Servitization and the digitalisation of the Product-Service System
We welcome our guest blogger Stefano Butti, CEO and Founder at Servitly.
Digital technologies, especially IoT, are crucial to any servitization initiative. This is why, as a matter of fact, all the companies that have undertaken servitization have implemented a new digital system to support their newly defined product-service system (PSS).
Systems of this type are becoming so widespread and have such similar features that we can collect them under a new category of software: the Digital PSS (you can find more on this subject here: Good morning Digital PSS).
As we said, the digitalisation of the PSS at first is a primary necessity. Companies initially design it to collect and manage the new information needed to implement the new service offering. In this effort they almost always make use of IoT technologies.
In reality, the impacts of an IoT-based, digitally-enabled PSS can extend far beyond these primary needs. This extension is the greatest benefit of extensively using a Digital PSS.
The Business Model Canvas of a PSS
To understand and evaluate the potential impact of a Digital PSS on the business model of a manufacturing company we will use the Business Model Canvas.
The Business Model Canvas is our tool of choice and we use it a lot in our work with companies. We find the division of the business model into nine building blocks helpful to think through the impact of an initiative or innovation. The extensive digitalisation of the PSS has a positive impact on many of the building blocks, so let's see in detail which ones.
The new product-service system already has, of course, an intrinsic value proposition. Its value generally depends on how "advanced" your services are.
However, the digital component of the PSS can further enrich this value proposition.
This can happen thanks to digital services (also called smart services): capabilities you offer your customers through digital technologies. These capabilities offer your customers additional benefits over and above those already achieved through advanced services.
They can be useful information or advice to improve the performance of the product or customer's process, digital functionalities to save time in operational activities or automations integrated with the customer's IT/OT system.
Very often this is a great new opportunity that opens up thanks to servitization: establishing a relationship with your customers.
Traditionally, product-centric companies sell their products through a distribution chain and have no contact with, or even knowledge of, their end customers.
Servitization changes this scheme and aims at a long-term relationship with customers. The digitalisation of the PSS plays a key role in this step. In fact, although the provision of advanced services increases opportunities for customer relationships, it is only through digital that this relationship can be virtually continuous over time.
As already taken for granted for service companies (telecom, banks, utilities), manufacturing companies also come into direct contact with customers thanks to "rich customer portals".
The purpose of a "rich customer portal" for a manufacturing company is, on the one hand, to deliver digital services to customers (see previous paragraph) and, on the other hand, to enrich the product-service offer with information and details in order to foster trust, credibility and the spirit of partnership between supplier and customer.
Channels (dealers, distributors, technical assistance centres) are often not at the top of the list when designing the new product-service system. However, most companies have a prevalence of indirect sales over direct sales. Thus, the success of a servitization initiative is strongly related to the ability to involve, manage and incentivise channels.
As with customer relationships, digital capabilities play a key role here too. All actors involved in the channels must have their own space in a complete DPSS system. As resellers, the DPSS is the tool that allows them to manage the life cycle of the new PSS offering.
As providers of "physical" activities related to the new service contracts, the DPSS gives them all the information they need to increase the operational efficiency and optimise their operating margin.
Finally, the DPSS gives channel stakeholders all the additional information and details to make them feel part of the manufacturing company's major servitization project, thus motivating and pushing them in the same direction.
This is the area where most companies have focused their digital initiatives so far. Manufacturing companies that have embraced servitization have begun to leverage IoT and other digital technologies to optimise their service operations, thereby reducing their costs.
Let us now consider the most important of the blocks. The goal of every business model is to generate profits. In addition to optimizing costs, it is therefore essential to maximize the revenue generated by the value proposition. The digital component of PSS can also help a lot in this goal. There are at least 3 important points.
1) Subscriptions and recurring revenues
The transition from selling a product to selling a PSS typically leads to a business model based on subscriptions and recurring revenues. These may be related to the sale of advanced service contracts (such as full-risk all-inclusive maintenance) or even the entire product as a service (Equipment-as-a-service).
A comprehensive DPSS system helps the OEM and all its channel stakeholders to manage subscriptions, automate payments and generally maximise the renewal rate.
2) New pricing models
Depending on how "advanced" the related services are, the pricing model of a PSS may vary: from a simple time-based subscription, to a pay per use model, to more advanced models such as pay per availability or pay per outcome.
In any case, the role of a Digital PSS is to support the OEM in calculating the periodic fee as clearly and comprehensively as possible for all stakeholders. In this way the DPSS instills confidence in customers and distribution channels, giving a further boost to sales and renewals.
3) Digital services monetisation
Finally, sometimes the digital services that make up the value proposition (see paragraph above) have so much value for the customer that they can be sold on their own, separately from the advanced service contract, or even without it.
In this case the role of a Digital PSS is fundamental. In fact, the DPSS is the actual means to sell and monetise digital service subscriptions.
If you are thinking about how to leverage IoT and other digital technologies to support your servitization initiative, don't just focus on extracting data and information to optimise your service activities.
The digitalisation of PSS can actually go far beyond this perspective. By exploiting a comprehensive Digital PSS system, you can also create a significant impact on your value proposition, customer relationships, channels and ultimately the generation of new revenue streams.
Want to hear more? Catch Stefano in conversation with Professor Tim Baines about monitoring value and delivery. Stefano will also be a keynote speaker at The World Servitization Convention 14-16 September.