Servitization in Home Appliances

Dr. Arsham Mazaheri . July 30th 2023

Servitization in Home Appliances: Introduction

You've probably noticed it yourself. Your refrigerator no longer just chills food. It might have a screen that displays your grocery list, gives recipe suggestions, or even lets you know when food is expiring. It’s a sign of the times. Welcome to the servitization revolution in the home appliances industry. What once were simple, standalone devices in our homes are transforming into holistic service experiences. This isn't just a mere technological tweak; it's a paradigm shift.

Servitization Benefits for Home Appliances Services

When one ponders over the home appliances sector, servitization might not immediately ring a bell. But as mentioned above, with servitization steering the helm, the Home Appliances industry is on a transformative journey. Understanding this strategy's potential reveals a wealth of business opportunities:

Extended Appliance Lifespan: Dive deeper than mere durability. With servitization, appliances are no longer just static devices. Picture a washing machine offering predictive maintenance. This not only promises longevity but assures top-tier performance, translating to significant cost savings and bolstering brand reputation.
Minimized Downtime: No one enjoys disruptions. Servitization, through its proactive maintenance and predictive analytics, promises users an experience where their appliances rarely, if ever, take an unexpected break. The outcome is a consistently optimal performance and heightened user convenience.
Enhanced Customer Convenience & Engagement: Imagine a world where your coffee machine learns your preferences, or your oven gives you recipe recommendations! That's the servitized world for Home Appliances, where the experience is tailor-made and hassle-free, from reduced maintenance worries to a delightful morning brew!
Personalized Solutions & Customization: The one-size-fits-all era is behind us. Servitization in Home Appliances, similar to other industries, paves the way for businesses to craft personalized service packages, meeting the unique demands of every customer. Whether it is extended warranties, bespoke maintenance plans, or priority repairs, customization is the new norm.
Cost Predictability: The dreaded unexpected costs become a relic of the past. Subscription models usher in an era where customers enjoy predictable monthly expenses, mitigating any unforeseen financial strain.
Sustainability & Reduced E-Waste: In a world echoing sustainability chants, servitization offers a choir. Repair, upgrade, and energy-monitoring services not only enhance appliance value but champion eco-conscious consumption and reduced e-waste.
Value-Added Services: This isn't just about fixing a faulty toaster. Think broader—like integrating that toaster within a smart home system. Servitization, particularly in Home Appliances, empowers businesses to bundle these enhanced experiences, from seamless installations to smart integrations.
Brand Loyalty & Strengthened Reputation: Continuous engagement nurtures loyalty. Customers, having reveled in the holistic services, are likely to be repeat buyers, associating brands with reliability and exceptional experiences.
Innovative Features: Servitization isn't static. As appliances evolve, so do the services. Manufacturers can frequently update features, ensuring that appliances aren't just working but continually improving.

User Insights: This ongoing journey provides businesses with a goldmine of information. Understanding customer preferences, pain points, and behaviors can be pivotal in shaping future products and marketing strategies.

Types of Advanced Service in the Home Appliance Industry

I trust by now you have understood that in the evolving landscape of the Home Appliance Industry, advanced services aren't just a luxury but a necessity. As our homes become smarter and our demands more personalized, the services on offer are diversifying at a rapid pace. Here are some of the forerunners:

Predictive Maintenance: Moving beyond mere reactive measures, appliances now have the capability to alert users, and sometimes even manufacturers, about impending issues. Leveraging data analytics and IoT technology, this service predicts the need for repairs or part replacements, often before an actual breakdown occurs.
Subscription Services & Models: As we say in Avrogan, “the era of ownership is ending!” and the traditional purchase-and-own model is being revamped. Now, consumers can opt to lease appliances, paying a recurring fee, which encompasses not just the device, but also ongoing services. This includes regular maintenance, upgrades, replacements, and even the opportunity to swap out for newer models, ensuring a consistent and hassle-free user experience.
Integrated Digital Assistance: As the digital age thrives, appliances aren't left behind. Devices now come embedded with digital assistants. The digital component is crucial, whether it's for task assistance, automating supply reorders, or integrating into larger smart home ecosystems for remote control and real-time monitoring.
Maintenance, Repairs, and Upgrades: At the core of these advanced services is ensuring appliances are always in tip-top shape. Whether it is on-demand fixes, scheduled checks, or the option to upgrade to the latest model, these services prioritize optimal functionality and longevity.
Consultation and Personalization: In a world of overwhelming choices, expert guidance is invaluable. Tailored advice and recommendations assist customers in selecting appliances that align perfectly with their unique needs and lifestyles.
Energy Efficiency Audits: With sustainability taking center stage, energy efficiency audits have emerged. These assessments guide users toward energy-saving appliances, and they also suggest best practices to curtail energy consumption.
Extended Warranties: A very simple but very necessary service in the era of Servitization! The security of an extended warranty cannot be understated. Beyond the standard period, these plans shield customers from unforeseen repair expenses, instilling a deeper sense of trust.
Appliance Recycling and Disposal: In a circular economy era, if we welcome new appliances at our homes, it's crucial to bid goodbye to the old responsibly. Advanced services now ensure the eco-friendly disposal and recycling of dated devices, when and if needed depending on which phase of the circular economy it is.

Installation Services: To guarantee an appliance delivers its promised performance, correct installation and configuration are pivotal. This service ensures devices are set up safely and efficiently, right from the get-go.

