Welcome to the service economy. Extended warranties, online help, home delivery, installation and repair services are quickly becoming expectations rather than "above and beyond."
The transformation of companies from just selling products to providing offerings as well as other related services is known as servitization. Some analysts have hailed servitization as a very disruptive model. "It’s ultimately changing the manufacturer from selling products to offering capability. It’s a fundamental change in how you approach customers, as well as how you bill them and maintain the products you sell them," according to one white paper.
In other words, manufacturers are transitioning from selling products to selling customer outcomes. According to a recent survey of 750 manufacturers in 16 countries, 68% of respondents claimed that servitization is already either ‘well-established and is already paying dividends’ in their company or ‘in progress and is receiving appropriate executive attention and support.’
Customer charges may be based on usage or other agreed upon performance metrics. IFCO RPCs are an example of the servitization transformation, with the cost to the shipper based on each crate usage, rather than on the cost of purchasing a new container for every shipment.
Manufacturers of durable goods see the migration to the service model as a way to maintain customer relationships. Rather than relying on third parties to provide replacement parts and repair services, manufacturers can establish closer relationships with shoppers, keeping the manufacturer at top of mind when it comes time to make a replacement purchase. Service models also generate an increasingly significant portion of revenue versus sales. The interplay between product sales and service offerings varies widely across industries and is known as the service-product continuum.
Servitization is also an approach that gives producers pause to rethink product design. If profitability is tied to product’s performance over its lifetime, then manufacturing emphasis shifts from making the cheapest product to making one that offers the most beneficial solution over the product’s lifetime. Durability and ease of repair take on greater importance. And as it turns out, servitude models are more closely aligned with circular economy aspirations – an increasingly urgent customer priority. Goods that are more durable and can be repaired before ultimately being recycled, tend to be more sustainable than short-lived products.
Discussions of servitization as a trend seems to mainly be associated with durable goods. Nonetheless, service initiatives are increasingly critical for food retailers.
With online grocery expenditure projected to grow to 20% of the market by 2025, e-commerce stands out as one service area that retailers cannot ignore. Other expanding service revenue opportunities include ready-to-eat solutions, meal kits, and in-store food and beverage provisions. In-store eating experiences can boost store revenue while enhancing the shopping experience and provide product promotion opportunities. As the cost of technology drops, shopping experiences will become increasingly personalized.
Other service innovations such as automated checkout technologies, including "Scan, Bag, Go", will provide a better customer experience regarding expediting customer payment, and cutting costs associated with it.
And that is the magic of the servitization transformation. Businesses are poised to prosper through offering services that are increasingly focused on optimizing the customer experience. They can deliver more sustainable product lifecycle choices while establishing deeper customer relationships in the process.