Defining Servitization in 2023
In a new series of articles that are serialised from an exclusive new Field Service News white paper co-authored by Kris Oldland and Justin Konopaske, we will explore multiple aspects of the complex discussion of servitization.
This paper will explore multiple aspects of the complex discussion of servitization. However, before we dive deeper into understanding the ‘how’ of the topic, let us first better understand the ‘what’ and the ‘why’.
It may sound like hyperbole, but the reality is that servitization has profound implications for modern business practices. Those companies that have successfully adopted servitized business strategies have been able to uncover and harness a transformative shift from traditional product sales to outcome-based service models. In doing so, they have become closer to their customers, making both their product and service operations more resilient and profitable.
While there are many extended definitions of servitization, it can be boiled down to a relatively simple-to-understand concept. Servitization is the process that moves risk from the customer to service provider in exchange for more profitable and longer contracts.
Defining Servitization and Its Modern Significance:
Servitization transcends the conventional transactional approach to business. It embraces a customer-centric philosophy that extends beyond selling products to forging long-term partnerships. This shift represents a fundamental evolution in how companies engage with customers, placing customer success and value at the forefront of operations.
In the traditional business model, companies focused on selling products and components. Servitization introduces a seismic paradigm shift where the emphasis moves from mere products to the outcomes and experiences those products deliver. Organizations no longer sell commodities; they provide holistic solutions tailored to meet customer needs and aspirations.
Central to the servitization journey is the recognition that customers seek more than just products – they yearn for results and experiences that positively impact their operations. As we move through this paper, we will explore the vital role of embracing customer-centric approaches, such as understanding pain points, predicting customer needs, and creating localised value propositions.
The transformational impact of servitization is not confined to a single sector – it permeates various industries. In the second paper in this series, we will examine how diverse sectors, from manufacturing to healthcare and beyond, have embraced servitization to enhance customer engagement, create new revenue streams, and drive innovation.
The emergence of advanced technologies, from IoT sensors to AI-powered analytics, acts as a catalyst for realizing the potential of servitization. We are now fully begininng to understand how technology can empower organizations to gather insights, predict maintenance requirements, and deliver seamless service experiences that were previously unimaginable.
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"Servitization allows an organization to not only avoid this spiral by diversifying revenue streams but also secure longer-term contracts, which in turn improves customer retention...."
Indeed, as we shall see later in this paper, the trend toward servitization has been growing steadily for many years. As a service professional, you almost certainly have come across the term. It may even be something that has been discussed in your organization as a future strategy.
However, given the current economic backdrop, there has never been a more crucial time to move forwards with plans for servitization.
Servitization as a Resilience Strategy in Times of Economic Downturn:
Recessions bring economic uncertainty, and depending on where you are in the world, your economy may be in recession or on the brink of one. Certainly, the ongoing economic downturn will be affecting your customer purchasing behaviours. Firstly, there will always be less resources available for CAPEX investment in periods of strained finance. Not only will this impact your customers’ direct purchasing habits regarding new assets, but it will also reinforce the importance of service and maintenance as your customers ‘sweat’ assets beyond their standard lifespan.
Additionally, for those customers not in a position to extend the lifespan of their assets, if you and your competitors both focus on product sales, then cost becomes an important factor. In such scenarios where price becomes a key differentiator, it inevitably becomes a negative spiral leading to paper-thin margins.
Servitization allows an organization to not only avoid this spiral by diversifying revenue streams but also secure longer-term contracts, which in turn improves customer retention.
This is another critical factor as to ‘why now’ regarding servitization. Ultimately, your customers will be seeking solutions that offer value and immediate benefits during tough economic times. Servitization’s emphasis on outcome-based approaches ensures customers receive the value they’re seeking, leading to increased loyalty and retention.
A natural bi-product of establishing a servitized business strategy is that you will establish deeper engagement with customers, understanding their evolving needs. This proactive approach is essential to maintaining strong relationships and adapting to changing priorities, placing you closer to their operations and a more critical part of their ecosystem.
"In many ways, a global downturn is the perfect environment to introduce a bold new strategy for your business. Periods of economic instability spark innovation as companies seek new ways to add value, and customers seek to remove risk and cost..."
Critically, outcome-based services, or even just more integrated advanced services, build partnerships rather than transactional relationships. Such long-term partnerships offer stability and predictability, even in turbulent economic times.
Of course, those organizations that have already established servitized offerings are in prime position not just to ride out the global downturn but, in fact, come out stronger as their competition falls away. However, that doesn’t mean it is too late; as the adage goes, the best time to start was yesterday, but the next best time is today.
In many ways, a global downturn is the perfect environment to introduce a bold new strategy for your business. Periods of economic instability spark innovation as companies seek new ways to add value, and customers seek to remove risk and cost.
Servitization fosters this mindset, encouraging organizations to develop solutions that resonate with customers’ current challenges creatively.
Indeed, we only need to look at the data for SaaS sales in the 2008 great recession to see how status-quo-breaking, subscription-based models flourished due to widespread economic decline. In a period of econmic tension, where uncertainties abound, and businesses face unique challenges, servitization emerges as a compass of resilience and adaptability. It aligns with cost-conscious customers, promotes loyalty, diversifies revenue, and positions organizations to thrive amidst economic turbulence.
Later in this paper, we will look at some brief examples of companies that have already walked this path and the benefits they have seen, which we shall cover in more detail, benefits which include:
- Enhanced Customer Loyalty and Retention
- Recurring Revenue Streams
- Increased Profitability
- Improved Customer Satisfaction
- Improved Operational Efficiency
- More Effective Predictive Maintenance
- Deeper Insights and Data Utilization
- Differentiation in the Market
- Cross-Selling and Upselling Opportunities
- Sustainable Business Model
- Market Resilience
- Innovation Catalyst
- Long-Term Partnerships
- Agility in Business
- Strategic Customer Insights
Indeed, the benefits of servitized business strategies are many and varied, as we shall see later in the paper as we explore a series of examples.
Now having made the case as to why in the opening chapter of this paper, we shall spend the remaining time in this paper focussing on the how.
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