Service business

What is it and its benefits

A growing number of companies around the world are adopting “as a service” business models. But what exactly is such a model? And what are the advantages of ‘As a service’? Tim Vellema, consultant at The Next Organization, presents the concept and its advantages.

The “as a service” business model is an emerging business model that shifts the customer-supplier relationship from the traditional ownership model to one that evolves around providing a service without ownership.

This change is centered on the idea that society is moving from a “goods-centric and customer-centric” society to a “service-centric” society. This new “service-centric” logic argues that customers are at the center and are in charge of value creation. Thus, organizations become “value enablers” instead of “value producers”. Not only do they provide the product, but they also facilitate and provide value in use.

Differences between ‘As a service’, purchase and operating lease

The difference between ownership of the product and “as a service” is substantial. A traditional transaction involves a customer purchasing the product, after which the seller only provides the warranty required by law or charges additional fees for follow-up services.

The difference between operational leasing and ‘As a service’ is more subtle, with the main difference being the duration of the contract. When concluding an operating lease, the customer undertakes to use a product for a period agreed in advance. If the customer decides that they no longer want to use the product, the remainder of the period must still be paid in full (or a “fine” is applied). On the other hand, an ‘As a service’ contract is very flexible and often on a monthly basis.

In addition to contractual differences, ‘As a service’ can also be a more environmentally sustainable solution. Since the customer only pays for usage and returns the product to the supplier afterwards, the product is still part of a closed loop. The product will, if necessary, be repaired and refurbished and shipped to a new user.

Consequently, this approach reduces the number of products to be manufactured, since they will be reused until the end of their useful life and (often) recycled afterwards. This reduces the supplier’s environmental footprint and leads to a more sustainable manufacturing process.

Example: B2B ‘As a Service’
Signify has been providing “Light as a service” for Schiphol Airport since 2015. Signify owns the lights, while Schiphol only pays for their use. Signify consulted Engie Services to adapt the lamps to increase their longevity by 75% and make them as easily replaceable as possible. Signify remains responsible for the durability and performance of the lighting system and takes care of the recycling of end-of-life lamps.

Example: B2C ‘As a service’
The car manufacturer Lynk & Co has been active in Europe since 2020. It offers a monthly “Car as a service” subscription. For €500 per month (excluding fuel), a customer pays for the use of the car, including maintenance, insurance and road tax.

Moreover, sustainability is also an integral part of their value proposition. According to Lynk & Co, cars are only used 4% of the time. That’s why they offer their customers the possibility of sharing their car. This reduces the number of cars to be produced, and therefore the impact on the environment, and allows customers to reduce their monthly costs since they receive compensation when they lend their car.

Benefits of an “as a service” business model

The first advantage is particularly relevant for high-end products. Since the “as a service” business model does not require customers to make an upfront investment, premium products become more accessible to a wider range of customers. Meanwhile, for vendors, the “as a service” model enables predictable and recurring revenue streams.

Take for example the “Care by Volvo” subscription. The “buy now” price of the available models makes these cars belong to the premium segment. However, with the “Care by Volvo” subscription, these cars also become accessible to customers who are not normally able to purchase cars in this segment. This allows organizations to have access to a wider pool of potential customers, which leads to potentially greater revenue generation.

A second benefit of implementing an “as a service” business model is the continuous feedback loop. Since the customer will be served at every stage of their use of the product, constant contact is required. This provides the supplier with valuable data to continuously learn from the customer experience and improve both product and service.

A third benefit is the ability to build customer loyalty. Since the customer will be served while using the product, an organization is able to influence the customer experience at all times. If this opportunity is coupled with improvements based on the continuous feedback loop, customers can be better served, customer loyalty can be increased, and “customer lifetime value” can be improved.

How to set up an ‘As a service’ business model

If you want to implement an “as a service” business model, there are several factors to consider. Three important considerations:

A united approach
It is essential to have a service-oriented organization and a supportive culture. This mindset begins with the board’s vision, which must be translated into an appropriate organizational culture. The organization must facilitate “use value” and serve the customer at all times.

The value of non-ownership
Another thing to keep in mind is that the “as a service” business model is not suitable for all products, and therefore for all organizations. Think about the “pain” you are taking away for the client. Why would a customer want to “use” the product instead of “own” it? If you’re selling a product that doesn’t fit the concept of “service,” you should be wary of pursuing that business model.

For this business model to succeed, the “hassle and hassle” of owning a product must be significant enough for a customer to consider an “as a service” proposition. Ultimately, every value proposition must be based on customer needs; the product should fit the business model and should not be constrained to it. The solution must be convenient enough to offset the high price the customer often has to pay. You will only be able to create value if this is the case.

Third, determine the price of your product “as a service”. Do you focus on volume, a premium price, or are you so unique that you can achieve both? Since it is a capital-intensive business model, it needs a solid business case. This requires a detailed estimate of total cost of ownership, price elasticity, willingness to pay, and a compelling business case.