The Growing Challenge of Monetizing Servitization and How to Address It

Making the decision to shift towards a service-oriented growth strategy has probably never been so easy. With experts floating the concept of servitization as the logical way to bring in more revenue and build resilience in times of acute change, industry players are increasingly encouraged to think about heading into a profitable servitized future.

Whether by choice or necessity, many industrial organizations have already responded to expert advice and started gravitating towards servitization—a strategic practice that allows industry players not only to produce and sell equipment but also to offer supplementary services for creating and capturing additional value. Firms correctly recognize the importance of bundled product/service offerings in efforts to keep pace with shifting customer and market demands. There are even signs that the major efforts put into service-led growth are paying off; findings from IDC’s Servitization Barometer report indicate that firms pressing ahead to adopt servitization show profitability improvements.

Concerns, however, still loom in the background. The move to servitization takes more than bundling value-added services with products; it requires an extensive rethinking of the firm’s business model and product development strategy. Moreover, industry players need to find ways to monetize the related services. But the lack of monetization know-how, which often emerges as one of the most significant hurdles in the way of achieving servitization, steadily persists in industrial environments.

How do firms pivot to convert their service-led efforts into tangible revenue streams? Here are a few ideas to consider prior to committing to a monetization strategy for service-based offerings.

It Is Easier for Industrial Firms to Venture Into Value-Based Monetization

Servitization is, at its core, a continuous process of enhancing value. As a result, firms may logically want to invest in value-based plans not only when it comes to providing a service, but to monetize it, too. This approach brings to the fore a method of “quantifying product monetization along with [the customer’s] willingness to pay,” experts note.

Estimating a customer’s willingness to purchase is a primary stepping stone for successful value-based monetization. Interacting with clients before launching a new service can help firms explore the true potentiality of current monetization plans—allowing them to prioritize, optimize, or customize strategies for revenue growth accordingly when necessary. Ideally, industry players will center these conversations predominantly around the value provided through the firm’s new services.

For example, a firm operating in industrial environments can develop value-added services by assuming full responsibility for:

• Monitoring the condition of sensor-equipped machinery to prevent asset failure and maximize equipment uptime.
• Planning and performing maintenance or timely repairs to reduce operational costs.
• Offering prolonged warranties and providing replacement parts in OEM quality.
• Using audio/visual technician assistance for faster service completion times.
• Introducing customers to self-service for minor issues to minimize waiting times.
• Applying performance-based contracts to consistently improve accountability and service quality.

Value is an outcome that essentially drives buying decisions; the value, in this case, is the lifelong support offered by the industrial firm and the quality of this service. Selling this type of value can even remove some of the uncertainty customers may feel around investments amid the pandemic-infused economic slowdown. Recent studies of customer behavior changes driven by COVID-19 confirm that there has been a shift to value-based purchasing in the past year—meaning that buyers increasingly prefer to pay based on the quality and efficiency of service. It is important for industry players to commit to performance-based agreements to increase accountability for the delivery of services and ensure that quality standards are properly attained.

Experts Are Warning Against Disjointed Practices

Cautions regarding the use of disjointed practices have long been issued by experts, but the latest data is showing only a glimmer of improvement. A recent servitization study reports that 39% of firms have joined-up systems and operations in place; 14% of organizations, however, still struggle with siloed operations, manual processes, and fragmented business systems. This goes to show that a significant number of firms have yet to forge connections throughout their value chains.

When organizations invest in advanced technology systems and rely on integrated value chains, they end up “operating like an ecosystem [and] feed data in and out of the company,” according to experts; that data can be confidently monetized by firms pursuing servitization. Firms may need to restructure and routinely optimize their value chains to better respond to changing customer needs, diminish potential value leaks, and maximize revenue opportunities.

Looking to align value with pricing and the customer’s willingness to purchase can also help with obtaining new servitization gains.

“How you charge is as or more important than how much,” professionals at Simon-Kucher & Partners remark as they outline an instructive approach to monetize servitization: “aligning on price model, metric, and level based on service value and customer willingness-to-pay.” Here is how this procedure would apply:

“A differentiated pricing model, such as the two-part tariff, reduces this risk, as starter packages cover one-off expenses for hardware and integration costs. Whether companies make a profit depends on the price metric. The number of possible price metrics is nearly infinite, ranging from usage-based to performance-based to result-based models. The price level is usually determined using the fair value approach, i.e. by simulating the customer benefit.” — Simon-Kucher & Partners 

Achieving full servitization is a matter of evolved business models, integrated operational frameworks, and routinely optimized service value chains that broaden the potential for tangible revenue opportunities.

Time Is Ripe for the Pursuit of Service-Led Business Growth

Industrial organizations had to revise their operating models to systematically support a sustainable recovery from the COVID-19 pandemic. More challenges are on the way for those seeking to succeed in the post-COVID-19 world by navigating the inevitable transition to service-oriented business models—possibly none more grueling than monetization.

Firms continue to pursue servitization, but many fail to move ahead with plans for monetizing their new offerings due to a lack of know-how.

It is not enough to flesh out the value of service-based offers to generate new and tangible revenue streams. Understanding how customers perceive the value of a new service and evaluating their willingness to pay for it will allow firms to come closer to monetization success. Additionally, industry players using advanced technologies and integrated approaches will be better equipped to improve the performance of their value chain activities and fully optimize new servitization revenue streams.