The Internet of Things (IoT) has created a connected world where products are constantly capturing data about their performance and people who use them. They’re relaying this data back to their manufacturers in real-time. With sensor prices falling, manufacturers are rushing to bring everything into the fold of the connected-ecosystem, be it a toothbrush, printer, watch or car.
IoT opens up vast new opportunities for businesses by making it possible for the first time to close what I refer to as the “value-generation loop.” Compared to the traditional open-loop system that manufacturers have been struggling with, a closed-loop system helps a manufacturer gain intimate knowledge about how end-users are using its products. Insights from such a closed-loop ecosystem not only provide manufacturers with the opportunity to re-invent their products, but also transform their business models – especially from selling products to selling their products as services. This has become known as servitization.
IoT is what moves manufacturers towards the servitization model. Servitization allows them to enhance the value they provide customers who not only get the exact solution they need, but get it at a fraction of the upfront investment required. It also frees customers from the constant need to maintain and service the products they buy.
Here are four primary ways that servitization is already helping a growing number of manufacturers and their customers:
1. Enhancing reliability and uptime: When products are digitally connected to a manufacturer, that company receives product performance and customer usage data in real-time. That allows it to constantly monitor potential product failures and inform customers before they occur. This will help manufacturers deploy maintenance personnel to the client’s location and service the equipment before it fails. It also empowers them to determine what kind of warranty to offer to their customers, and open the gates for personalized warranty services as well.
2. Customer operational improvement: Manufacturers know how to get the best out of their products. When they tap into real-time data from their products in the field, they’re able to advise customers on how to optimize performance and make the most of their investment. For manufacturers, this (often fee-based) service can give them a competitive edge.
3. Selling new product capabilities: Today’s products are made up of one-part hardware and one-part software. In a connected ecosystem, manufacturers can enhance their products with software updates sent to the device, over-the-air. Such upgrades not only serve as a source of additional revenues but also help companies upgrade several or all of their devices without inconveniencing their owners or having to deploy maintenance personnel.
4. New revenue-generating businesses: Customers don’t necessarily need to own the products that manufacturers create; they simply need those products to do a job. This allows manufacturers to provide their products as a service, as well as offer optional services that help customers get more value from the service. As a result, manufacturers can explore new business models that can augment or re-imagine their existing business models.
While servitization provides many benefits, adopting it isn’t easy for manufacturing companies with long-established products and business processes, or cultures that avoid experimentation. I have captured some of the challenges and how to adopt them effectively in my article ‘What Happens When You Turn Your Products into Services’ in our management journal Perspectives