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Three reasons your manufacturing business should take notice of servitization

23 January, 2017
Take notice of servitization

If you’re a manufacturer that is trying to compete on product and pricing alone, I would like to take this time to introduce you to servitization.

Servitization is based on the premise that by integrating products with services, you can create bundles or service plans that are of greater value to customers than just selling your products alone. By moving from purely providing products to being service providers too, it adds another level of value to your product offering and has the scope to generate additional revenue.

This transformation has been said to disrupt businesses for manufacturers globally, especially with the rise of IoT and more enhanced ERP making the process more convenient and streamlined. You might be thinking that this is just another industry buzzword, but it isn’t, the liked of Rolls Royce and Siemens have already adopted this model successfully and you should too. Here’s three reasons why:

Remain competitive

More and more manufacturers are adopting this strategy and change to their business model, if you decide not to follow suit, you could run the risk of being left behind as your competitors pull ahead.

With the buying habits of customers continually changing due to rapid developments in technology, globalization and financial instability, it is expected now that there should be more value when working with a business than a product alone. And as manufacturers face challenges from developing customers with significantly lower production costs, price is no longer as easy to compete on.

To remain competitive in this evolving world of manufacturing, you have to differentiate. You are the experts on your products, how they work, how they can be more efficient, and you know what to do when things go wrong. By creating a service offering that maximises your knowledge and enables your customers to rely on you for support, you can remain competitive.

If you combine servitization with the latest advancements in technology such as IoT, ERP and BI combined you open your business to a world of opportunities. The ability to track and analyse data and your businesses functionality in real time means that you can use your customers to inform design for new products or higher tier service offerings.

Increase customer retention

By changing to the servitization model, you’re giving the customers what they want. At the core of servitization, it’s really a win-win situation. Andy Neely, Director of the Cambridge Service Alliance at the University of Cambridge says:

“In the past, if I sold you a product, I would only get involved again if something went wrong, so, in some ways, it would be in my interest for this to happen, as I would make money from repairing it. If instead I sell the ability to use the product to achieve an outcome, then it is in my interest to make the products work for as long as possible, requiring minimum maintenance. This is also what the customer wants.”

Through the value-added service model, you are much more closely involved with delivering the outcome for a customer over a long period of time, which ties them in, and gives you the chance to nurture a solid long-term relationship with them. Servitization opens up more opportunities for you to delight your customers and build a lasting bond, rather than have a customer, supplier divide.

The added value from such a customer relationship has mutual benefits, with you as a manufacturer benefitting from information that can inform product design, quicker entries to market and increased revenue streams. And the consumer gets up to date, efficient, best in class kit with an expert service plan to go with it.

Financial stability

With long-term service contracts comes a guarantee of regularly recurring revenue, and the opportunities for you to upsell to your loyal customer base. Researchers have observed that manufacturers a ‘high-installed’ product base, can often see higher revenue potential through the implementation of service plans as opposed to new product sales.

Sales in service also seem to be a steadier source of revenue, as increasing service revenues can serve as compensation for declining revenues from equipment sales. Service plans and support are also a lot more resistant to the change in economic cycles and therefore they can support steadier cash flows in times of economic turbulence and uncertainty. Due to this lower sensitivity, service offerings are a lot more likely to provide higher margins and rates of return compared to pure product offerings.

With this said, manufacturers that will succeed financially when implementing servitization are those who look at the bigger picture. It isn’t only about adopting the service strategy, but also the service sale skills, information systems and tools to enable service deployment that need to be taken into account. Alignment of your businesses operational strategy is paramount for seeing the financial success with servitization.

If you want to understand more about how servitization could benefit your business, and to learn what you should do next, you can take our servitization assessment here. Following your completion, you will receive a detailed report showing what you need to do to get started on the servitization journey.

Categories: Manufacturing