Although it has yet to become widespread in consumer markets, an alternative service sector is evolving which is rooted in the technological competencies of manufacturing.
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Service-based business models, or servitisation, involve manufacturers offering services tightly coupled to their products. It is about moving from a transactional relationship, where you simply sell customers a product, to a relationship-based model featuring long-term, incentivised, pay-as-you-go contracts.
These could include, for example, leasing or hiring models, selling the service or outcomes of a product rather than the physical product or long-term repair and maintenance contracts. So while production still lies at the heart of manufacturing, the line between it and the service industry is becoming increasingly blurred.
Exploring this approach can create new and resilient revenue streams. According to a study by the Aston Centre for Servitisation, it promises sustained annual business growth of 5-10% a year and 25-30% lower customer costs.
In short, it builds high-entry barriers for competitors. EEF members report that services are a key tactic to defend their market position in the face of unrelenting pressure from lower-cost competitors.
Most of the cost savings passed to customers are from reduced production inputs because, in many cases, offering services strengthens significantly the incentive for resource efficiency and product longevity. Manufacturers offering services also report forming longer-lasting relationships with customers and unlocking product innovation.
This is an area which has huge potential. But what we are currently seeing is an evolution not a revolution. Innovation support and raising awareness will be key to fostering its growth. Remanufacturing, which arguably is the back-room operation that gives viability to many of the most resource-efficient services, suffers from poor awareness in the UK.
There is also limited innovation support, the language associated with it varies wildly, and companies need help to foster the culture change, financing and contract development that is unique to servitisation.
Susanne Baker is senior climate and environment policy adviser at the manufacturers’ association EEF
Line between production and services is blurring