“Servitization” (bundling of products with services) has become an imperative in today’s economy, especially in developed markets. Product companies that do not embrace this concept are bound to face stiff competition from low-cost manufacturers in emerging markets. Key among the risks they face is the prospect of being forced out of the market in the long term. Hence, the benefits of servitization are too compelling to ignore.

1. - Dr. Martin Lockstrom
Driving Revenue Through Service Innovation
INSIGHTS

2. Introduction
Most company executives have ambitious
growth plans. It’s not uncommon to see
revenue growth targets of 10-15% per year,
even though overall markets might grow
at a more modest rate of 2-5% depending
on geography. Obviously, this means
that it is not sufficient to simply protect
one’s market share and grow with the
market, but more importantly, to create
new revenue streams from new products
and services. In recent years, many
manufacturers in developed markets have
been struggling to stay competitive as
competition especially from manufacturers
in emerging markets has mounted. Those
that have survived and are still thriving all
have something in common: they have
made a transition from a product-centric to
service-centric organization.
Servitization – What is It?
As products across all industries are
becoming increasingly commoditized,
many companies are trying to adopt a
more service-oriented business model. The
development is logical: research suggests
that Western companies have to reduce
their cost by at least 30% in the mid-term
in order to stay competitive. Servitization
means that a producer bundles the
products with services into a solution, with
the objective of creating new revenue
streams.
There are also other rationales behind;
for instance, a service solution is more
intangible in nature vis-à-vis a pure
product, meaning that it is harder to
analyze and imitate by competitors,
meaning that profit margins potentially
should be higher, at least in the short to
medium term. Furthermore, a service
solution is also more outcome-oriented,
meaning that the producer gets paid for
helping the customer to reaching an end
rather than providing a means to an end.
This also helps in negotiations, as the
rhetoric can effectively be shifted away
from pricing toward value.
One of the pioneers in this area is Rolls-
Royce, which launched its“Power-By-The-
Hour”concept in the 1960s (Figure 1). It is
important to remember that servitization
is distinctly different from leasing, where
the latter is merely a way of spreading a
cash flow over an extended period of time,
whereas the former is about creating new
revenue streams.

3. Table 1. Producer and customer benefits of servitization
Figure 1. Servitization at Rolls-Royce
POWER-BY-THE-HOUR AT ROLLS-ROYCE
Situation:
In the 1960s, RR wanted to improve customer service
and help them shift CAPEX to OPEX
Solution/Innovation:
RR took responsibility for delivery, operations,
maintenance and repair throughout its lifecycle.
Basically means paying for a jet engine as a service
only when it is used (and working) through a
fixed-fee per flying hour. Usage time was manually
recorded and approved mutually on trust basis
Outcomes:
Reduced total cost of ownership (TCO) for customer
and higher revenue for RR, lower capital expenditure
The Case for Servitization
Customers increasingly adopt more of a variable-cost structure with as low upfront investment as possible, i.e. buying construction and
industrial services on demand instead of a one-time purchase. A viable way of winning and keeping customers is to reduce complexity
and simplify for the customer, particularly through servitization of product offerings, e.g.”pay for a hole instead of a drill”. An overview of
servitization benefits for customers and producers are shown in Table 1.
As can be seen above, there are clear benefits to both parties involved, which can explain the success of the model. Servitization has
taken place in most industries; an overview of illustrative cases is shown in Table 2.
PRODUCER BENEFITS
• Predictable and constant revenue stream from
subscribed individuals for the duration of the
subscriber’s agreement.
• Reduce uncertainty and the riskiness of the
enterprise.
• Greater customer intimacy through more regular
customer interaction.
• Higher average customer lifetime value (ACLV) than
that of nonrecurring business models
• More potential for upselling and cross-selling other
products or services.
CUSTOMER BENEFITS
• No need for upfront investments
• More predictiable cash flow
• Lower threshold for making purchase decision
• Greater incentive to maintain relationships with
their customers (after all, why should they care once
they’ve received their money?)
• Better opportunities of alignment with customer’s
goals and expectations
• The customer that receives value is more likely to
buying the service and possibly at an increased rate
in the future.

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Author Profile
Dr. Martin Lockstrom
Principal Consultant, Building Tomorrow’s
Enterprise, Infosys Labs
Martin is a specialist in Supply Chain and
Operations Strategy, Outsourcing/Offshoring
and International Management. During a
six-year stint in China, he established the
research and education activities at the SCM,
Sustainability and Automotive academic centers
at China Europe International Business School,
Shanghai.
He established the first endowed chair
for Purchasing and SCM in China at Tongji
University, Shanghai, and was also responsible
for setting up Supply Chain Management
Institute China, an international network of SCM
research and education hubs.
Martin co-founded Procuris Solutions, an IT
company specializing in SCM-related solutions,
offering consulting services to companies like
Accenture, Ariba, BMW, Clariant, Dell, Dow,
Ernst & Young and Intel, among others.
He has a Ph.D. in Supply Chain Management
from European Business School, Germany, a
bachelor’s and master’s degree in Industrial
Engineering and Management, from Chalmers
University of Technology, Sweden. He speaks
Swedish, English, German and Chinese, has
published over 50 articles and papers and
presented at more than 60 conferences.
Summary and Conclusion
Servitization has become an
imperative in today’s economy,
especially in developed markets.
Product companies that do not
embrace this concept will face
serious competition from low-
cost manufacturers particularly in
emerging markets and risk becoming
forced out of the market in the long
term. Servitization helps improving
the inimitability of products offered, as
well as helping creating new revenue
streams, ultimately leading to deeper
customer relationships. It is also
very attractive from the customer’s
perspective as it reduced the need
for upfront investments, instead
allowing a more stable and predictable
cash flow over time. From an overall
perspective, the mutual benefits are so
compelling that the concept cannot,
and must not be neglected.
Company Industry Project Focus
Southwest
Airlines
Airliner
Southwest Airlines compete on service and constantly
innovate, using their innovative culture to maintain a
competitive advantage.
Mayo Clinic Healthcare
The Mayo Clinic is constantly innovating how they deliver
their services to their“customers”
Apple
Consumer
electronics
Apple sells iPods but makes money with the iTunes service
Royalty Food retailer
They are exporting their innovations and other countries
are paying the“royalties”.
Retail Clothing
Created a new retail category by focusing on an unmet
customer demand
Atlas Copco Machinery Predictive maintenance services
Bank of
America
Banking
Bank of America has over 300 people with Innovation in
their title, the best Canadian bank has around 10.
Table 2. Cross-industry servitization examples