What’s Servitization and How it can Help Manufacturers
The astounding rise of the Dollar Shave Club, from a small California start-up in 2012 to its billion-dollar acquisition by Unilever in 2016, is a classic example of successfully coupling products and services. Dollar Shave Club delivers razors and other personal grooming products to customers by mail on a subscription basis, rather than relying on one-off purchases at stores.
Moving to high value products, there is GE Healthcare that not just installs their commercial medical devices in hospitals but also offer post-installation services such as maintenance and monitoring.
Outside of the product, there are usage-based or result-based services offered by manufacturers and service providers such as Xerox offering pay-per-use model to customers using their managed print services.
“The concept of servitization – the coupling of service offerings with products – emerged decades ago. Rolls-Royce’s pioneering “power by the hour” approach to support business jet engines in the 1960s marks an early servitization milestone. What is new, however, is how leading manufacturers now leverage digital technology advancements to deploy servitization models that drive significant growth.”
– Shanton Wilcox, Partner, Manufacturing Practice (U.S.) and Rafi Billucru, Partner, Manufacturing Practice (Europe), Infosys1
Manufacturers often struggle to connect with consumers and add value to products frequently classified as commodities. In the traditional model, manufacturers are forced to surrender customer relationships to agents, retailers and other third parties, thereby limiting their ability to create differentiated customer experiences.
"The search for new revenue streams has driven manufacturers to think about new ways they can deliver value to customers. In an environment where products can quickly become a commodity, the ability to solve customer problems and provide enhanced experiences has created an environment where manufacturers have begun to explore service-first model."
- Aly Pinder, Program Director, Service Innovation and Connected Products, IDC2
The trend toward servitization could prove to be a great opportunity for manufacturers to reclaim customer relationships.
Drivers for servitization
There are a couple of factors accelerating this move towards servitization. One is that manufacturers are quickly transitioning from traditional pipeline-based models towards more platform-based approaches. That allows them to unlock new sources of value by enabling seamless connections with vendors, customers and partners. Servitization is recognized as a business model that has originated or evolved due to digital disruption and is one way companies can increase their odds of success.3
Secondly, greater adoption of the “internet of things” (IoT) means that manufacturers have a credible means to access real-time information on the workings and condition of the product, even beyond the sales cycle.
With greater servitization, the traditional wall beyond the factory gates are crumbling. Manufacturers can now create a direct communication channel with end users, in addition to traditional channels. We might see an arrangement where the dealer maintains the primary commercial relationship, but the manufacturer maintains a stake by later providing value-added services to the customer. For example, while John Deere provides maintenance and parts services through its wide network of dealers, it has launched several apps in the past few years that provide advanced guidance to farmers owning John Deere machines for optimizing their farming activities. The manufacturers may also choose to sell directly through an e-commerce platform and share content such as research reports, FAQs, infographics, blogs, etc. to engage better with end users.
There are several service models that manufacturers may choose to embrace. The offering could just be limited to basic services, for example providing only goods and spare parts. It could extend to include intermediate services such as product repairs, maintenance, overhauls, help desks, training and condition monitoring. Manufacturers could also opt to provide advanced services that come with customer support agreements and outcome contracts.
Similarly, there are different servitization business models. There could be a basic do-it-yourself or DIY model where the customer purchases the asset upfront and the manufacturer provides a self-service option. The other option is a pick-and-choose model where the consumer buys the product and has the option to invest in a separate service contract for upkeep. Additionally, the pay-per-use model is an option where the customer uses the specified asset as required and pays based on usage. For example, the cost could be based on measures such as the quantity or time used.
“The more asset-incentive an industry is, the more complicated the products, operations and services are – and the greater the need for initial investment and the ongoing costs for end users. This pushes the need for a servitization-based model where the customer pays the original equipment manufacturer according to product usage.” 4
Planning for Servitization Success, an Infosys Point of View
One of the most evolved models for servitization is an outcome-based model where the usage of the asset is not measured. Instead the cost depends on the outcome that the product has helped to generate. That could be calculated based on the number of parts manufactured using a particular tool. Some printer manufacturers offer this model to enterprises, where they charge based on the number of printouts rather than number of machines used or other parameters.
Greater value for customers and manufacturers
Irrespective of the business model and mode, there are some inherent advantages that a servitization model brings both to customers as well as manufacturers. It enables manufacturers to build deeper customer connections and incentivizes them to innovate based on parameters that matter the most to customers or those that help drive greater profitability. Michelin Fleet Solutions, which offers tires to fleet operators on a pay-by-the-mile basis, encourages the company to invest in developing longer lasting tires.
As customer experience becomes more important than ever, and technology evolves to allow manufacturers deeper insights into the operation of their products while in use, we can certainly expect to see a greater move toward servitization in the manufacturing sector.