Challenges in Embracing Servitization for Home Appliance Industry

The concept of servitization in the home appliance industry, while brimming with promise, does not come without its set of challenges. As businesses aim to make this paradigm shift, they face a multitude of hurdles:

Complex Business Model Overhaul: The leap from pure sales to offering intricate services demands a complete revamp of existing business models. This introduces complexity in reconfiguring established systems.
Cultural and Mindset Shift: This isn't just a business transition; it's a people transition. Teams are now expected to lean into a customer-centric approach, necessitating a massive cultural and mindset shift.
Technological Integration and Hurdles: The journey to servitization is paved with advanced technologies. From IoT integrations to data analytics, businesses grapple with both monetary investments and upskilling their workforce to navigate these technological terrains.
Appliance Diversity and Service Design: With a plethora of appliance types, sizes, and brands, crafting consistent and high-quality service solutions across this spectrum is undeniably challenging.
Supply Chain Reconfigurations: As the focus pivots to services, supply chain dynamics change. The need to always have spare parts at hand for swift repairs demands a reimagining of traditional supply chain strategies.
Physical Accessibility Constraints: Some appliances, by virtue of their installation or design, are tricky to access. Addressing maintenance and repair needs for such devices demands specialized tools and skills.
Overcoming Customer Perceptions: Generations, especially the older ones, have been conditioned to buy and own. Breaking this mold and introducing consumers to subscription or service-centric models, especially when seen as pricier, is a tough sell.
Sourcing Technical Expertise: The confluence of manufacturing with service provision, data analysis, and IoT demands a diverse skill set. Cultivating or hiring such a multifaceted workforce is easier said than done.
Data Management Dilemmas: The data deluge from connected devices is a double-edged sword. While it's rich in insights, handling, processing, and gleaning meaningful information from this data heap presents logistical challenges, especially with strict directives and regulations like GDPR.
Upfront Financial Implications: The initial cash outflow for technological infrastructures, training, and more can be substantial, requiring businesses to evaluate the long-term ROI meticulously.
Security Quandaries: In an interconnected appliance world, data security takes precedence. Safeguarding customer data and ensuring appliance functionality in the face of potential vulnerabilities is paramount.
Designing Balanced Service Models: Curating service packages that resonate with diverse appliance lifecycles and varied customer preferences, all while ensuring simplicity, is a delicate dance.
Navigating Regulatory Waters: Servitization might usher in new regulatory territories, especially concerning service quality and data handling.
Scaling Customer Support: Enhanced services demand enhanced support. Bolstering customer support capabilities to cater to diverse queries and technical issues is a monumental task.
Building and Maintaining Trust: The onus is on businesses to assure customers of consistent, high-quality service, particularly for premium appliances.
Legacy Product Conundrums: Integrating or offering services for products that predate the servitization era, without compromising profitability, is a jigsaw puzzle for many manufacturers.
Carving a Unique Niche: As the servitization wave sweeps the sector, standing out in a saturated market becomes crucial.

In a nutshell, while the journey to servitization is paved with unparalleled opportunities, it's interspersed with challenges that businesses must acknowledge, anticipate, and adeptly navigate.

Leading by Examples: Servitization Case Studies in the Home Appliance Industry

The journey of servitization in the home appliance industry has been illuminated by pioneers who not only adopted this model but also set benchmark practices. Their stories are a testament to the potential of servitization:

Whirlpool's Connect to Care Program: Whirlpool's "Connect to Care" exemplifies proactive customer service. Through IoT, it bridges the communication between select appliances and the company's service network, facilitating real-time diagnostics and preemptive customer assistance.
Bosch's Home Connect Platform: Through its Home Connect platform, Bosch has expertly woven a variety of home appliances into a single, cohesive network. This integrated system gives users remote access and monitoring capabilities, opening the door to a connected home environment.
Lowe's Extended Protection Plans: Lowe's extends a safety net for its customers with its protection plans. These plans go beyond the conventional manufacturer's warranty, ensuring customers are always covered.
General Electric's Subscription Model: GE took the servitization route in 2019 with its holistic laundry solution. Subscribers enjoy a bundled offering that encompasses laundry machines, their upkeep, and even replenishment of detergents.
Electrolux Professional's Assisted Cooking Program: Targeting the professional culinary realm, Electrolux Professional's assisted cooking program offers a combination of top-notch kitchen equipment coupled with continuous training and support.
Philips' Hue Lighting Ecosystem: Philips diverges from the traditional appliance mold with its Hue smart lighting. Customers who purchase these smart bulbs gain access to a wide range of services, including remote control, automation, and integration with larger smart home systems.
Miele's Dedicated Service Contracts: Miele, synonymous with luxury in home appliances, furnishes its customers with service contracts. These contracts envelop maintenance, repair, and tech support, ensuring prolonged excellence in appliance performance.
Samsung's Family Hub Refrigerator: Samsung's Family Hub refrigerator is an example of the company's move toward servitization. It offers more than just cooling thanks to its touchscreen and IoT capabilities. Through their refrigerators, users can manage their groceries, enjoy entertainment, and even communicate.
LG's ThinQ Appliance Range: With its ThinQ technology, LG brings smart capabilities to its appliance lineup. Users can command, diagnose, and fine-tune their devices through a dedicated mobile application, making everyday chores more streamlined and efficient.

The aforementioned leaders in the home appliance industry serve as an example of how servitization can be transformative. Their success tales serve as an example and compass for the industry as it moves toward a service-centric future.

Conclusion

The home appliances industry is no longer just about appliances. It’s about experiences. As the lines blur between product and service, it's clear that the future is servitized.

Now, where do we at Avrogan - Your Partner for Smarter Business, fit into this picture? We're here to streamline this transformation for businesses. With our advanced service contract management SaaS solution, Avrogan Service Excellence™, we're equipped to guide you through every facet of configuring, pricing, managing, and monitoring advanced service contracts that your business can design and offer to the customers. Dive into the servitization wave with confidence. Partner with Avrogan. Because with us, the future is not just smart; it's service-smart!

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.