Today, it’s often difficult for mid-market and enterprise B2B firms to cleanly separate the topics of servitization and customer experience.
Customer experience has been a hot topic for a number of years now, along with the growth, popularity and adoption of design thinking and customer centricity. The growth in popularity of “CX” has resulted in some confusion and questions about applicability between B2C and B2B contexts. Today, it’s often difficult for mid-market and enterprise B2B firms to cleanly separate the topics of servitization and customer experience. This leads to unnecessary confusion – and competition for resources – within organizations.
The Service Design Group firmly believes that the opportunity and path forward is about servitization, not customer experience, recognizing that the servitization journey will, inevitably, require customer experience activities (it is, after all, impossible to win with services and not have exceptional customer experiences!).
This is to say firms should invest in servitization rather than investing solely in customer experience.
First, definition of terms.
Servitization
Servitization, or as-a-service transformation, is when a firm – for the first time – produces and collects service-based or service-derived revenue. It’s when a firm moves beyond having revenue that comes exclusively from selling product(s). Servitization begins when the firm takes steps to collect its first service dollars (non-product revenue) and continues until the firm has significant service(s) revenue from a portfolio of in-market service offerings and is, at that point, servitized.
Customer Experience
These activities are almost exclusively focused inward, resulting in modest efficiency gains for the organization, but have no ability to create on-ramps to innovation or changes in enterprise value.
Customer Experience, or CX, is when a firm decides to understand, codify and improve aspects of its existing customer experience. Buzzwords and phrases – including customer centricity, journey mapping and frictionless experiences – abound. Typical activities include establishing voice of the customer (VOC) programs and running journey mapping exercises. Significant emphasis is placed on CX metrics and key performance indicators (KPIs), including net promoter score (NPS), customer satisfaction (CSAT), and loyalty.
Often, new teams are created, with dedicated specialists in user experience and customer experience, who do a mix of user research (UR), journey mapping and user experience (UX) design. Many times, the bulk of the focus is on understanding and optimizing a digital marketing strategy, the digital sales funnel, and the end-to-end customer journey (which, in reality, is the buyer journey). The customer experience work may also include improving the user experience (UX) of the product(s) in use with the bulk of the focus on digital product experience, which essentially means user interface (UI), web, mobile and application design. These activities are almost exclusively focused inward, resulting in modest efficiency gains for the organization, but have no ability to create on-ramps to innovation or changes in enterprise value.
Now, the investment case!
Servitization diversifies revenue. Customer Experience does not.
At its core, servitization is about creating net-new revenue streams from services. It is the path forward for firms to diversify revenue. In particular, it is the only way to change the type, behavior and characteristics of revenue. Only servitization, or as-a-service transformations, can produce recurring revenue. No amount of customer experience work – in the absence of servitization – will contribute diversified, recurring revenue to a firm. In fact, one would be hard pressed to generate examples of how, when and where customer experience improvement generated any directly attributable revenue. The soft metric improvements (e.g. NPS and CSAT) that measure customer experience have not been proven to correlate with fundamental measures of a firm’s success. In fact, when you peek behind the curtains of high-growth organizations which are held up as exemplars of customer experience what you actually see are service-based businesses with multiple recurring revenue streams!
Servitization grows revenue. Customer Experience does not.
This virtuous circle of revenue growth can progress into new business models, including as-a-service offerings and outcome-based pricing.
In addition to creating diversified revenue, servitization provides a powerful revenue growth engine. New service offerings grow revenue with existing customers and improve your ability to win business from competitors. New service offerings also enable you to attack adjacent markets in new ways. And, inevitably, your new service innovations and offerings will lead to the identification of yet unseen revenue growth opportunities. For example, a firm may first grow revenue by monetizing a warranty on a device. The warranty also allows the firm to displace some competitive business. Then, the firm identifies opportunities for financing, further growing revenue. This virtuous circle of revenue growth can progress into new business models, including as-a-service offerings and outcome-based pricing. Each of these servitization advancements are capable of significantly growing the revenue capture potential of the firm overtime. Where and how will customer experience produce a revenue growth result? Nowhere. It won’t!
Servitization creates enterprise value. Customer Experience does not.
There’s one more secret weapon of servitization. Servitization creates enhanced enterprise value. For most firms, enterprise value is the name of the game. It is what shareholders expect and demand. Time and again, the market and the street reward firms that demonstrate recurring revenue from services with enhanced enterprise values. It makes good sense. The predictable and smoothed nature of recurring revenue is attractive to investors. As with revenue diversification and revenue growth, one must ask: where are the examples of customer experience producing an enterprise value result?
What investing in servitization looks like.
Investing in servitization is a strategic choice and commitment, just like the choice to invest in customer experience. The key is that investing in servitization will drive servitization and customer experience outcomes! That is to say, instead of “just doing customer experience” the investment will go towards servitization, and the servitization strategy and goals will drive the customer experience enhancements and transformations needed to be successful. To be effective, any investment in servitization should create an innovation pipeline of servitization options and a managed portfolio of service offerings in the market.
While not set in stone, the first movers, disruptors and market leaders in servitization and as-a-service transformations typically are willing to invest at least 6% of revenue into servitization with a three to five year horizon on results. Not bad, for a payoff of revenue diversification, revenue growth and enhanced enterprise value!
Or, you could spend the same amount, take the same amount of time, and have a cooler experience and happier customers. You decide!
