Servitization for Manufacturers: The Future of Business?
Servitization is a buzz word that’s been floating around in manufacturing circles for decades, and there are countless research papers on its benefits and concepts.
But what exactly is servitization and why should you care about it?
Let’s explore the idea of servitization to help you decide whether you want to implement it in your business.
- What is servitization?
- The servitization business model
- Why manufacturers should servitize
- Examples of servitization
- How to implement servitization
- A framework for successful servitized businesses
- A gradual transition to servitization
- Challenges of servitization
- Making servitization work for your business
What is servitization?
Servitization is generally defined as adding services to your product-focused business, in order to create new revenue streams and deliver a desired outcome to your customers on an ongoing basis, often to the point where the business becomes primarily solution-focused.
In other words, servitization means selling entire solutions instead of just products.
The concept of servitization was popularised in the 1980’s as a way for manufacturers to differentiate themselves from their competition and strengthen customer relationships.
Although it’s generally discussed in terms of manufacturing, servitization can also be applied to any product-based business.
Servitization is an alternative to the traditional approach where a business might sell a customer a piece of equipment once and then never deal with them again.
The servitization business model
These days there are plenty of businesses operating “software as a service” business models, where you pay a regular fee to access their software, with continual access to support and updates, instead of the older “buy once pay once” software as a product model.
You could look at servitization as a kind of “product as a service” business model. In other words, although you’re technically selling someone a machine or asset, what you’re really selling them is the result that the product can deliver, along with the services they’ll need to realise those outcomes.
There are three main levels of services that a manufacturer could provide to their customers:
Spare parts – Selling replacement components as required
Reactive “as needed” services – Repairs, maintenance, training, support, reconditioning or entire replacements
Ongoing services – Maintenance contracts, condition monitoring, support agreements, outcome-based contacts (also known as “advanced services”)
The further through these levels you can move, the more stable your business model becomes, and the stronger your relationships with your customers.
Why manufacturers should servitize
In the increasingly complex and competitive world of manufacturing, it’s important for businesses to constantly be looking for ways to improve their performance and resilience.
Here’s seven compelling reasons why manufacturers should consider servitizing their businesses.
1. Growth in revenue & profitability
The most obvious one is that by adding services to your offerings, you increase the number of ways that customers can give you money, leading to additional revenue.
And a well-managed service operation can be a highly profitable additional to any business.
2. Financial stability
By offering services that complement your existing products, you can also create recurring revenue streams.
Whether that’s programmed maintenance schedules or condition monitoring of equipment, by providing ongoing services to your customers, your income becomes more predictable and secure, insulating you from slow sales months and temporary changes in market conditions.
3. Complexity of equipment
As equipment has become more complex and technical over the years, it simply isn’t possible for customers to have the level of expertise required in house to look after equipment effectively.
As the manufacturer of their equipment, you are perfectly placed to not only understand how to operate and repair the equipment, but also to provide guidance on how customers can maximise their investment.
4. Better customer outcomes
By focusing on solutions, rather than products, you start thinking in terms of the customer’s needs and goals, and can adapt your products and services to achieve those outcomes.
Having access to someone with your expertise ensures that they’re making the most of their machinery and realising the value they were promised when they originally made the decision to buy.
And that established service relationship with your customer also means you can respond faster and more appropriately to issues or challenges that arise, leading to better outcomes.
5. Stronger customer relationships
The increase in customer satisfaction that comes from a responsive service team, and better utilization of their equipment, builds a much stronger relationship with your customers.
Your customers will be more loyal, less likely to switch to another supplier, and may often act as advocates on your behalf, promoting you to their business network of potential customers.
Seeing this as a collaborative partnership between your business and your customers creates an environment for success for everyone.
6. Increased innovation
Your field staff are on the ground at your customers’ businesses every day and have access to invaluable insights about their struggles and challenges.
See your technicians as lead generators who have access to information that can help to provide better customer service, and sell even more, to your existing customers, as well as make improvements to existing products and services.
Tapping into these insights can also provide you with ideas for new services, insights into your competitors weaknesses, or even other products that you could sell – and then servitize – in order to continue innovating and growing your business.
7. Higher barriers to entry
The stronger and more established your relationships are with your clients, the harder it is for another business to come in and steal market share from you.
The value you’re offering your customers as a servitized manufacturer is in the support, knowledge and trust that exists between you, and becomes less about the actual products you’re selling, which is impossible for another business to replicate.
Examples of servitization
To make the value of servitization even clearer, let’s examine three concrete case studies where manufacturers successfully added services to their existing businesses.
1. Bristol Siddeley / Rolls Royce
Back in the 1960s, Bristol Siddeley implemented one of the earliest known servitization plans for their Viper engines.
Instead of buying the engine, customers purchased “Power by the Hour” which offered a set fee per flying hour that included the engine and all accessory replacement costs. This program has now been incorporated in the Rolls Royce business model for its engines.
Customers were paying for the value (the power) that the engine provided, and not the engine itself. As a bonus, it also meant that their customers no longer had to worry about capital costs.
Although Xerox started its life selling photocopiers and photocopy paper, it has successfully transformed itself into a service-based business.
Not only do they provide full-service printing, photocopying and scanning solutions, they have also branched out into the wider field of “document production and management”, along with training solutions.
When Schiphol Airport in Amsterdam needed new lighting, with the stated aim of becoming one of the world’s most sustainable airports, they arranged to receive “light as a service” from Philips.
Using energy-efficient LEDs, Philip’s servitization arrangement meant that Schiphol Airport did not need to buy the light globes up front, but immediately gained a 50% saving in electricity usage.
