Definition:

Servitization

Servitization is a new business model that let manufacturers offer their product as a service instead of selling products directly to consumers. Rolls-Royce, Spotify, and Netflix are good examples of companies that offer this commercial scheme. It is a budget-friendly concept that offers convenience for consumers and in some cases help promote a circular economy that reduces or eliminates waste.

Netflix and Spotify offer online versions of media – music and movies – instead of selling DVDs and CDs that produce the same outcomes as the online services. Not only is this system in tune with today’s digital age, servitization in the music and media industry also prevents discarded DVDs ad CDs from ending up in landfills and oceans as non-biodegradable waste.

With servitization, businesses can offer additional services that supplement their products. Companies can offer maintenance of a building’s lighting system for example, or keep a fleet of company cars in good running condition aside from providing the vehicles through lease contracts or on rental subscriptions.

Offering a product as a service was developed out of the need of industries to remain profitable and competitive while adding value to what they offer. The term “servitization” was coined in the 1980s but the concept has been around since the 1960s when Rolls-Royce introduced “power-by-the-hour” wherein the company offered fully-maintained aero engine used and billed by the hour.

When servitization follows a circular economy strategy of “reduce, reuse, recycle and upcycle” the environment benefits as well. With this platform, merchandise offered as a service to customers are designed in a way that let the products be dismantled for efficient recycling at the end of its lifecycle. This allows the manufacturer to reuse parts of broken and used up items for another product.

A survey of around 750 manufacturers in 16 countries found that more companies today offer supplementary services such as maintenance, replacements, and disposal. Close to 70% of those surveyed said they were offering some type of product as a service. Almost ¾ of managers deemed servitization as a means of establishing a longer and stronger customer relationship.