.
Change in Mindset
To shift from selling products to providing services, one must change one’s mindset. A significant organizational transformation is also required, and resistance must be overcome (e.g., different sales mentality and processes). Instead of a single sales goal, focus on long-term customer engagement.
By now, you must have an in-depth knowledge of what Servitization is and in what way it can affect a business. Servitization strongly encourages innovation. With a pay-per-use business model, a service provider has the incentive to find creative ways to boost productivity, make the most of available resources, and reuse parts.
This aligns with the interests of society, industry, and the environment. Improved preventive maintenance, rethinking system design, incorporating IoT and AI technologies, and using a systemic approach when providing customer service are just a few of these creative approaches.