Gil Meier & Karima Madhany
By 2025, 79.4 zettabytes of data are expected to be generated from approx. 41.6B Internet of Things (IoT) devices, according to the IDC Forecast. Most of this data will come from non-personal business-to-business (B2B) and business-to-customer (B2C) interactions.
What is Servitization?
B2B Servitization complements products with value-added services, resulting in a more transparent and resilient sector where high efficiency and profitability can be achieved. For example, the maintenance and keeping of a fleet of customer vehicles on the road are offered as a service to supplement manufacturers'/distributors' traditional products.
Understanding the implications of Servitization in the context of global B2B distribution is essential.
The pivot from a product economy to a service economy, enabling a new level of efficiency in the end-to-end value chain: customer -> manufacturer -> raw material supplier, is highly evident in this space where customers consume an outcome instead of a product.
Why Should I Implement Servitization?
This concept of Servitization has developed over time out of the necessity for businesses to set themselves apart from competitors, build new and sustainable revenue streams to remain profitable and competitive and retain their customer base. Products alone will not sustain the business. Distributors are looking to differentiate themselves as they face:
- Compressed margins - deliver a high level of service, more for less and quickly.
- Market share shifting to non-traditional players – increasing competition from new entrants.
- High customer expectations of meaningful relationships and experiences
The life cycle of manufactured products is increasing, and with technological advances, higher quality products are being developed quickly; therefore, products need to be replaced less frequently.
In face of the growing competition and increased business pressures, manufacturers and distributors must look at transforming their business model to include a set of high-value services that can naturally complement the product model they have built a successful organization around. Through innovation from the customer's perspective, these businesses provide end-to-end solutions layering on additional services such as consultancy and solution delivery too.
This results in their customers purchasing an outcome instead of simply a traditional product or piece of equipment.
Once a high-value set of services have been incorporated, data-driven practices can be adopted – further benefiting from servitization by providing key insights making the provider more responsive and in tune with customer needs.
Shifting from a regular product-based service delivery business model that provides break/fix functions to a data-driven outcome-based business model offering enhanced digitalized services such as 24/7 remote monitoring or preventative maintenance and where uptimes are guaranteed.
In this scenario of data-driven outcomes where digital technologies are used to monitor products, giving advanced warning of faults, allowing for faster maintenance and repair, the business processes become more proactive and integrated with the customers' business processes, i.e., issues are addressed before they become actual problems. Design processes are also better informed about performance, so products and services improve. Technological innovation coupled with continuous improvements and enhancements means that products and services are well-designed and robust.
How can Servitization Make a Difference?
Distribution industries are ripe to offer additional value-added services and reposition themselves as service providers. They can take advantage of technological advances by understanding their customer's unmet needs, extending the customer focus along the customers entire value chain. Subsequently, to deliver this value, they must rethink their business capabilities, realign their talent strategy, and reconfigure the business architecture to embed the importance of the Product as a Service (PaaS) across the organization.
Servitization is therefore shaping a new and different future.
B2B distributors and original equipment manufacturers (OEMs) can exploit this to their advantage by leveraging real-time data generated within their supply chain ecosystems and using that data to analyze and increase asset utilization and availability. The smarter the products/services, the tighter the integration and connectedness of these products/services, and the more relevant the generated data. Trends are identified, and predictive actions and decisions can emanate from these systems. Current, state-of-the-art digital technologies make this possible. B2B industries can use low-cost intelligent sensors, embedded controllers, cloud technology, IoT, mobile applications, artificial intelligence, machine learning and 5G-enabled wireless communications.
In the last three years, many organizations have moved from conceptualizing the strategy to implementing pilots and scaling the strategy across products and service lines. The following is a brief review of a company where the product revolution and Servitization are underway.
Dutch electronics firm Philips is an excellent example of Servitization to Amsterdam-Schiphol airport. Amsterdam-Schiphol strives to be one of the world's most sustainable airports, receiving LED lighting-as-a-service from Philips. LED lamps are incredibly efficient but expensive to buy. Under this business model, Schiphol will benefit from a 50% reduction in electricity consumption without the upfront cost of purchasing the lamps. Philips retains ownership of the equipment and sells "light" as the service/product rather than the actual LED units. With "Internet of Things" (IoT) connectivity, Philips can monitor each lamp and replace faulty units often before the fault occurs, providing a comprehensive servitization package.
In Conclusion – the Pricing Model
Servitization is usually a subscription model and can be applied to most industries in one way or another, be that $xx/month to keep a fleet of vehicles on the road, or even $xx/month for the fleet.
Value-based pricing is another approach that distributors with a long history and experience in the product business can use. They can evolve from simple break/fix models to services-based models (using service contracts) to data-driven outcome-based models offering 24/7 remote monitoring and preventative maintenance. Again, customer uptime is the critical factor in the customer's price, with agreed-upon penalties for severe underperformance.
Data-driven outcomes and special contractual features make them more appealing to the customer. These additional value-add features include pay-for-use, assured product performance and even commitments to innovate products and reduce costs over time. In return for this added value, the customer agrees to long-term contracts of 2-5 years or even longer.
About Gil Meier, Principal Consultant, Digital Transformation
Gil Meier is passionate about ever-changing digital technology and its opportunities in various industries, particularly B2B.
Gil helps companies define and deliver their digital transformation growth by applying innovative products, services, and business models that take advantage of digital technologies.