What is Servitization?

Dr. Arsham Mazaheri . July 30th 2023

What is Servitization?

Servitization is a business strategy where companies shift their focus from selling products to providing a combination of products and services to create more value for customers and strengthen long-term relationships.

Servitization could be the differentiating factor, enabling businesses to stand out in the face of the fiercely competitive modern business environment. Servitization is catalyzing a fundamental shift in how businesses interact with and serve their customers because it serves as an essential component of contemporary business strategies.

How does Servitization work?

The process of servitization takes place along a spectrum, ranging from simple service enhancements to complex, value-focused arrangements. The process can take the following forms at various points along this spectrum:

An Original Equipment Manufacturer (OEM) creates a high-quality product from conception to completion and then adds services to it in order to provide the customer with additional layers of value. This may include maintenance, repair, or other after-sales services that are bundled with the product at the point of sale.
As we progress along the spectrum, the business development team may plan comprehensive service contracts in addition to tying these services to the product. These agreements include comprehensive services that increase the value of the product and are tailored to meet the needs of the customer.
On the more complex end of the spectrum, the OEM uses the product as a means to give customers outcomes or performances (in other words, values) rather than the physical machine or the product. This means that the OEM while maintaining ownership of the product, assumes full responsibility for all of its operations and functions, focusing solely on providing the customers with the value and outcome. In these circumstances, the pricing strategy can be based on the value provided to the customer rather than the value of the product or used labor.

The goal is to integrate these services into your overall offerings in order to shift from a product-focused to an outcome-based strategy. This enables your company to offer complete solutions that are tailored to the needs of your clients. In this context, servitization transforms from a straightforward business model into a strategic alliance for mutual success.

Servitization in Practice

Servitization is transforming a diverse range of industries, from automotive and robotic manufacturing to business, healthcare, and even agriculture.

Example #1
Take a look at the automotive industry for instance. Major car manufacturers like Volvo Cars and Toyota are breaking away from traditional norms. They are not just selling vehicles anymore; they're venturing into providing comprehensive mobility solutions. “Volvo on Demand” and "Care by Volvo" subscription services, as well as the similar offerings by Toyota as “Kinto Share” and “Kinto Flex” are perfect examples of this shift. Instead of just selling a car, Volvo Cars and Toyota now offer packages that include insurance, maintenance, and even roadside assistance. They’re a one-stop solution for all mobility needs, delivering unprecedented value to the customers.

Example #2
In the realm of manufacturing, particularly robotics, companies like AutoStore are embracing servitization with open arms. They've adapted the concept of "pay-per-pick", allowing customers to pay based on the usage of their innovative warehouse management solutions. This model opens up opportunities for a wider customer base to leverage AutoStore's cutting-edge technologies, without bearing the upfront cost of owning the robotics system.

Example #3
Healthcare is another sector where servitization is making a significant impact. Medtronic, for example, has transitioned from just selling medical devices to offering comprehensive health solutions. Their "Integrated Health Solutions" package includes not only their world-class medical devices but also operational and consulting services. This approach aims to optimize healthcare systems and improve patient outcomes, offering tremendous value to healthcare providers.

Example #4
Agriculture isn't left behind either. Companies like John Deere have incorporated servitization into their business model. They're selling not just farm equipment but also data-driven services. By leveraging advanced technologies such as IoT and AI, they provide farmers with real-time insights into their operations. This helps farmers increase efficiency, maximize yields, and ultimately improve their bottom line.

Across these examples, one common theme stands out: the strategic shift towards creating value through the integration of products and services. It's not just about the product anymore; it's about the comprehensive solution that delivers lasting value and creates a robust customer relationship.

Servitization Benefits for your Business

Servitization can offer a plethora of advantages, including increased revenues, improved profit margins, enhanced customer satisfaction, and expense reduction. It allows for the diversification of your offerings, fostering consistent revenue streams, and can amplify customer loyalty.

With servitization, customers gain access to services that are precisely tailored to their needs. This strategy empowers companies to not only meet but also anticipate customer needs, thereby boosting satisfaction and fostering loyalty.

The adoption of servitization can unlock several benefits for businesses. Here's a list of key advantages:

Increased Customer Satisfaction: By proffering services that complement the core product, businesses can elevate the overall customer experience. Catering to customer needs through comprehensive solutions can result in higher satisfaction levels and foster enduring relationships.

Competitive Advantage: Servitization equips businesses with the means to differentiate themselves from competitors who focus solely on products. By offering additional services and support, a company can carve out a unique niche in the market, gaining a competitive edge.

Recurring Revenue Streams: Instead of depending solely on one-time product sales, businesses can establish long-term relationships with customers through service contracts, subscriptions, or usage-based models. This leads to the creation of recurring revenue streams.

