How to increase revenue and profit through servitization

Servitization can drive up revenue and profit. But it requires extensive changes to both the business model and culture. The practical guide ‘Becoming a solution provider: Integrating in the customer process’ from CBS shows this.

What is servitization?

Servitization is when a company goes from selling products to customers to ultimately handling the entire process that the product helps to address the customer’s need. In connection with servitization, you work with different levels of integration in the customer’s processes. At a low level, it may be a periodic service of products as an example. At a high level of integration, the supplier does not sell products, but to a large extent services and handles the entire process for the customer, including e.g. monitoring of performance, process optimization and product development within the field.

What does servitization mean for the supplier?

A servitization strategy where a supplier goes from selling a product to providing an ongoing service is a major transition. An example in the practical guide is Volvo Construction Equipment, which previously exclusively manufactured and sold construction machinery, but now also performs process optimization for its customers among other things. There is great potential in this type of change, including the reduction of dependency on the product, and it provides new revenue opportunities and a stable turnover. However, it also poses a risk to the company’s earnings in the short term. Both opportunities and risks from a supplier’s perspective are outlined in the guide.

What does servitization mean for the customer?

The customer can focus on their core services and avoid the risk by investing in technology and competencies that may become obsolete in a few short years. In addition, servitization also results in a reduced balance sheet (and resulting better performance indicators) and less binding of liquidity.

What makes servitization possible?

Part of the basis for the new business models and services is the development within IT, IoT and communication technology – including big data, connection of equipment and products along with remote diagnostics. In the practical guide, you can read about examples of how you can increasingly enter into partnerships where a company’s products come online and contribute with data, insights, and new opportunities.

What does it take to establish servitization?

A lot. The guide presents experiences from both Europe and the US, and they show, among other things, that there is a radical change in the company’s business model, organization, and culture. Thus, the development from producing and selling a product to providing a service and handling a complete process is complex and it requires a lot of planning and effort.

What requirements does servitization have for the business model?

The classic business model for product development must be expanded so that it moves up the steps for servitization, which the practical guide outlines, and in the long run provides comprehensive solutions that handle the entire process for the customer. This entails new conditions and risks. Products that could previously be sold become investments for the supplier, and equipment and spare parts for the original product go from being a source of revenue to being an expense. Such changes require a new business model with new KPIs.

What competencies does servitization require?

The practical guide defines several necessary new competencies – e.g. in terms of being able to develop and deliver services and IT solutions – that are necessary in order to achieve success with service-based business models. It also requires that you develop a strong and customer-oriented corporate culture, where there is a focus on understanding the customer and their challenges.

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