Let us start the article with two important definitions. One is defining what customer lifetime value is. CLV is the metric that represents the total profit that a company can expect from a customer. By this definition, you can imagine that CLV is something that any commercial entity would like to maximize. The second term that we need to define is servitization. Moving from the traditional model of selling products to a Servitization Model is a transformation journey. It is a process to offer advanced services to supplement or replace traditional product offerings. Servitization is also known as a ‘sell-a-service.’
The servitization process transforms a tangible product to a product and supporting service and from thereon to product and differentiating services. The final phase of servitization would be to offer the product itself as a service. The concept of servitization can be better explained with an example. Take the example of Rolls Royce which moved from selling aero engines to selling a total care service package that manages and maintains the engines for a fixed price on the number of hours flown.
As you can surmise, this transformation from selling a product to servitization can result in:
- Increased share of customer wallet
- Recurring revenue flow
- Be more competitive by differentiating from the competition
- Move into new markets and target different customers
- Allow customers to move from CAPEX to OPEX
- Create increased customer satisfaction
Now that we have a clear picture of what servitization means, it is easy to see how it can positively affect the customer lifetime value. It can help you transition from being a mere seller with a one-time profit to a service provider with recurring revenue. You can expand the scope of your portfolio and your customer base with servitization. Even those customers who hesitated earlier due to the huge capital required to buy the manufacturing equipment would be interested in your servitization offerings as they can limit their upfront capital investment.
What are the steps required to explore the sell-as-service or servitization model?
- Talk to existing customers and even some prospects to identify their pain points which would provide you identify areas for improvement and ideas on how to position your offering
- Make it all about customer experience. Identify customer touch-points and ensure that you improve the engagement experience
- Engineer your processes, teams, and platforms for the new model with a focus on mobile engagements
- Keep analyzing results to observe the experience and optimize the areas that require improvement
- Lay out the elements that need to be changed and the technologies to adopted
- Focus on revenue generation, additional costs, the way the business will shift
- Get stakeholder buy-in—discuss revenue models, bring about cultural change, tweak systems, etc.
Start with a long-term plan where you focus on both outright selling and sell-as-service to retain those customers who are not very keen to make the change at once. Over a period, make the transition complete after taking a call on whether it is worth your while to continue outright selling to retain customers who are not willing to transition.
Servitization is a trend that is here to stay with more and more customers wanting to pay only to the extent of usage. It is about engaging the customer easily and effectively to deliver maximum value at every level. With servitization, you can maximize customer lifetime value.
Disclaimer: The usage of the above blog header image with the Rolls Royce logo is only to illustrate the company's adoption of the 'sell as a service' or the 'servitization model'.
Peter van Leeuwen