Improved Profit Margins: Diversification into service offerings can tap into more profitable revenue streams, potentially augmenting overall profitability.

Extended Product Lifecycle: Servitization can elongate the lifecycle of products. By offering maintenance, repairs, upgrades, and other services, businesses can enhance the lifespan of their products, thereby maximizing value for customers.

Enhanced Customer Loyalty: The provision of ongoing services and support helps businesses cultivate loyalty among their customers. This loyalty can result in repeat business, and potential referrals, contributing to sustainable growth.

Stronger Partnerships: Servitization often involves collaboration with other service providers or complementary businesses. By forging partnerships and creating ecosystems, companies can leverage each other's strengths and resources, resulting in mutual benefits and an expanded market reach.

It's important to note that the benefits of servitization may vary depending on the industry, market conditions, and specific business strategies. However, overall, embracing a service-centric approach can offer numerous advantages and help drive long-term growth and success.

Servitization as Business Digital Transformation

Servitization and digital transformation are closely intertwined. Businesses can enhance service delivery and customer engagement by leveraging digital platforms and tools. For instance, devices connected through the Internet of Things (IoT) facilitate remote troubleshooting, predictive maintenance, and real-time product monitoring, all contributing to an improved customer experience.

Digital technologies empower businesses to amass and scrutinize a vast array of data their services generate. This data can be harnessed to uncover valuable insights into customer behavior, preferences, and usage patterns, allowing businesses to refine their services, devise personalized offerings, and anticipate customer needs more effectively, leading to increased customer satisfaction.

Digital transformation plays an instrumental role in boosting operational efficiency within servitized businesses. Automation and digital workflows simplify service delivery processes, curtail manual errors, slash response times, and elevate the overall service quality. By utilizing digital tools, businesses can optimize resource allocation, schedule maintenance tasks efficiently, and manage inventory more effectively, thus leading to cost savings and increased productivity.

Moreover, businesses can exploit digital platforms to engage new customers, penetrate new markets, and collaborate with partners, thereby amplifying their competitive advantage. Cloud computing, for instance, offers the flexibility and scalability required to deliver services on a global scale.

Another facet of digital transformation is the creation of value-added services that supplement the core product offerings. Consider a manufacturing company traditionally involved in selling equipment; it can introduce value-added services like remote monitoring, performance optimization, or predictive maintenance, thereby enhancing its overall value proposition for customers.

In conclusion, servitization and digital transformation reinforce each other.

Digital technologies enable businesses to deliver services more efficiently, accumulate insights for informed decision-making, establish recurring revenue models, improve operational efficiency, and create value-added offerings. By embracing both servitization and digital transformation, businesses can unlock novel opportunities, outpace the competition, and provide unparalleled customer experiences in our increasingly digital era.

How to switch to Servitization Business Model

Feeling enticed by servitization? Here are the high-level steps you can take to make the transition:

Identify your customer's goals: Understand their needs and how your solutions can address them.
Create comprehensive solutions: Combine your product with value-added services to create comprehensive solutions.
Provide high-quality services: Ensure your services exceed customer expectations and specifically address their pain points.
Sell outcomes: Rather than selling a product, sell the value or outcome that the product and/or services deliver.

Servitization Challenges

While servitization harbors substantial potential, it's not devoid of challenges. Given that the concept is fairly new, a learning curve exists for both businesses and customers. Here are some of the most prevalent obstacles businesses frequently encounter:

Cultural Transformation: Transitioning from a product-focused to a service-oriented mindset necessitates a significant cultural shift within an organization. Employees may need to acquire new skills and espouse a customer-centric ethos, which can be a time-intensive process.
Complexity of Service Offerings: Incorporating services alongside products can instigate complexity within a business. Handling service contracts, orchestrating maintenance activities, and maintaining service quality demands well-established processes and adept coordination. Investments in new systems, tools, and training may be essential to manage the complexities of service delivery proficiently.
Revenue and Pricing Models: Deciphering suitable pricing and revenue models for services can be intricate. Unlike product sales, services often involve ongoing costs and variable elements. Factors such as subscription pricing, usage-based models, and value-based pricing must be considered to ensure profitability while sustaining competitiveness in the market.
Technological Integration: The effective integration of digital technologies is crucial to successful servitization. Nevertheless, merging new technologies with existing systems and infrastructure can present challenges.
Customer Adoption and Expectations: Enlightening customers about the value and benefits of integrated service offerings can be an obstacle. Some customers, accustomed to the traditional product-centric model, may require time to comprehend and welcome the added services. Articulating the value proposition effectively and addressing customer concerns are vital for successfully assimilating the servitization strategy.

At this junction, Avrogan, a preeminent servitization strategy and solution provider, steps in. We assist in facilitating your transition smoothly and efficaciously. As a leading provider of servitization strategies and the provider of the avant-garde service contract management solution, Avrogan Service Excellence™, we ensure your company stays at the forefront, providing exceptional value to your clients, while enhancing your bottom-line and top-line performance.

