Beyond Products - Servitization in Manufacturing

You’ve probably heard it before; “People don’t want a quarter-inch drill, they want a quarter-inch hole” or even better - they want to hang their family picture on a wall. It’s the basic lesson of consumer behaviour; people are looking for outcomes, not products. Today servitization is one of the best tools manufacturers can use to deliver better outcomes to clients on one hand and reap the rewards for their business on the other.

March 27, 2024

Deja Kofol, Design researcher

What is servitization?

In its essence, servitization is a shift from a product-only business model to an outcome-focused one. In this approach, we recognize products as just one of the elements in value creation. Instead of only offering products to satisfy clients’ needs, we focus on a wider experience surrounding that product – we may support users with information on how to use the product and knowledge about how to use it in a better way, offer support, maintenance, etc. This new way of thinking not only brings opportunities for innovative and more efficient ways of delivering outcomes to a customer but can also improve the perceived value of your offer, brand, and generate new revenue streams.

What are its benefits?

As more global corporations develop holistic, highly personal, and convenient solutions, consumers become more demanding, expecting reliable, always accessible services. They seek more customisation and sustainable solutions. Servitization is one of the possible approaches to staying competitive in this saturated market. Here are a few opportunities it can create for your business:

New revenue streams: By offering additional (or monetising existing) services like instalment, maintenance, education, insurance, or support alongside products, you may increase income and diversify revenue streams.

Access to new markets: With an extended offer, you may open up new markets or make your offer accessible to a wider range of consumers who were previously deterred by upfront product costs, etc.

User satisfaction: With a user-centric approach to planning and delivering value to your clients, you may develop a package that feels tailor-made and frictionless. By increasing customer satisfaction and the perceived value of your offer, you will get a chance to retain customers, maximise profit margins, and drive sustainable growth.

Customer retention and loyalty: By fostering long-term relationships as customers commit to additional and ongoing services, you will tighten your relationship with them and possibly even reduce new client acquisition efforts.

Differentiation: Services are an opportunity to deliver a specific outcome customers were looking for or address your customers' needs in a way your competition doesn’t.

Market control: Use this new and increased intimacy you build through ongoing services with end-users to generate data that will inform your future projects and make your offer even better tailored to your users' expectations, giving you an advantage in tackling competition.

Improved sustainability: By delivering value through services instead of goods, you may reduce your company's impacts on the environment. You may even plan new services focused on reducing environmental impacts of your products in use or at the end of their lifecycle.

What are the challenges?

While the benefits of servitization are evident, only 9% of companies currently bundle products with additional services (source: NTT DATA), suggesting there is a lack of knowledge and confidence in implementation. Some common challenges you will have to overcome during implementation are:

Changing the mindset: Remember, you are no longer only selling to customers, you are building a long lasting relationship with them. Successful companies tailor their offerings to meet clients evolving preferences, which requires understanding your customers on a deeper level. Shifting from a feature-focused to an outcome and user-centric mindset requires structural adjustments and cultural transformation at a company level.

Business model innovation: Services will present you with many uncertainties about resources needed for implementation. However, iterating your business model (and testing it) offers a chance to deliver your offer to customers in a way that ensures user adoption and ideally improves efficiency on your side.

New approach to R&D: Not only will you have to use a different design approach, but you’ll also have to consider the human factor in service provision, posing unique challenges for standardisation and scalability. We suggest you employ a collaborative approach from the start, since servitization will require changing relationships between some departments (for example, marketing and sales) from linear to iterative.

Soft skill development: Your business will gain new touch-points, some of which may require direct contact between customers and your employees. Make sure these client-facing employees are equipped with the right skills and protocols to tackle all scenarios that may endanger customer satisfaction or positive brand perception.

Technical capabilities: Technological innovation has opened new opportunities for people-centric transformation, providing and making accessible tools like AI, big data, and IoT. Still, it may be a challenge to up-skill the workforce and acquire the right professionals who will be able to deliver seamless experiences and predictive services while keeping you and your clients safe. Depending on your offer, some investments in digital infrastructure and talent development will be necessary.

Where to begin?

Servitization brings a spectrum of options, ranging from basic product support to comprehensive service-based business models and can be implemented across industries. Regardless of whether you’re marketing to end users or companies, in the majority of cases, there are opportunities for adding value through services. In any case, your first step should be uncovering unmet user needs and pain points around your product; these present the opportunity for meaningful and monetizable services.

And finally - yes, the process may require quite a bit of effort, new know-how, and cultural change, so don’t hesitate to seek external support, internal collaboration, or new partnerships to support your initiative. At Sito, we excel at tackling the first 3 challenges and would love to support your journey from a manufacturer to a solution provider.