A simple explanation of servitization
The drivers, reasons and enablers of servitization, digitalization or as-a-service transformations are clear. No matter where one looks, there is evidence that – even for mid-market and enterprise B2B players – customers expect service-based business models and, over time, service-derived revenue streams outperform product-based approaches (e.g. recurring revenues from services result in enhanced enterprise value).
The Service Design Group has helped many clients with successful servitization transformations since 2011. And yet, while the drivers, reasons and enablers are even clearer now, we still find many companies wondering: what is servitization (or digitalization or as-a-service transformation)? From our experience, we believe this explanation will help.
At its simplest, it is when a firm moves beyond having revenue that comes exclusively from selling product(s).
Servitization is when a firm – for the first time – produces and collects service-based, or service-derived, revenue. At its simplest, it is when a firm moves beyond having revenue that comes exclusively from selling product(s). Servitization begins when the firm takes steps to collect their first service $’s (non-product revenue) and continues until the firm has significant service(s) revenue and is, at that point, servitized.
A firm makes and sells a product, for example, a piece of equipment, an ingredient, component or supply used in its customers’ process. The firm collects $’s every time it sells its product and the firm provides necessary care, feeding and support of its product for its customers. The firm might help with product startup and troubleshooting. While the firm does not charge for (aka monetize) its customer service, it performs customer service activities as a valuable differentiator and critical component of the business. This is a good business. But the firm is not servitized.
A (traditional) step…
The firm realizes, or is required to explore, monetization of traditional services. This may be self-initiated and opportunistic (e.g. a clear market opportunity presents itself) or it may be self-inflicted and protectionist (e.g. the firm is facing significant competitive pressure or commoditization of its product). Either way, the opportunity to monetize follows well established patterns. The firm can offer warranties, financing, after-market services or preventative maintenance. Or, the firm can offer complimentary services, such as engineering or optimization. Or, the firm can right-size its existing approach to customer service and withhold some of the most valuable activities it does in exchange for additional value (e.g. premium delivery). Any of these is a good move and a great thing for the firm. Revenue just expanded and became more diversified. The firm has begun servitization.
A (digital) step…
The firm realizes, or is required to explore, a brave new world, made possible by digital tools and technologies, including but not limited to Internet of Things (IoT), Edge computing, Big Data, Artificial Intelligence and Machine Learning. As with the traditional step, this may be self-initiated and opportunistic or self-inflicted and protectionist. However, in the digital step, the root causes are usually quite different. Likely, the driving forces here are either a C-suite imperative (e.g. “let’s go digital” or “let’s become more customer-centric”) or there are new entrants to the market using technology and new go-to-market pricing models to disrupt the world the firm once knew. Here, the opportunity to monetize follows newer, more innovative patterns, generally described as digitalization, digital services, Xaas or as-a-service transformation. For example, the firm can harvest data and provide digital tools and analytics. Or, the firm can offer subscriptions to its products using metered consumption models. Or, the firm can convert its product to a device or a product-as-a-service model. Or, the firm can delve into outcome-based pricing and pay-for-performance offerings. Any of these are a strong move and a great thing for the firm. Revenue just expanded and diversified. The firm has begun servitization.
Most importantly, the firm continually builds a pipeline of new service innovations and continually manages and improves its in-market service offerings.
Taking one of or both of these steps (traditional or digital services), the firm begins to grow a service-based revenue stream. It begins to invest in the skills and capabilities needed, which might include new platforms (e.g. payment gateways and subscription billing systems) and new functions (e.g. customer success management teams that drive adoption, renewals and expansion of services). The firm begins to realize where it needs to adapt and grow pre-existing functions. For example, after years of only selling products, the firm might realize a weakness in sales capabilities and have to grow service and solution selling skills. Most importantly, the firm continually builds a pipeline of new service innovations and continually manages and improves its in-market service offerings.
The firm is growing service-based revenue, which increasingly contributes to total revenue, and the firm enjoys strengthened market share, competitive differentiation and barriers to entry. The firm has moved well beyond starting servitization. The firm is actively servitizing.
At some point, it’s hard to remember how this story started. The firm looks very different from years past. A significant portion of revenue (if not all) comes from service-based offerings. Servitization – and all that comes with it, from customer-centricity to business model flexibility and agility – is in the DNA of the firm and the teams that build and deliver services on a day-to-day basis. The firm is recognized as a (if not the) market leader and commands increased levels of renewals and customer intimacy with its clients. Even better, the firm has an improved enterprise value, as the street tends to assign greater value to service-derived revenues (i.e. the recurring value of predictable cash flows is attractive to investors). The firm is now servitized.
A few words of warning
Servitization is not for the faint of heart. It takes courage, commitment and vision to embark on and sustain a servitization journey. While the payoff and rewards are there in the end, this is no quick sprint. But, can a firm afford to not get started? We think not. Market by market, segment by segment, the servitization journey will play out, leaving “those who did” standing and “those who did not” wondering what happened, and perhaps not understanding why their attempts to “go digital” or “be agile” didn’t quite work out.
Hint: they missed this story about servitization!