03. November 2021
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A short overview on servitization, as-a-service, subscription and pay-per-x in the industry

A short overview on servitization, as-a-service, subscription and pay-per-x in the industry

Road to Servitization

We often come across terms such as servitization, as-a-service, subscription and pay-per-x in the industry. But are they used correctly?

There are very scientific approaches to their definition and also many publications on the subject. In this article, authors Julius Klemkow and Volkmar Mohs offer a practical explanation to introduce the topics.

What does Servitization mean?

Servitization refers to the transformation of a company from a provider of a physical product to a provider of a product service system (PSP).

Such a PSS represents a bundle of different services that replace the previous product-centric core offering of a company, with the aim of creating additional customer benefits through the combination of services. Depending on the customer's needs, these include, for example: Delivery, installation, commissioning, consumables, maintenance, repair, spare parts, cloud-based software, upgrades, updates, financing, insurance, training, consulting and decommissioning.

Servitization, however, should not be understood as simply expanding a company's service portfolio. Rather, it requires very strong customer-centric thinking throughout the organization, as well as specialized skills and processes in development, production, marketing, sales, service and finance.

What does 'as-a-Service' mean?

'As-a-Service' refers to the business model targeted by servitization. It typically has two types of contract: flexible contracting and performance contracting.

The value proposition of flexible contracting is the synchronization of revenue and expense streams (cash flow alignment) associated with variable use. The value proposition of performance contracting, on the other hand, lies in the impact of the product for the customer. For example, in the form of an increase in productivity, output or a reduction in the total cost of ownership (TCO).  

In comparison, the value proposition of pure product offerings, was based on the delivery of the physical product with its defined properties. These were to meet the customer's requirements. However, the manufacturer did not bear any responsibility for the actual fulfillment of the customer's expectations. We are therefore dealing with a shift in performance away from an abstract marketing promise to a performance promise of the individual asset.

Another elementary feature of 'as-a-service' is the ownership structure. The using company only receives temporary rights of use. It does not acquire legal ownership. In fact, depending on how the contract is structured, there may be ownership under tax law or for accounting purposes ("economic owner"), but legally the user is always to be regarded as a tenant. 

What do subscription and pay-per-x mean?

Subscription and pay-per-x are common revenue models for monetizing 'as-a-service'.

Subscription enables the provider to generate recurring (e.g., monthly or annual) fixed revenues, sometimes supplemented by additional dynamically bookable and provided packages with the help of upgrades/downgrades, as known from mobile communications (for example "5GB for 30 days, can be cancelled monthly"). This is a long-term customer relationship that can nevertheless be terminated at short notice at any time.

With pay-per-x, on the other hand, the customer pays on the basis of what he actually consumes (e.g. pay-per-hour) or produces (e.g. pay-per-part). Pay-per-x is often used in combination with the subscription revenue model, especially for equipment. The reason for this is that the fixed subscription fee can be used to cushion the risk of a reduction in value due to aging of the machine and "downtime damage" when not in use, e.g. due to production downtime.

What examples can already be found for 'as-a-Service' in the industry?

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