Philips are also making use of the “internet of things” (IoT) to monitor the lights and ensure that faulty lamps are replaced promptly.
How to implement servitization
Now that the value of servitization for manufacturers is abundantly clear, how exactly does a manufacturing business go about transforming themselves into a servitized business?
1. Understand your customer’s goals
To begin with, servitization requires a shift in thinking, where the product sold simply becomes a way to sell a service to the customer.
And that service needs to directly address the outcomes that the customer desires.
Start by asking yourself, how can I help my customers achieve their goals?
2. Build solutions
Once you understand your customer’s wants and needs, your job is to then design services that drive the outcomes they want.
They may involve creating monitoring systems (e.g. using IoT) and delivering proactive maintenance, but it can also be as simple as providing support or training.
3. Deliver outstanding service
The delivery of these new services is central to the success of servitization, so make sure you have the systems in place to create an outstanding customer experience, every single time.
And make sure to capture relevant data on the quality of these services, so you can tell how you’re doing.
4. Refine and repeat
Every time you deliver a solution to a customer is an opportunity to look at what works and what could be improved.
Be learning and improving constantly by using data from all sources – technicians, customers, staff, equipment – and use this to create services that deliver on their promise.
A framework for successful servitized businesses
Businesses that have successfully implemented servitization have many, if not all, of the following features:
- Service operations that are located near to and/or heavily integrated with their customers’ operations
- Staff with excellent interpersonal & technical skills
- Integrated business systems that allow them to efficiently manage assets in the field
- Proactive monitoring of systems combined with responsive maintenance
- Metrics focused on asset performance e.g availability and reliability
- A culture of continuous improvement (with relevant data to support it)
If you don’t have some or all of these in place yet, then see this as a framework to guide you as you transform your manufacturing business in a servitized one.
A gradual transition to servitization
Keep in mind that you also don’t have to go from a product-based business to a servitized one overnight – and in fact that’s likely to be impossible to achieve.
Instead, approach it gradually, with a step-wise strategy for transitioning to a more service-based business. Here’s one way you could do it:
Step 1 – Basic service
Offer the simplest, easiest thing you can do for your existing customers – repairs and basic maintenance on their equipment.
Step 2 – Add support
Start offering support to your existing customers for the products they already own. Some of your customers will value having access to your expertise and it’s a great opportunity to refine your service offerings.
Step 3 – Other services
Think about other services you might be able to provide to your customers that will help them get even more out of their equipment. Do they want programmed maintenance, do they help with implementation, or are they looking for training?
Step 4 – Proactive services
When you’re ready to move to proactive services, you’ll need to find ways to monitor your customer’s assets so that you know before they do when problems might arise. The rise of the internet and digital technologies, along with smart sensors makes this a lot easier than in the past.
Step 5 – Sell outcomes
When your servitization is sufficiently mature, think about moving to selling on outcomes. Your service provision should be robust, and your knowledge of likely business outcomes should be enough to give you the confidence to sell based on the results your customers can achieve in partnership with you.
Challenges of servitization
Moving to a customer-centric, servitized business is not always an easy process. Here are some of the challenges that you may face along the way:
1. Changing an entire business culture
To begin with, the shift from a product-centric mindset, to one where the product is simply a service-selling mechanism, is massive.
It needs to come from the top down, but also engage staff at every level to think about the business in a new way.
Spending time to map out the vision and the roadmap will help keep everyone cohesive as you move through this transition, which may take years.
2. Requires different capabilities
Thinking in terms of services and solutions, rather than products, requires a very different set of skills.
Although both require design abilities, services and solutions also have to consider customer needs and goals, which is very different from the mechanics of a machine.
You may need to call on outside help for a fresh perspective and to redefine your design process to ensure that you create solutions that will satisfy your customers.
3. Lack of a clear framework
Although many businesses have gone through the process of servitization, there remains a lot of debate about terms and the best ways to approach it.
This is partly because each business is at a different point and wants to end up in a place that’s unique to them, that may not have even been done before.
It’s certainly worth learning what you can from business who have done this before you, even if you don’t seem that similar at first glance.
4. Uncertainty of success
There are no guarantees in business and servitization is no exception.
Because you are moving into uncharted territory for your business, and potentially even for your industry, servitizing your business will always include a risk of failure.
Use every resource at your disposal, encourage constant innovation and ensure you have the right systems in place to maximize your chances of success.
5. Takes time to develop and succeed
Servitization is not something that you can reasonably expect to happen overnight, especially if you take something like the gradual approach outlined above.
Your business needs to change and grow at a pace that it can handle, so that it remains resilient and profitable.
This means that you may be in a constant state of change and flux for an extended period as you transition, so allow for that in your planning and expectations.
6. Delivering quality customer service
Customer service is at the heart of a successful servitization strategy, and it’s not always the easiest thing to ensure that you’re delivering it to the highest possible level every time.
Unreliable or inconsistent customer experiences may undermine your efforts to servitize your business.
Make the quality of your services the top priority, by hiring the right people and using appropriate systems to help you delight your customers.
Making servitization work for your business
Although servitization does have its risks, the benefits to a business in terms of growth, profitability and resilience make it well worth considering for any manufacturing operation.
You can take your time and transition gradually into offering more and more services, until one day you find yourself selling outcomes to your customers.
Talk to us today about how NextService can empower your business to provide an outstanding customer service experience in the field and support continuous improvement of your servitized manufacturing business.
And download the NextService product guide below.