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What is the Servitization Business Model?
The servitization business model revolutionizes how companies meet customer needs. It moves manufacturers and OEMs beyond selling products only and enables them to offer a comprehensive solution that encompasses both the product itself and ongoing services.
What is servitization? Imagine a manufacturer of industrial machinery: traditionally, they'd sell the machine and move on to their next customer, or at most, sell a package of support services. With servitization, manufacturers can offer preventative maintenance plans, performance optimization, remote monitoring and updates, pay-as-you-go plans, and much more. This creates a win-win situation - the manufacturer builds a stronger, recurring revenue stream through service contracts, while the customer benefits from maximized product uptime, reduced operational risks, and potentially lower overall costs.
The servitization model offers many other advantages, too. With servitization, companies can cultivate deeper customer relationships by becoming trusted partners in their success. Additionally, data collected through service interactions allows for continuous product improvement and innovation. Perhaps most importantly, servitization unlocks the potential for higher profits from recurring service revenue streams compared to one-time product sales. It aligns perfectly with the growing trend of customers seeking subscription-based solutions that shift focus from capital expenditure (buying a product) to operational expenditure (paying for ongoing service).
Core Principles and Key Advantages
The Servitization Business Model is a customer-centric approach that transforms companies from product sellers to solution providers. By integrating services with products and focusing on customer outcomes, Servitization unlocks a range of benefits. Following are some of the core principles and key advantages of servitization:
Core Principles of Servitization
- Product-Service Integration – With servitization, the core product becomes part of a larger solution that includes ongoing services.
- Focus on Customer Outcomes - Servitization lets companies focus on the customer's desired outcome - helping them achieve their goals and not just selling the physical product.
- Recurring Revenue Model - Servitization aims to establish long-term customer relationships through service contracts, generating recurring revenue instead of one-time product sales.
Key Advantages of Servitization
- Stronger Customer Relationships - By providing ongoing support and becoming a partner in the customer's success, companies build stronger and more loyal relationships.
- Product Innovation - Data collected through service interactions allows for continuous product improvement and the development of new service offerings.
- Increased Profit Potential - Recurring service revenue streams can generate higher and more predictable profits compared to one-time product sales.
Servitization Business Model: Real Life Examples
This new business model can be applied in multiple ways. Some of the key use cases include:
Use-Oriented Services
Use-oriented services encompass various offerings like leasing, renting, and product-sharing - all focusing on providing access and functionality over product ownership. By way of example, consider a software company that traditionally sold licenses for a design program. With use-oriented services under servitization, they can offer a subscription model. Instead of customers owning the software outright, they pay a monthly fee for access and ongoing services like updates, cloud storage, and online tutorials.
Results-Oriented Services
Results-oriented services showcase a manufacturer’s focus on customer outcomes. In this model, companies go beyond simply providing a product or access, instead guaranteeing a specific result for the customer. A prime example can be found in the elevator industry. Traditionally, companies sold elevators outright. With servitization, they might offer a "performance-based" package. The customer wouldn't own the elevator but pay a fee based on factors like guaranteed uptime or energy efficiency.
Product-Oriented Services
Product-oriented services enhance the value of the core product. These services directly complement the physical product, extending its functionality and lifespan. By way of example, in the medical equipment industry, traditionally, companies sold medical imaging machines like MRI scanners. With servitization, they can offer comprehensive service packages. The customer would still own the machine, but the company would provide ongoing services like maintenance, staff training, software updates, and more.
Servitization Model vs Traditional Models: A Comparative Analysis
The servitization business model offers a distinct value proposition compared to traditional business models based on ownership. By focusing on providing access, functionality, and desired outcomes, servitization fosters long-term customer relationships and continuous product innovation.
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