Does Avrogan support pricing excellence initiatives?

Yes, any manufacturing company requires to establish processes and methodologies to achieve pricing excellence in Product pricing, Spare Parts pricing, Service pricing (both legacy and digital services), and data monetization. Avrogan’s team can support the operational deployment of such initiatives.
What is high-quality pricing?

High-quality pricing is pricing that is easy to explain and defend to the customer. Such pricing is in proper alignment with the brand positioning within the market and in comparison, with other competitors. Customers can easily relate to the prices and there is a willingness to pay for the prices.
What is the main pricing methodology that Avrogan can support our organization with?

We support the operational transformation to Value-based and market-driven pricing as the main methodology that can properly reflect customers’ perception of value to make sure no business is lost due to over-and underpricing. Over-and underpricing is the common result of cost-based pricing or blind following of competitors.
Why should we focus on price improvement rather than cost reduction?

Pricing is the strongest lever in business to improve profitability. Within the manufacturing industry, 1% price improvement can result in 3 to 7 times margin improvement in compare with improvement in other levers such as Cost, Volume, etc.
What is pricing power?

In simple terms, it is your ability to increase prices without losing a considerable number of customers. If you are scared that many customers will leave you due to your price increase, your pricing power is probably low.
Why pricing power is important?

“Pricing power is the most important factor in evaluating businesses…” Waren Buffet
How can we improve our pricing power?

By improving your pricing quality. High-quality pricing is easy to defend and explain. You don’t need to give away in discounts to persuade the customer to pay the price. In other words, your price should be in harmonization with customers’ value perception in the market.
Why cost-based pricing is not the best option?

Direct reliance on cost for pricing will increases the chance of low-quality pricing. Cost levels are usually defined based on factors that are not in your control and customers cannot relate to them if you pass the cost by adding a constant margin on top to the customers. It is also hard for the sales teams to defend such prices towards the customers and usually being crushed by customers’ urge for discounting.
How Avrogan’s way of working can support the transformation toward high-quality pricing?

While we have a look at market conditions, competitors, and cost as guidance metrics, we try to measure and grasp customers’ value perception and willingness to pay with the help of various quantitative and qualitative studies and analyses. The aim is to put the pricing into the context of different products and offerings of the business and draw a harmonized pricing logic across each category of offerings to create a consensus across the organization about the value that is offered and the value to be captured.
Is value-based pricing about increasing the prices?

No, the goal is to make sure all prices are in harmonization with customer perception of value. In this process, some prices will be increased, and some will be decreased. Therefore, businesses can expect improvement both in margin and volume for the whole business
What is the typical gain out of pricing excellence initiatives?

We have seen companies can easily achieve 5% to 15% gross margin improvement as a result of pricing excellence initiatives for products and spare parts. The ultimate gain depends on the readiness and the effort deployed by the business in realizing the profitability impact.
What is a typical project length?

Depending on the scope, operational pricing projects take between 3 to 9 months. For a more detailed estimation please contact us.
We have deployed a pricing excellence initiative couple of years ago, but we lost the knowledge during the years. How Avrogan can support us?

It is a challenge that some companies lose track of their achievements over couple of years, as the knowledge is not passed on properly within the organization. We always suggest and provide easy-to-maintain documentation, plus we suggest the usage of pricing management solutions. ERP or excel are not proper tools to maintain and manage sophisticated pricing frameworks and logic.
Can Avrogan support our pricing solution acquisition process?

Yes, Avrogan’s team has high knowledge of existing pricing solutions in the market for the manufacturing industry. We can support your required documentation and selection process.
What are the steps in value-based pricing for spare parts?

We start with creating a pricing-focused product structure where we can put together similar spare parts into groups. Then we defined value drivers together with your product specialists and marketing teams. In the next step, the data values of these value drivers are gathered. In the final, step a pricing logic is defined based on the value drivers and with the look at market conditions, any available competitor data, and of course margins. This logic creates a central reference price. This reference price is then transformed into suggested market prices by applying the market price level adjustment factor. When prices are ready, feedback will be gathered from marketing, product management, and sales teams to assure the acceptance of the new prices before market implementation.
We have bad data quality; can we still apply value-based pricing for our aftermarket business?

You are not alone. We have seen such challenges over and over and we have different solutions to still navigate through such challenges. Contact us to discuss a detailed proposal for your business.
Why cross-border business happens?

Cross-border business happens when there is enough price gap (list or net) between two market regions where a trader can sell the product at a lower price in the landing market while they realize an acceptable profit. As a rule of thumb, a trader should have a minimum of 15% of margin after all costs for the trade to start doing the trade.
What is the actual damage of cross border business for our company?

