Products Are Becoming Services

by Slavko Kastelic | Dec 23, 2019 | Blog

Consumers buy refrigerators to extend the shelf life of foods and to serve cold drinks during the summer months. They buy a car so they can optimally move from point to point. People and businesses buy their products (in most cases) to meet their needs, but this could be solved in other ways than just by purchasing a product.

Globalization resulted in lower profitability of products due to fiercer competition. Refrigerators from different manufacturers differ more or less only by brand name, and manufacturers can only differentiate with the price. However, only by reducing the price, companies can no longer survive or provide revenue to shareholders, so they look for new business models.

Services achieve a higher margin, so many manufacturing companies choose to offer their products as a service. This has an additional effect - companies get regular monthly revenue instead of a one-off payment for selling the product.

Enter servitization and new business models

Changing consumer habits are telling us that people prefer sharing economy over product ownership. This is opening the whole new way to new business models. Solving a consumer problem as a service also means that the manufacturer can add services to the basic product. And earn more money. This is called servitization. It can be offered by the manufacturer or by an independent service provider.

Let me just list a few examples based on this principle:

  1. Apple: In addition to the classic phone sales, it offers a program called iPhone Upgrade Program, which provides users with a new phone every year, insurance against damages and an assurance that the phone will work flawlessly with the local communications provider.
  2. Volvo: In addition to classic car sales, Volvo also offers the Care by Volvo program in some countries, which advertises with the slogan " Everything you need. One monthly payment." This means that the service includes the car itself, insurance and maintenance. You can configure the car online and confirm the rental by just entering your credit card. Volvo, in this case, is playing the car leasing, which based its service precisely on such a business model. This also means that the added value has transferred over to the car manufacturer.
  3. The e-scooter boom is also very interesting to observe as it has a profound effect on mobility, delivering great changes. There are several providers of e-scooters in every major city. In Ljubljana, for example, you scan the code on the e-scooter, an application opens on the mobile phone, telling you the starting fee is 1 euro, and the provider charges an additional 10 euro cents per minute. You can pick up and leave the scooter anywhere in the city.
  4. Outotec: The most complex model of servitization that we have come across is the performance-oriented business model, where the supplier ensures the execution of the work process. Outotec mining equipment manufacturer is responsible for running the mining operations by guaranteeing and selling a cost per ton. With this, the supplier is deeply involved in the process itself, and it is also very difficult to be replaced by a competing company.

Providing a very high level of service to the customers, however, requires manufacturers to be able to monitor and control the performance of products remotely, so that they can take action in the event of defects and irregularities.

Building a cycle of continuous improvement

The rapid development of IoT and its incorporation into products itself allows manufacturers to closely monitor consumer behavior and understand their needs, expectations, and challenges. Engineers and designers will no longer have to guess how their products work in practice, as they will be able to collect and see actual data. This way they will be able to identify their customers' habits and adapt to them with new products or services.

Contact us to brainstorm about the solutions of managing large amounts of data.


*For further reading we recommend our blog - IIoT is Business Driven and vice versa