Servitization (As-a-Service Models)

What is servitization?

Servitization (also known as servitisation) is the strategic transformation of a company from pure product sales to integrated product-service systems. The product remains at the core of the offering, but is complemented by services or fully replaced by a service.

The classic example: Rolls-Royce no longer sells engines, but “Power by the Hour” — airlines pay per flight hour instead of for the engine. This principle can be applied across many industries and is a key driver of business model innovation.

The stages of servitization

Servitization is not all-or-nothing—it happens in stages:

1. Basic services: Product-related services such as maintenance, repair, and spare parts—the entry point
2. Advanced services: Consulting, training, optimization, and monitoring—knowledge transfer as added value
3. Outcome-based services: The customer pays for outcomes, not the product—“pay per use”, performance guarantees
4. Product-as-a-Service (PaaS): A fully service-based approach—the product remains the provider’s property

The higher the stage, the stronger the customer loyalty and the higher the margins—but also the greater the complexity. The value chain changes fundamentally.

Service business models in practice

• Equipment-as-a-Service: Machines and equipment are rented out instead of sold—the manufacturer takes over maintenance and operation
• Managed services: IT infrastructure, building technology, or fleet management as a full-service model
• Performance contracting: Payment is based on measurable outcomes—e.g., energy savings, productivity gains
• Subscription models: Regular usage fees instead of a one-time purchase—from software to coffee machines
• Data-driven services: IoT sensors provide usage data for predictive maintenance and optimization—the basis for data-driven business models

Servitization is often linked with Industry 4.0: connected products generate data that enables new service models.

Benefits of servitization

• Recurring revenue: Predictable, stable revenue streams instead of project-based one-off revenue
• Higher margins: Services typically achieve 25–40% higher margins than product sales
• Stronger customer loyalty: Long-term contracts and close integration reduce churn
• Differentiation: Services are harder to copy than products—a sustainable USP
• Customer proximity: Ongoing contact provides insights for innovation processes
• Sustainability: Durable, maintained products in a service model support the circular economy

Implementing servitization

1. Understand customer needs: What are the jobs to be done? Customers do not buy a drill—they need a hole in the wall
2. Identify service potential: Which parts of the customer journey can be delivered as a service?
3. Design the business model: Use the Business Model Canvas and Value Proposition Design to structure the service model
4. Define pricing: Usage-based, outcome-based, or subscription? The pricing model must match customer value
5. Pilot and learn: Lean Startup approach—start with a pilot customer segment and iterate
6. Adapt the organization: Build new capabilities—service delivery, customer management, digitalization

Challenges and risks

• Cultural change: From product thinking to service thinking—requires profound change management
• Cannibalization: Service models can reduce product revenue in the short term—the ROI comes in the long term
• Complexity: Service delivery is operationally more demanding than product sales
• Risk assumption: With outcome-based models, the provider takes on more risk
• IT infrastructure: Data-based services require IoT, CRM, and analytics platforms

Especially for SMEs, a gradual transition is recommended: start with basic services and progressively grow into higher stages.