Servitization Business Model: Key Metrics & Comparison

The servitization business model revolutionizes how companies meet customer needs. It moves manufacturers and OEMs beyond selling products only and enables them to offer a comprehensive solution that encompasses both the product itself and ongoing services.
April 1, 2024


min read

Servitization Business Model: Key Metrics & Comparison

What is the Servitization Business Model?

The servitization business model revolutionizes how companies meet customer needs. It moves manufacturers and OEMs beyond selling products only and enables them to offer a comprehensive solution that encompasses both the product itself and ongoing services.

What is servitization? Imagine a manufacturer of industrial machinery: traditionally, they'd sell the machine and move on to their next customer, or at most, sell a package of support services. With servitization, manufacturers can offer preventative maintenance plans, performance optimization, remote monitoring and updates, pay-as-you-go plans, and much more. This creates a win-win situation - the manufacturer builds a stronger, recurring revenue stream through service contracts, while the customer benefits from maximized product uptime, reduced operational risks, and potentially lower overall costs.

The servitization model offers many other advantages, too. With servitization, companies can cultivate deeper customer relationships by becoming trusted partners in their success. Additionally, data collected through service interactions allows for continuous product improvement and innovation. Perhaps most importantly, servitization unlocks the potential for higher profits from recurring service revenue streams compared to one-time product sales. It aligns perfectly with the growing trend of customers seeking subscription-based solutions that shift focus from capital expenditure (buying a product) to operational expenditure (paying for ongoing service).

Core Principles and Key Advantages

The Servitization Business Model is a customer-centric approach that transforms companies from product sellers to solution providers. By integrating services with products and focusing on customer outcomes, Servitization unlocks a range of benefits. Following are some of the core principles and key advantages of servitization:

Core Principles of Servitization

  • Product-Service Integration – With servitization, the core product becomes part of a larger solution that includes ongoing services.
  • Focus on Customer Outcomes - Servitization lets companies focus on the customer's desired outcome - helping them achieve their goals and not just selling the physical product.
  • Recurring Revenue Model - Servitization aims to establish long-term customer relationships through service contracts, generating recurring revenue instead of one-time product sales.

Key Advantages of Servitization

  • Stronger Customer Relationships - By providing ongoing support and becoming a partner in the customer's success, companies build stronger and more loyal relationships.
  • Product Innovation - Data collected through service interactions allows for continuous product improvement and the development of new service offerings.
  • Increased Profit Potential - Recurring service revenue streams can generate higher and more predictable profits compared to one-time product sales.

Servitization Business Model: Real Life Examples

This new business model can be applied in multiple ways. Some of the key use cases include:

Use-Oriented Services

Use-oriented services encompass various offerings like leasing, renting, and product-sharing - all focusing on providing access and functionality over product ownership. By way of example, consider a software company that traditionally sold licenses for a design program. With use-oriented services under servitization, they can offer a subscription model. Instead of customers owning the software outright, they pay a monthly fee for access and ongoing services like updates, cloud storage, and online tutorials.

Results-Oriented Services

Results-oriented services showcase a manufacturer’s focus on customer outcomes. In this model, companies go beyond simply providing a product or access, instead guaranteeing a specific result for the customer. A prime example can be found in the elevator industry. Traditionally, companies sold elevators outright. With servitization, they might offer a "performance-based" package. The customer wouldn't own the elevator but pay a fee based on factors like guaranteed uptime or energy efficiency.

Product-Oriented Services

Product-oriented services enhance the value of the core product. These services directly complement the physical product, extending its functionality and lifespan. By way of example, in the medical equipment industry, traditionally, companies sold medical imaging machines like MRI scanners. With servitization, they can offer comprehensive service packages. The customer would still own the machine, but the company would provide ongoing services like maintenance, staff training, software updates, and more.

Servitization Model vs Traditional Models: A Comparative Analysis

The servitization business model offers a distinct value proposition compared to traditional business models based on ownership. By focusing on providing access, functionality, and desired outcomes, servitization fosters long-term customer relationships and continuous product innovation.

Feature Traditional Model Servitization Model
Focus Selling physical products Providing access, functionality, and desired outcomes
Revenue Model One-time product sales Recurring revenue from services (subscriptions, usage-based, performance-based)
Customer Relationship Transactional Long-term, partnership-based
Product Innovation Limited, driven by internal R&D Continuous, driven by customer data and feedback
Customer Costs Upfront capital expenditure for product purchase Potentially lower overall costs through predictable service fees and access to updated equipment
Company Risks Relies on one-time sales success Risk of customer churn if service value proposition is weak

Financial Implications of Servitization

Servitization's financial impact is a double-edged sword. While it offers the potential for increased profitability, there are also challenges to consider.

On the positive side, servitization unlocks recurring revenue streams through subscriptions, usage-based fees, or performance-based contracts. This creates a more predictable income flow compared to one-time product sales. Additionally, servitization can lead to higher profit margins on services compared to the hardware itself. Furthermore, data collected through service interactions allows for product optimization, potentially reducing manufacturing costs and improving product lifecycles.

However, servitization also presents financial hurdles. Transitioning to this model requires investments in new capabilities like service infrastructure and customer support. Additionally, effectively delivering services can be more complex than simply selling products. There's also a risk of customer churn if the value proposition of the services isn't strong enough.

Overall, the financial implications of servitization depend heavily on successful implementation. Companies that can effectively manage the transition and deliver valuable services can reap significant financial rewards.

Key Metrics and KPIs for the Servitization Business Model

Effectively measuring success in the servitization business model requires a shift in focus. While traditional models prioritize sales figures, servitization demands tracking metrics that gauge customer satisfaction, service delivery, and recurring revenue generation. Here are some of the key metrics and KPIs for servitization:

10 Key Metrics and KPIs for the Servitization Business Model

  1. Customer Acquisition Cost (CAC) - Tracks the cost of acquiring new service contracts.
  2. Customer Lifetime Value (CLTV) - Measures the total revenue a customer generates throughout their relationship with the company.
  3. Monthly Recurring Revenue (MRR) - Tracks the predictable monthly revenue generated from service subscriptions.
  4. Annual Recurring Revenue (ARR) - Measures the annual predictable revenue generated from service subscriptions.
  5. Customer Churn Rate - Tracks the percentage of customers who cancel their service contracts within a specific period.
  6. Service Uptime - Measures the percentage of time a service is operational and available to customers.
  7. First Call Resolution Rate - Tracks the percentage of customer service inquiries resolved during the first interaction.
  8. Customer Satisfaction Score (CSAT) - Measures customer experience and satisfaction with the experience.
  9. Net Promoter Score (NPS) - Measures customer loyalty and likelihood to recommend the service to others.
  10. Service Revenue Margin - Tracks the profitability of service offerings by calculating the profit generated as a percentage of service revenue.

The Future of Servitization Business Model

The servitization business model is well-positioned for continued growth. With the rise of the "experience economy" - where customers prioritize access and functionality over product ownership - subscription services and pay-per-use models will become increasingly popular across industries. What’s more, advancements in technology like IoT (Internet of Things) will play a crucial role, as sensors embedded in products generate valuable data on usage and performance - allowing companies to personalize service offerings and optimize product lifecycles.

Additionally, artificial intelligence can automate service tasks and predict customer needs, leading to more efficient service delivery. Looking ahead, successful servitization platforms for OEMs and manufacturers will likely involve a combination of these elements, with companies offering a seamless blend of products, services, and data-driven insights to deliver superior customer value.


Subscribe to our blog
Insightful articles delivered straight to your inbox.
Insightful articles delivered straight to your inbox.