Should organizations choose the servitization model? Source: Shutterstock

Should organizations choose the servitization model? Source: Shutterstock

Should business leaders think about servitization in 2020?

In TODAY’S customer-first world of business, an as-a-service business model makes more sense.

Also known as the servitization, flexible consumption model, the anything as a service (XaaS) model, it helps businesses organize their activities around customer needs and opportunities rather than around the product lifecycle.

What’s exciting about a servitization business model is that it allows businesses to work more closely with customers, understanding their needs, and receiving direct feedback from them.

In turn, businesses are able to nurture the relationship, provide effective service, and also discover new opportunities for their business.

Servitization provides new revenue streams

When companies run on servitization business model, the unique insights they uncover not only transform what they build but also create new opportunities to serve existing and potential customers.

Let’s explore this with an example:

If you’re a consumer electronics manufacturer and one of your specialty divisions serves chefs at high-end restaurants with expensive, mission-critical electronic equipment for their kitchens, shifting your division to a servitization business model could be exponentially beneficial.

As a direct consequence, your sales staff will be able to persuade chefs at smaller or less sophisticated kitchens to sign on for your products since the nominal monthly charge looks a lot smaller in comparison to the hefty upfront investment they previously needed to make.

However, imagine if your equipment had a few sensors that could alert you, the manufacturer (and service provider), to possible damage to the machines, inform you about wear and tear, and keep a track of how chefs used your product. What could that do for you?

Well, it could help you offer new services to your customers for a small premium.

Maybe you could alert the kitchen about upcoming maintenance issues for an added 10 percent on the monthly subscription. Or send over someone to repair it in time, if maintenance is included in your contract and part of the service you provide.

The first step to moving to the servitization model

The hardest thing about moving to servitization business is getting started. A traditional business operates on a cash-and-carry basis or maybe provides credit for a few months. As a result, the business has a lower working capital requirement.

However, shifting to an ‘as-a-service’ model means that bills for raw materials, labor, and overheads will need to be settled immediately while revenues from the products created might take months or even years (depending on your pricing model and terms of the service/subscription contract you offer to new customers).

Hence, businesses contemplating a transition to a servitization model need to ensure that they plan and arrange for the capital required before they make the move.

Operating on the servitization model

Once you’ve arranged for the capital, it’s easy to make the transition to a servitization business especially if you have the support of your sales staff and can find some exciting new clients to serve.

However, the most important thing about running a servitization business is making sure you and your staff understand that you’re in the “services” domain now.

This means, providing value and support to the customer has to be at the center of everything you do.

Businesses that successfully transition to a servitization business model tend to create a new unit within their business that takes care of customer’ questions, liaises with them regularly, and nurtures the relationship to earn their trust and loyalty.

Can you avoid the transition?

Well, there’s no guarantee that simply transitioning to a servitization business model will provide a better chance of surviving or thriving in the marketplace, or avoiding the transition will spell doom for existing businesses.

What’s most important for businesses is to understand their own industry, product, and customers. And while the servitization business model promises new opportunities, it’s not the solution for everyone.

Say, for example, you’re a manufacturer of cheap ball pens that sell US$2 a dozen. It makes little sense to morph into a service provider.

However, what makes sense in today’s customer-first world of commerce is for the ball pen manufacturer to find a few other partners from within the stationery industry and offer ‘office supplies as a service’ through a joint venture of some form.

At the end of the day, businesses simply must understand that customers have a lot of power and they’re constantly exercising that power with their wallets. To survive and thrive, businesses must keep their customers happy.