It depends on who performs the trade. If the cross-border trading happens by the company’s sales network, the damage is proportional to lost market value for the landing market’s sales company. If it happens by a third party, the damage is the total loss of market value for the landing market. It will anyway affect the price positioning of the company within a specific market and will put higher pressure on margins.
We have a cross-border business issue. How can we improve that?

Avrogan’s team has experience and tools in assessing the risk and mitigating it by improving pricing harmonization across markets where your business is active. To have an assessment of the potential risk in your business contact our team.
How can we increase the success rate of our pricing excellence initiative?

It is important to share the information about the initiative from the beginning and involve all relevant stakeholders within the project to assure the high-quality results and acceptance of the new prices. In this process receiving proper feedback and involving the sales teams are crucial.
Can Avrogan support the change management process and go to market activities?

Yes, we have the training and a structured sales enablement methodology to support the release of new prices to the market and how sales teams should respond to tough questions from customers.
We need support on where to start with pricing. Can Avrogan support that?

Yes, we have maturity and readiness assessment tools that we can apply to your business. To get more details please contact us.
What kind of market research methodology should we use for improving our pricing quality?

There are different methodologies for different purposes. Some of such market research methods are more qualitative like the VEL study which defines the perceived brand and price positioning of the business in the market, while some others are more quantitative like Conjoint analysis which can support defining price threshold and market share potential through statistical analysis. Please contact us to design the proper market research model for your business.
We need to improve and align pricing knowledge across our organization, can Avrogan support that?

Yes, we have detailed and operational pricing training for products, spare parts, and service pricing. Please contact us to review the syllabus and design the most appropriate educational program for your team.
What differentiates a product-centric model from a service-centric model in manufacturing?

A product-centric model focuses on selling products as a one-time transaction, while a service-centric model, often seen in servitization, focuses on selling the product bundled with value-added services to foster long-term customer relationships and recurring revenue.
How does servitization benefit customers?

Servitization can offer customers greater value by providing a comprehensive solution with lower risk and higher performance that goes beyond the product itself. This can include tailored services, improved customer support, increased reliability, and reduced total cost of ownership.
How can servitization impact revenue streams?

Servitization can diversify and stabilize revenue streams by generating recurring income from service contracts. This is in addition to the traditional one-time income from product sales. Additionally, increasing the service revenue, which normally has higher margins, will increase the profitability and thus improve the bottom line.
What role does data analytics play in servitization?

Data analytics is crucial in servitization as it helps businesses understand customer behavior, predict service requirements, personalize offerings, and make informed decisions. This data-driven approach enables companies to optimize their service delivery and enhance customer satisfaction.
What impact does servitization have on sustainability and the circular economy?

Servitization can contribute to sustainability by encouraging the efficient use of resources and reducing waste. This is because a service-centric approach often includes maintaining and upgrading products over time, rather than replacing them. This can help foster a circular economy, where resources are used as long as possible, extracting their maximum value.
How does servitization fit into the Internet of Things (IoT)?

Servitization and IoT go hand-in-hand. IoT devices can collect and analyze data to provide insights that help companies deliver tailored services, predict maintenance needs, and create new revenue opportunities.
How does servitization fit into Industry 4.0?

Servitization fits perfectly into the concept of Industry 4.0, a term that refers to the fourth industrial revolution characterized by the digitalization and interconnection of industrial processes. In Industry 4.0, technologies such as the Internet of Things (IoT), Big Data, Artificial Intelligence (AI), and cloud computing have a transformative impact on the way businesses operate. These technologies enable businesses to collect and analyze vast amounts of data in real-time, leading to a better understanding of customers' needs, improved operational efficiency, and the creation of new business opportunities.
How does servitization impact competitive differentiation?

With servitization, companies can differentiate themselves by offering unique value-added services that competitors may not or cannot offer, because normally service offerings are connected to expertise and know-how knowledge than a physical product that in many cases can be replicated or have alternatives. This enhances customer loyalty and provides a competitive edge in the market.
What is the relationship between servitization and customer loyalty?

Through servitization, businesses aim to nurture long-term relationships with customers. By delivering a combination of products and high-quality services tailored to customers' needs, they can enhance customer satisfaction and loyalty, and transform them to “clients”!

Dr. Arsham Mazaheri

Chief Operating Officer

Arsham is a data scientist by background, with 17+ years of industrial and managerial experience in various disciplines. Throughout his career, Arsham has helped many of Fortune 500 companies with their data and requirement challenges and has been involved in many IT solution implementation projects. Arsham has both mechanical and industrial engineering backgrounds and has a D.Sc. in Risk Management from Aalto University in Helsinki, Finland. He is a certified change and problem manager (CCM & CPCM) and holds an MBA in shipping and logistics.