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Servitization: Moving from Products to Services with IoT

Moving from products to services – servitization – is something we in the IoT world have been talking about for a long time. Now, with digitalization in manufacturing well underway, more and more companies are understanding the benefits of making this move. Of course, it’s no secret that the subscription economy has impacted how we consume everything from music and movies to cars and printers. The subscription business model/servitization moves away from one-time transactions and instead allows companies to build loyal, long-term relationships with customers, delivering customer-centric services while also creating predictability. According to the Subscription Economy Index, companies that moved towards a subscription-based business model grew six times faster than traditional businesses in 2020.

The benefits of servitization are myriad. The first and perhaps most important benefit is that it allows you to meet customer demands, which ultimately leads to greater customer retention, something we all need to focus on as customer requirements increase. Another benefit is that customers only pay for the value received from a supplier, while the manufacturer no longer has to focus solely on units sold, and instead builds a profitable business from regular streams of additional, incremental revenue. Additionally, useful insights into future R&D processes can be gained by analyzing the performance of a product and using this information for continuous improvement.

Servitization is not about new pricing models or financial constructs, it’s about creating a new relationship with customers, one built on loyalty and one that requires companies to no longer focus solely on consumption, not on units sold.

When it comes to manufacturing, the question is if this customer-driven model works for Original Equipment Manufacturers (OEMs), where customers can ‘rent’ or gain access to machinery and industrial equipment for a recurring fee or subscribe to various add-ons? Through the use of IoT-enabled sensors and devices, the answer is a resounding yes.

A good example of this is Rolls Royce’s TotalCare program for aircraft engines. The company no longer simply sells engines to airlines. Instead, it invoices them on a Power-by-the-Hour basis, while continually monitoring the engines. This means airlines no longer need to buy, operate, or maintain engines, nor do they have to train personnel on repairs, or purchase and store spare parts. Instead, if an engine needs servicing, Rolls Royce takes care of it. And if the engine breaks down? The responsibility again falls on Rolls Royce. This allows both the airline and Rolls Royce to focus on what they do best: the airline moving passengers from point A to point B and Rolls Royce delivering a reliable service for its engines.

Rolls Royce is able to do this through embedded machine sensors and devices, which provide a steady stream of data on aircraft engine health metrics. In other words, the data that is fed back to the manufacturer provides information on the condition of parts and the overall product, allowing Rolls Royce to engage in predictive maintenance – i.e., address any challenges such as wear and tear or even potential failures long before they ever become a real problem, or, should anything break unexpectedly, Rolls Royce is automatically notified, allowing them to respond quickly.  This keeps equipment in service and also leads to an extended lifecycle, so it’s win-win for both Rolls Royce and its customers.

There are a number of compelling reasons why manufacturers should consider servitization:

Revenue growth & profitability

By adding services to your offering, you increase your number of revenue streams and those become recurring. Complimenting your existing product portfolio with ongoing services to your customers allows your income to become more predictable and secure, which in turn helps insulate you from fluctuating market conditions or a slow sales month.

Equipment complexity

We all know that machines and other equipment have become increasingly complex and technical, and it isn’t really possible for all customers to have the required level of expertise to effectively maintain their equipment. You, as the manufacturer, have the requisite knowledge and experience needed to not just understand how to operate and perform maintenance on machines, but to also advise on how to best maximize performance.

Improved customer outcomes

Focusing on solutions instead of products allows you to think in terms of your customers’ needs and goals, which means you can adapt products and services to help them achieve those outcomes, as well as helps you to respond faster to issues and challenges that may arise. The resulting increase in customer satisfaction builds a stronger relationship and increased loyalty.

Higher entry barriers

The more established your relationship with you customers, the more difficult it is for someone to come in and steal market share. Servitization means your customers benefit from your support and knowledge in real terms, every day.

If you would like to learn more about how IoT can help your business, please get in touch.